2. What is an investment ? Book Definition: The act of redirecting resources from being consumed today so that they will create benefits in the future. Translation: Putting money aside today so that you can make more money for the future!

3. Everyday Risks  What risks do you take when you play sports?  What risks do you take when you are driving?  Risk = the possibility of loss or injury Goalie

4.  Why does a saver purchase wealth-creating assets?  They hope to get a return on their investment  Return = the money an investor receives above and beyond the sum of money initially invested Making $ From Investing $

5. Wealth-creating assets are possessions that: capital gain increase in value over time (capital gain) (dividend, interest) provide a return(dividend, interest) Capital gain = the profit from when an asset grows in value and is sold for more than its purchase price Dividend = portion of a company’s profit that is paid to stock owners Interest = fee for the use of money over time OR

6. Not All Investments Make $ Financial Risk The possibility that an asset will fail to produce a return or will lose value over time. Risk and Return Have a Positive Relationship

7. I What are the benefits and risks of saving and investing? Savings you deposit in a bank will grow with hardly any risk at all. Investing, while more risky, may yield a larger return for your initial investment. It may also prove to be financially devastating if it is ill-timed or mismanaged.

8. What is liquidity?  Liquidity:  Liquidity: the ability to be used, or directly converted into, cash Checking accounts, savings accounts CDs, bonds

9. 4 Types of Financial Risk  Credit Risk (Risk of Default) When a saver loans money or buys a bond, the borrower might not repay the original amount or the promised interest.  Risk of Capital Loss When a saver buys an asset hoping for a capital gain, the market price of the asset can fall, resulting in a capital loss.  Risk of Inflation When a saver earns a rate of return that is less than the rate of inflation, purchasing power is lost.  Risk of Liquidity When a saver buys an asset for an investment, the asset must be sold to realize the capital gain. Market conditions affect the saver’s ability to sell the asset. Inflation

10.  Case 1  Several years ago, Chelsea was given a painting by a famous artist. She planned to keep it as an investment, hoping its value would increase so that she could sell it and make a profit. Several years later, Chelsea had costly emergency surgery, and she didn’t have enough money in her savings to pay for the procedure. Fortunately, the painting had substantially increased in value, and she decided to sell it. She found a reputable art dealer who told her that market conditions would make it difficult to sell the painting for its full value in the next six months. Chelsea needed the money immediately, so the art dealer offered to buy the painting at a deep discount.  How would you describe the financial risk that Chelsea faces? Liquidity Risk

11.  Case 2  Paul’s friend Gabby had an idea of creating a photography service that went to school functions, such as football games, pep rallies and dances, to take candid pictures. The pictures would be available to purchase the following week. She needed $300 to buy additional equipment and start an advertising campaign, so she asked Paul for a loan. She promised to pay him back the $300 and give him 25 percent of her profits from the first semester. Gabby sold a few pictures the first week of school but quit going to events to take pictures. She can’t repay the loan, and there are no profits. Paul lost $300.  How would you describe the financial risk Paul faces? Credit Risk (Default Risk)

12.  Case 3  Mike spent every summer during high school mowing yards. He saved the money to pay for his living expenses during college. He decided to keep his money in certificates of deposit at his bank. The deposits earned 3 percent interest. He anticipated that he would have enough money for two years of living expenses. When he got to his college town, he realized that food and rent, along with many other prices, were much higher than he had originally estimated. Prices rose faster than the value of his savings.  How would you describe the financial risk Mike faces? Inflation Risk

13.  Case 4  Jennifer decided to buy $1,000 worth of stock in a company that makes very popular products. She believed that the company would grow and be profitable for the next several years. Several months later, she found out that the company lost a major case in court and will no longer be able to sell its most popular product. Jennifer decided to sell all her stock. When she called her stockbroker, she found out that her shares were worth $400.  How would you describe the financial risk that Jennifer faces? Capital Loss Risk

14. Can only have 2 of the 3 RETURN RISKLIQUIDITY INVESTMENTS

15. Free Enterprise and Investing Capital is scarce! This is why investing leads to profits. If you have spare capital someone will pay you to use it. When people save money they are really loaning it to other people. Investing is essential to the free enterprise system. People deposit money into a savings account and the bank lends this money to businesses. Businesses can then increase production, which leads to expansion and economic growth. It promotes economic growth and contributes to a nation’s wealth.

16. CERTIFICATES OF DEPOSIT  Bank accounts that offer a guaranteed interest rate for a fixed amount of time.  Banks charge substantial penalty for withdrawing before the CD has reached maturity ReturnLiquidityRisk

17. COLLECTIBLES Items you buy, hold onto, and hope they increase in value. ex. Baseball cards, coins, stamps, comics, antique furniture, art, old cars Return Liquidity Risk

18. BONDS  Loans or IOU’s from the government or a corporation that must be repaid to the investor.  Characteristics: coupon rate (interest rate) coupon rate (interest rate) maturity (time until repayment is due) maturity (time until repayment is due) par value (face value/principal/what the loan is for) par value (face value/principal/what the loan is for)  Types: U.S. Savings U.S. Savings Treasury Treasury Municipal Municipal Corporate Corporate Junk Junk Bonds

19. CORPORATE BONDS  Corporate bonds are IOUs issued by corporation to help raise money to expand business. Return Liquidity Risk (because investors must depend on the corporation’s success)

20.  Junk bonds are bonds with a high risk and a potentially high return. Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt.

21. MONEY MARKET ACCOUNTS  Bank account that allows you to save and write a limited number of checks.  Higher interest (variable) than a savings account, but generally requires a minimum balance and has increased fees. Return Liquidity Risk a.k.a. Insured Money Market Accounts (IMMAs) Money market acct

22. MUNICIPAL BONDS  State and local governments issue municipal bonds (IOUs) to finance such projects as highways, libraries, parks, and schools.  You are loaning your local government money Return Liquidity Risk

23. MUTUAL FUNDS  Fund that pools the savings of many individuals and invests this money in a variety of different stocks, bonds and other financial assets.  Naturally diverse investment option, which reduces risk Return Liquidity Risk

24. REAL ESTATE Land, including the buildings and the natural resources found on it Return Liquidity Risk Real Estate

25. SAVINGS ACCOUNTS  A bank account used for depositing money that may be needed in a short amount of time. Return Liquidity Risk

26. STOCKS Corporations can raise money by issuing stock which represents ownership in the corporation A portion of stock is called a SHARE. Return Liquidity Risk Stocks

27. U.S. SAVINGS BONDS  Low-denomination bonds issued by the U.S. government, who then pays interest on the bonds. Return Liquidity Risk commercial

28. Continuum of Risk Savings Account CDs C o l l e c t i b l e s Corporate Bonds IMMAs M u n i c i p a l B o n d s Real Estate Stocks US Savings Bonds Low Risk High Risk

29.  Why do people say “Don’t put all of your eggs in one basket?” Spreading out your risk Diversificationallows you to spread out your investments so that you don’t put all of your money into one single investment. Diversification allows you to spread out your investments so that you don’t put all of your money into one single investment. ○ Ex. $10,000 = 1 dime or 10 pennies Diversifying helps reduce the risk of losing everything.

30. SECTION29 Want to connect to the Economics link for this section? Click Here!Click Here! Chapter 11, Section 1 2222 3333 Review Questions What is investment? Why are people willing to pay you later to use your money now? What is risk? What is a return? What is liquidity? When speaking of bonds, what is maturity? What is diversification? Which has greater liquidity: bond / savings account What has the potential to earn greater returns? bond / savings acct Which has greater risk? stock / bond Stocks & BondsStocks & Bonds What has the potential to earn greater profits? stocks/savings acct

31. How Stocks Are Traded  A stockbroker is a person who links buyers and sellers of stock.  Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.  Stock exchanges are markets for buying and selling stock.

32. Measuring Stock Performance Bull and Bear Markets  When the stock market rises steadily over time, a bull market exists.  When the stock market falls over a period of time, it’s called a bear market. commercial Stock Performance Indexes The Dow Jones Industrial Average  The Dow is an index that shows how stocks of 30 companies in various industries have changed in value. The S & P 500  The S & P 500 is an index that tracks the performance of 500 different stocks.

33. What are financial intermediaries? Financial intermediaries are institutions that help channel funds from savers to borrowers. What are some examples of financial intermediaries? 1.Banks and Credit Unions 2.Finance Companies 3.Life Insurance Companies 4.Mutual Funds 5.Pension Funds

34. What are the Three Main Functions of Financial Intermediaries? 1. Sharing Risk 2. Providing Information 3. Providing Liquidity

35. SECTION34

36. Providing Information and Liquidity  By providing vital data, either in a portfolio or a prospectus, financial intermediaries reduce the costs in time and money that lenders and borrowers would pay if they had to get the information on their own. portfolio: a collection of financial assets prospectus: an investment report that provides information to potential investors  Financial intermediaries also help people get access to their money when they need it, depending on how liquid the investment is. SECTION35

37. Saving and Investing 1. Savings Accounts Savings Savings ○ A bank account used for depositing money that may be needed in a short amount of time. ○ Low Risk/Highly Liquid/Lowest Return (Low Interest Rates) Money Market Money Market ○ Bank account that allows you to save and write a limited number of checks. ○ Higher interest (VARIABLE) than a savings account, but generally requires a minimum balance and has increased fees. ○ Low Risk/ Liquid/Low Return (Variable interest Rates) Time Deposit (Certificate of Deposit or CD) Time Deposit (Certificate of Deposit or CD) ○ Bank accounts that offer a guaranteed interest rate for a fixed amount of time. ○ Banks charge substantial penalty for withdrawing before the CD has reached maturity ○ Low Risk/Low Liquidity/Moderate Return (Higher interest Rates)

38. 2. Bonds  Loans or IOU’s from the government or a corporation that must be repaid to the investor.  Characteristics: coupon rate (interest rate) coupon rate (interest rate) maturity (time until payment is due) maturity (time until payment is due) par value (face value/principal) par value (face value/principal)  Types: U.S. Savings U.S. Savings Treasury Treasury Municipal Municipal Corporate Corporate Junk Junk  Generally low risk/ Lack liquidity/ moderate return

39. Bond Ratings  In order to decide which bonds to buy, investors can check bond quality through independent firms, such as Standard & Poor’s and Moody’s, which publish bond issuers’ credit ratings. These firms rate bonds on the issuer’s financial strength, its ability to make future interest payments, and its ability to repay the principal when the bond matures. A high grade, such as AAA, means that the bond is safe to invest in. 38

40. Types of Bonds  Savings Bonds Low-denomination bonds issued by the U.S. government, who pays interest on the bonds.  Treasury Bonds, Bills, and Notes The U.S. Treasury Department issue Treasury bonds, bills, and notes, which are among the safest investments in terms of default risk. SECTION39

41.  Municipal Bonds  State and local governments issue municipal bonds to finance such projects as highways, libraries, parks, and schools.  These are attractive to long-term investments and are relatively safe. Checkpoint: What type of bond might have been used to fund the construction of your school? Duh. SECTION40

42.  Corporate bonds are issued by corporation to help raise money to expand business. These bonds have a moderate risk level because investors must depend on the corporation’s success.  Junk bonds are bonds with a high risk and a potentially high return. Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt. 41 crisis of credit

43. The Stock Market  Corporations can raise money by issuing stock which represents ownership in the corporation.  A portion of stock is called a SHARE.  By selling shares of stock, corporations raise money to start, expand and develop their businesses.  In this way, stocks encourage overall economic growth.  Corporations can raise money by issuing stock which represents ownership in the corporation.  A portion of stock is called a SHARE.  By selling shares of stock, corporations raise money to start, expand and develop their businesses.  In this way, stocks encourage overall economic growth. Stock Market Basics

44. 3. STOCKS  Represent a piece of ownership in a corporation  Potential Benefits: Dividends ( Dividends ( portions of a corporation’s profits that are paid out to stockholders of many corporations, usually quarterly.) Capital Gains capital loss) Capital Gains ( the money earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss)  Types of Stock: Preferred (non-voting owners, dividends paid to first) Preferred (non-voting owners, dividends paid to first) Common (voting owners, dividends paid out to last) Common (voting owners, dividends paid out to last)  Moderate to high risk/Highly liquid/Mod. to high return stock market

45. How Stocks Are Traded  A stockbroker is a person who links buyers and sellers of stock.  Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.  Stock exchanges are markets for buying and selling stock.

46. 4. MUTUAL FUNDS  Fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds and other financial assets.  Naturally diverse investment option, which reduces risk  Moderate Risk, High Liquidity, Moderate Return

47. Financial Asset Markets  Bonds, CDs, and money market mutual funds are traded on financial asset markets.  One way to classify financial asset markets is according to the length of time for which the funds are lent. Capital Markets ○ In these markets, money is lent for periods longer than a year, like in a CD. Money Markets ○ In these markets, money is lent for periods of a year or less and include Treasury bills and money market mutual funds.  Markets may also be classified according to whether or not assets can be resold to other buyers. Primary Markets ○ In a primary market, financial assets can be redeemed only by the original holder. Examples include savings bonds and small CDs. Secondary Markets ○ In a secondary market, financial assets can be resold, which provides liquidity to investors. SECTION46 Checkpoint: What are two ways of classifying financial asset markets?

48. $87 Billion The Crash of 1929  Between the years of 1925 and 1929 the value of stocks being sold on the New York Stock Exchange had more than tripled. $27 Billion 19251929 GM rose from $268 to $452 per share!!

49. Causes of the Crash  Dangerous investment practices Speculation Buying on the Margin  False sense of prosperity The “Roaring Twenties” brought unprecedented amounts of prosperity to the United States. During this period consumers had access to many new products and believed that they could all have the glitz and glamour of the era. Many spent well beyond their means and then utilized the largely unrestricted credit available to keep on purchasing.  Government policies “Laissez Faire” Lack of business regulation Lack of bank regulation Lack of stock market regulation

50. The Beginning of the End: Black Thursday  Despite signs in September that a stock market crash may occur, many people continued to invest in the market.  By late October it became clear that the market was getting increasingly dangerous. Professional investors began to pull out of the market which resulted in a decline in prices.  On October 24, 1929 almost 13 MILLION shares of stock were frantically traded.  As stock values plummeted below the amount borrowed to purchase them, brokers demanded that investors repay their loans. When they couldn ’ t, brokers offered the stocks for sale.

51. The Bottom Falls Out: Black Tuesday  On October 29, 1929 the stock market collapsed.  Over 16 MILLION shares of stock were sold on that day and by the end of the day many stocks had no value at all!  Investors lost over $30 BILLION which was equivalent to: 1/3 of the United States gross domestic product Wages of ALL Americans for that entire year!  The failure of the banks was one of the most devastating results of the stock market crash because it resulted in non-investors losing their savings October 29, 1929

53. Effects of the Great Crash 1. The Great Depression 2. Mistrust of banking industry/stock market 3. Long-term reduction of investment