1. Financial Markets Chapter 11

2. TYPES OF INVESTMENTS Financial Intermediaries
Is a “middle man” handling money for the investor – you pay this person or company to make investments for you.
Includes banks, S&Ls, credit unions
Also finance companies, pension funds, life insurance companies

3. Financial Intermediaries
Mutual fund—pools individuals’ money to buy range of financial assets
investors own shares of entire fund
Mutual funds let individuals own many assets; managers make decisions
Pension funds invest employees’ money, so will have more at retirement
Life insurance companies invest income in financial assets
let people save by building cash values, protect them against loss

4. Financial Asset Markets
Financial markets categorized according to time, resalability:
Time
Capital markets—assets held for over a year
includes stocks, bonds, mortgages, long-term CDs
Money markets—loans made for less than a year
includes short-term CDs, Treasury bills

5. Financial Asset Markets
Financial markets categorized according to time, resalability:
Resalability
Primary markets—financial assets can be redeemed only by original buyer
include savings bonds, small denomination CDs
also market where first issue of stock sold through investment bankers
Secondary markets—resale markets; offer liquidity to investors
include stocks, bonds

6. What Kind of Risk Are You Willing to Take?
Risk usually means loss of part of initial investment, or principal
no-risk investments: insured savings and CDs, U.S. government bonds
Safe investments risk interest rate may not keep up with inflation
Return on riskier investments depends on how profitable company is
bonds less risky than stocks; bondholders paid off first

7. Risk and Return
Safe investments have lowest return through fixed interest rates
Stocks, bonds—no guaranteed rates; stocks— higher return over time
If investing over long period, can risk losses in stock some years
if less time and money, may want safer investment
Diversification gives better chance of offsetting a loss with a gain

8. The Stock Market Two ways to earn money in stock
Buy to earn dividends, share of company profits
Buy to earn make money when you sell the stock

9. The Stock Market Types of Stock
Common stock—gives shareholders voting rights, share of profits
one vote per share owned to elect board of directors
Preferred stock—gives shareholders share of profits, no voting rights
investors get guaranteed dividends, paid off first if company closed
dividends do not increase if stock increases in value

10. Trading Stock Organized Stock Exchanges
New York Stock Exchange (NYSE) on Wall Street; oldest, largest in U.S.
traditionally, each stock auctioned from trading post on exchange floor
today, hand-held computers used to execute many trades
American Stock Exchange (AMEX) companies smaller than on the NYSE

11. Trading Stock Electronic Markets
Over-the-counter (OTC) market for stocks not traded on NYSE or AMEX
NASDAQ is centralized computer system for OTC trading

12. Trading Stock Recent Developments
Investors access Internet; huge growth in online brokerage companies
Through electronic communications networks (ECNs), 24-hour trading
computer technology matches buyers, sellers automatically; rapid trades

13. Measuring How Stocks Perform
Stock Indexes measure how stocks are performing.
U.S. indexes: DJIA, Standard & Poor’s 500, NASDAQ Composite
Since 1896, Dow Jones Industrial Average changed with U.S. economy
Includes 30 most successful companies in most important economic sectors
uses points to measure changes in prices at which stocks traded

14. Measuring How Stocks Perform
Tracking the Dow
Bull market—prices rise steadily over a relatively long period
Bear market—prices decline steadily over a relatively long period
Many things impact stock performance
Government action, overseas markets, Fed announcements

15. Other Financial Instruments
Certificates of Deposit
CDs offered primarily by banking institutions; have maturity date
Pay fixed or variable interest, reinvested for compound interest
longer maturity dates pay higher interest rates
Federal government insures funds up to $100,000
Risks: can lose interest, some principal if funds withdrawn early

16. Other Financial Instruments
Money Market Mutual Funds
MMMFs’ financial assets have maturities of one year or less
Give higher yield than savings accounts with similar liquidity
can redeem shares by check, phone, electronic transfer
Funds not insured but tightly regulated, so principal considered safe
Yield varies based on yield of assets in fund