1. The Free Market System Financial Markets

2. Saving and Investment 1.investment: the purchase of an asset in hopes it appreciates or generates income ●Examples: going to college, building a factory, buying real estate ●involves risk and reward ●key to economic growth in free market

3. “The Financial System” SAVERS (Households, Businesses) INTERMEDIARIES (Banks, Financial companies) BORROWERS (Governments, Businesses) Makes investment possible by allowing the transfer of money between savers and borrowers

4. Saving and Investment 2.diversification: spreading investments to reduce risk 3.return: the money an investor receives above and beyond the initial investment ●low risk and more liquidity = low return ●high risk and less liquidity = high return

5. Financial Assets 1.bond: a loan given to an entity for a defined period of time at a fixed interest rate ●treasury bond: issued by U.S. government ●municipal bond: issued by State or local governments ●corporate bond: issued by corporations

6. Types of Bonds TYPEISSUERRISKUSE TreasuryFederal Government Very LowFederal Projects MunicipalState & Local Governments LowLocal Projects CorporateCorporationsModerateBusiness Expansion

7. Financial Assets 2.savings account: a deposit with a modest interest rate allowing frequent withdrawal 3.certificates of deposit (CDs): a time deposit with a higher interest rate intended to be held until maturity 4.mutual funds: a holding that pools money from many people to purchase stocks and/or bonds

8. The Stock Market 1.stock: a claim of ownership in a corporation that is sold in portions called shares

9. The Stock Market 2.Making a Profit ●dividend: a portion of a corporation’s profit paid to shareholders ●capital gains: the difference between a higher selling and lower purchase price ●capital loss: the difference between a lower selling and higher purchase price

10. LaFleur’s Crazy Kicks Co. $100 $50 You Own: 5 shares at $100 per share 10 shares at $50 per share $500

11. The Stock Market 3.stockbroker: person who links buyers and sellers of stock

12. The Stock Market 4.stock exchange: a market for buying and selling stock

13. The Stock Market 4.stock exchange: ●NYSE: the largest exchange that handles transactions for “blue chip” companies ●NASDAQ: an electronic exchange that handles technology stocks ●AMEX: generally lists smaller companies

14. The Stock Market 5.Market Trends ●bull market: a steady rise in the market associated with confidence and the purchasing of stock by investors in anticipations of higher prices in future

15. The Stock Market 5.Market Trends ●bear market: a steady drop in the market associated with pessimism and the selling of stock by investors in anticipation of lower prices in future

16. Bull vs. Bear Markets

17. The Stock Market 6.Stock Indexes ●Dow Jones Industrial Average: compiles the prices of the 30 largest and most widely held public companies in U.S. ●S&P 500: gives a broader picture of stock performance

18. The Stock Market 7.Determinants of Stock Price ●corporate finances: corporations publish quarterly earnings reports ●business news: acquisitions, mergers, restructuring, product releases ●political events: elections, war, bailouts ●government statistics: unemployment, inflation, interests rates