Financial Markets How do your saving and investment choices affect your future?

 Objectives:  Describe how investing contributes to the free enterprise system.  Explain how the financial system brings together savers and borrowers.  Explain the role of financial intermediaries in the financial system.  Identify the trade-offs among liquidity, return and risk.

 Investment – the act if redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit  Examples:  How does it promote the free enterprise system?

 “Better safe than sorry.”  Nothing ventured, nothing gained.  “Don’t put all your eggs in one basket.”  “The riskier the road, the greater the reward.”  “A penny saved is a penny

 Financial system – the network of structures and mechanisms that allows the transfer of money between savers and borrowers  Financial Assets – claim on property or income of a borrowers

 Institution that helps channel funds from savers to borrowers  Banks, savings and loans associations, credit unions, finance companies  Mutual Funds  Hedge Funds  Life insurance companies  Pension Funds  WS: 11-1A

 Sharing Risk  Would you put your entire savings into one company?  Diversification: strategy of spreading out of investments to reduce risk

 Providing Information  Portfolios – collection of financial assets  Prospectus – an investment report that provides information to potential investors  Providing Liquidity

 Come up with your own scenarios of each type of risk. You will write them on note cards and then be asked to quiz the class.  Types of Risk:  Credit Risk – borrowers may not pay back the money they have borrowed, or they may be late in making payments  Liquidity Risk – you may not be able to convert the investment back into cash quickly enough for your needs  Inflation Rate Risk – inflation erodes the value of your assets  Time Risk – you may have to pass up better opportunities for investment

 Liquidity and Return  Do you need the money right away?  Return – money investor receives above the investment  Return and Risk

 Objectives:  Describe the characteristics of bonds as financial assets.  Identify different types of bonds.  Describe the characteristics of other types of financial assets.  List 4 different types of financial asset markets.

 3 Components of Bonds  1. Coupon Rate Interest rate  2. Maturity Length of time  3. Par Value Amount to be paid at maturity

 Suppose that you buy a $1,000 bond from the corporation Amazon. The investor who buys the bond is called the holder. The seller of the bond is the issue. You are, therefore, the holder of the bond. You are going to receive a 5% return on your investment after a 10 year period.  Coupon Rate =  Maturity =  Par Value =  How much would you receive after 10 years? Yield =

 Buying Bonds at Discount

 Standard’s & Poor’s  Moody’s  AAA – best rating  Higher the bond rating, the lower the interest payment…why?

 Savings Bonds  Treasury Bonds, Bills and Notes  Inflation-indexed bond – linked to rate of inflation

 Municipal  State and local govt.  Corporate Bonds  Help raise money  Junk Bonds  High rish

  Find 2 corporate bonds  Issuer, rating (if applicable), maturity date, coupon, yield to maturity, and price  Find 1 Municipal bond  Issuer, rating (if applicable), maturity date, coupon, yield to maturity, and price  Find 1 Treasury bond or T-bill  Issuer, rating (if applicable), maturity date, coupon, yield to maturity, and price  Which asset would you invest in and why?

 CDs  Money Market Mutual Funds

 Capital Markets and Money Markets  Capital Markets - $ lent for more than a year  Money Markets - $ lent for less than a year  Primary and Secondary Markets  Primary market – market for selling assets that can only be redeemed by the original owner  Secondary market – market for reselling secondary assets

 Objectives:  Evaluate the benefits and risks of buying stock by comparing them to those of investing in bonds  Identify the different systems and markets that allows the trading of stocks to occur  Create an investment portfolio  Describe the events leading up to the Great Depression

 Who benefits from the stock buying process?  You have $1000 based off of what you know, would you invest in stocks, bonds, or both?  Why is there a potential for greater profit in stocks?

 Dividends  Profits that corporations pay to their stock holders. Usually paid four times per year.  Capital Gain  Selling stock for more than you paid for it.  Capital Loss  Selling stock for less than you paid for it.

 You buy 300 shares of stock from a company that just went public at $25 per share. How much did that cost you?  You sell your 300 shares of stock at $32.50 per share. How much did you sell them for?  What was your profit?

 You buy 150 shares of stock in a company that just went public for $30 a share. How much did that cost you?  The market is looking grim and you sell your 300 shares for $25 a share, to avoid losing more money. How much did you sell them for?  What was your profit?

 Income Stock – Pays investors using dividends. These payments vary from company to company.  Growth Stock – Pays little to no dividends, but the investment is used to better the company.  Common Stock – Investors become voting members of the company. One share = One vote  Preferred Stock – Usually none voting members. But receive the dividends before the common stockholders.

 Owners of common stock sometimes vote to split the stock that their company owns.  This process doubles the amount of shares in a company and halves price of each share.  Why would a company want to do this?