1. Financial Markets and Risk
The higher the risk the greater the potential return.
Junk Bonds
Growth Stocks
RISK
Income Stocks
Corporate Bonds
Municipal Bonds
Savings Bonds
Treasury Bills
RETURN

2. Types of Risk
Credit Risk – you may not get paid back all of your money
Inflation Risk – the longer you have your money in savings the more inflation erodes its value
Liquidity Risk – you may need cash and if your money is tied up in a long term investment you may not be able to get it without paying a penalty
Time Risk – a better investment opportunity may present itself

3. Bonds as Financial Assets
Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor with interest.

4. Bonds and Risk Bonds have different levels of risk depending on:
Who issued the bond
Federal government is the lowest risk
Length of time before bond matures
Longer the time frame the greater the risk

5. Making Money with Bonds
Bondholders earn interest for the life of the bond.
Bondholders can sell their bond for a higher price then for what they bought them.
Bond ratings and current interest rates can change demand for bonds and thus their selling prices

6. Government Bonds
Savings bonds are the least expensive bond; they cost only $25, but they take 18 years to mature making them an inflation risk.
U.S. Treasury Bills are more expensive - $1000, but they mature in 26 weeks, making them one of the safest of all investments

7. Municipal bonds are tax free so they have less inflation risk.
Government Bonds
Municipal bonds are issued by state or local governments to finance improvements.
Municipal bonds are tax free so they have less inflation risk.
These take 5-15 years to mature.

8. Corporate Bonds
Corporation issue bonds to raise money to expand their business.
They mature in years.
Corporate bonds are rated according to risk
AAA is lowest risk
CCC is highest risk
Corporate bonds cost $1,000 and up.

9. Corporate Bonds
Junk bonds are the lowest-rated type of corporate bond, but they are potentially higher-paying bonds.
These bonds usually are being sold by companies on the verge of bankruptcy

10. STOCK

11. Why do companies issue stock?
By selling SHARES, corporations can raise money to:
Start
Run
Expand their business

12. There are TWO ways for shareholders to make a profit!
DIVIDENDS
A portion of the corporation’s profits are paid to shareholders
Higher Profits = Higher Dividends per share
CAPITAL GAINS
The difference in the purchasing price & selling price
a HIGHER price = gain
a LOWER price = loss

13. HOW DO I PURCHASE STOCK? Contact a STOCKBROKER
This is a person that links potential sellers & buyers.
Stockbrokers charge fees for conducting the sale.

14. TYPES OF STOCK Income stock Growth stock Pays dividends.
These are usually large well-established firms.
Growth stock
Pays few dividends, profits are reinvested in the company.
These are new start-up companies

15. MARKETS FOR BUYING AND SELLING STOCK
STOCK EXCHANGES
MARKETS FOR BUYING AND SELLING STOCK
New York Stock Exchange (NYSE)
The oldest, largest and most prestigious exchange in the US
The largest companies are known as BLUE CHIP stock

16. Over-the-Counter (OTC) Markets
STOCK EXCHANGES
Over-the-Counter (OTC) Markets
Stocks are bought and sold over computer terminals, not on the floor of an exchange
Stocks are listed on NASDAQ (the 2nd largest exchange in the US)

17. MEASURING STOCK PERFORMANCE
BULL MARKET
Stock market is rising steadily over a period of time.
BEAR MARKET
Stock market is steadily falling over a period of time.

18. MEASURING STOCK PERFORMANCE
Dow-Jones Industrial Average (DIJA)
Publishes a daily average of the closing prices of 30 stocks listed on the NYSE
Standard and Poor’s 500
Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

19. DOW Jones Industrial Average

20. Risk IS Involved!!! Corporations cannot guarantee profits
The Stockholder may experience a CAPITAL LOSS
Bond holders are paid FIRST!!!
***Remember***
A BOND represents DEBT that is owed by the corporation