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FINANCIAL MARKETS Chapter 11
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SAVING & INVESTING Section 1
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Investing Use of assets (money) to earn income or profit Redirecting resources today so they can create benefits for future Possibility of making a profit leads to investing Financial Systems include savers & borrowers which allow money transfers between them
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Financial Assets AKA securities Documents that prove you own property, money, etc. Serve as proof in court People use funds to develop new products, create new businesses, save for retirement, etc.
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Mutual Funds Uses lots of people’s savings Invest in several different stocks, bonds, etc. Ability to invest in range of companies allows for fewer financial losses
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Life Insurance Co. Financial protection for beneficiaries of the insured To make up for lost income Insurance Co. collects payments (premiums) each month to pay for payout incase something happens to the insurance purchaser Insurance Co. lends out part of the premium to investors and collects interest on the loans
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Pension Funds Income a retired person receives after working at a company for a long period of time or after they reach a certain age Employers may keep a % of a persons paycheck & put it in a fund for the employee until they retire Fund does collect interest over the years
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Diversification Spreading money around to different types of investments Reduces risk of loosing all money invested Portfolios show people’s & business’… gains and losses what they invested in
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Return & Risk Money investor receives from investment Minus your initial money invested Run a Risk if investing in a company or an account NOT insured by the government (FDIC) Possibility of loosing all of your money invested
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BONDS & OTHER FINANCIAL ASSETS Section 2
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Bonds Loans to a business or company Must repay investor Usually pay out fixed amount for certain period of time Low risk investment Characteristics … Coupon Rate – interest rate lender/investor will receive Maturity – date/time period in which lender will be repaid Usually 10, 20, or 30 years Usually 10, 20, or 30 years Par Value – amount investor paid for bond & will get back Face Value Face Value Principal Principal
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Savings Bond Low Denominations $50 to $10,000 Issued by United States Government No Risk / Will always get principal back Pays interest Buy bond for ½ of face value Receive face value on maturity date Example: Pay $25 and get $50 back
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U.S. Treasury Department T- Bond… 10 - 30 years $1,000 minimum T- Note… 2 – 10 years $1,000 minimum T-Bill… 3, 6, or 12 months $1,000 minimum * All are extremely safe!
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Municipal Bond Issued by state & local bonds Roads Bridges Schools & other buildings Safe depending on health of town &/or state Not subjected to income tax
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Corporate Bonds $1,000 to $10,000 Have to pay tax on them Moderate risk b/c payout depends upon success of business
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S.E.C. Security and Exchange Commission Government Agency Regulates Financial Markets & investment companies Enforces all market laws
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Markets Capital Markets – loans for more than a year Money Markets – loans for less than a year Primary Markets – only purchaser can redeem them Can not sell them to someone else Secondary Markets – assets that can be sold to another person
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THE STOCK MARKET Section 3
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Buying Stock Way for corporations to earn money Sold in shares Dividends – pay out to owners of stocks Usually pays 4 times per year Capital Gains – sell stock for more that originally paid for it Capital Loss – sell stock for less than the original amount paid for
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Types of Stock Income – pays dividends throughout year Common – Investors are voting owners of company One vote for every share owned Preferred – Nonvoting owners Receive dividends before common stock owners
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Trading Stocks Stockbroker – links buyers & sellers of stock Advises people to buy or sell stock Work for brokerage firm Stock Exchanges – Markets for buying & selling stocks
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New York Stock Exchange Located in New York Largest & most powerful in the country Began in 1792, informal & outside Only largest & most established companies can sell Largest & best known are known as “blue chip” In highest demand
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Nasdaq National Association of Securities Dealers Automated Quotations OTC Market are those that are traded electronically Created in 1971 2 nd largest market in U.S. / 3 rd in the world No trading floor, but info broadcasted to over 360,000 computers around the world
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Bull & Bear Bull Markets Market rises steady over time Bear Markets Market drops over a period of time
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The Dow The Dow Jones Industrial Average Started in 1896 Makes sure stocks remain representative of market as a whole Represents 30 of the largest industries of all markets
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S & P 500 Standard & Poor’s 500 Gives picture of stock performance Tracks price changes of 500 different stocks
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Crash of 1929 1929 Stock Market had combined value of $87 billion Small # of companies & families had much of the money Ordinary people were having hard times & went into debt buying electric goods on credit Industries producing too many goods Large surpluses & low prices
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Crash of 1929 Too many investors were using borrowed money to pay for stocks Many who couldn’t afford it were “buying on the margin” Less wealthy ppl were purchasing a stock for a faction of the price & borrowing rest from stock brokers Brokers loans went from $5 million in mid- 1928 to $850 million in Sept. 1929
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Crash of 1929 Sept. 3, 1929 Dow reached an all time high Stock prices went well above their real value Prices based upon company’s earnings & assets Stock prices started to fall in late Sept. and brokers wanted their loans repaid PPl started to sell their stock fast & prices of stocks started to come down dramatically “Black Tuesday” Oct. 29, 1929 16.4 million shares were sold Prior average was 4-8 million per day
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Aftermath of Crash 4 million had invested in stock market & felt 1 st affects Eventually crash would affect EVERY American some way Millions (many who didn’t even own stock) lost homes, farms, jobs, and became penniless Very little money in circulation & businesses couldn’t spend to put people back to work WWII eventually led the U.S. out of the Great Depression by putting people back to work making war supplies
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