1. Financial Markets
Chapter 11
Sections 3 & 4

2. Buying and Selling Stocks
Companies issue stock and sell to investment bankers in primary market
Initial public offering (IPO) is the sale that raises money for the corporation
Stock exchange-secondary market where securities are resold and bought
Buyers expect stock prices to rise, so they can resell for a profit
Capital gains-profit made from the sale of stock

3. The Stock Market Why buy stock? Types of Stock
Buy to earn dividends & share of company profits
Invest who want income & dividends
Buy to earn capital gains through the resale of stock
Investors who want growth look for potential capital gains
Common Stock-gives shareholders voting rights, share of profits
One vote per share owned to elect board of directors
Preferred Stock-givers shareholders share of profits but no voting rights
Investors get guaranteed dividends, paid off first if the company closes
Dividends do not increase if stock increases in value

4. Trading Stock Most people buy stock to earn capital gains
Stock prices are determined by demand and supply; influencing factors:
Company profits and losses
Technological advances
Overall economy
Stockbroker-buys and sells securities for customers, earns a commission

5. Trading Stock Organized Stock Exchanges Electronic Markets
New York Stock Exchange (NYSE) on Wall Street; oldest & largest in US
Old School-Each stock auctioned from trading post on exchange floor
Today-hand-held computers used to execute many trades
2006 merger allowed for electronic trades
American Stock Exchange (AMEX) companies smaller than on the NYSE
Over-the-counter (OTC) market stocks not traded on NYSE or AMEX
NASDAQ is centralized computer system for OTC trading
Second largest exchange in world in number of companies & shares traded
Companies from many sectors of IS economy, most in technology
OTC Bulletin Board is electronic market for smaller companies

6. Trading Stock Futures & Options Market Recent Developments
Most investors do not trade futures and options
Future-contract to buy, sell on specific future dates at preset price
Option- contract giving the right to buy & sell in the future at a preset price
Investor pays small fraction for stock’s current price for option
1990s regulations allow any firm to trade stocks in exchange
Through electronic communications networks (ECNs), 24-hour trading
Invest access Internet; huge growth in online brokerage companies
Lower commissions than traditional brokers
Computer technology matches buyers & sellers automatically

7. Measuring How Stocks Perform
About half of U.S. households own stocks
Stock index-measures & reports the change in prices of a set of stocks
Measures individual stocks and stock market as a whole

8. Measuring How Stocks Perform
Stock Indexes
Trading the Dow
U.S. Indexes: DIJA, Standard & Poor’s 500, NASDAQ, Composite
Global Indexes: Hang Seng, DAX, Nikkei 225, TSE 300, FTSE 100
Since 1896, Dow Jones Industrial Average change with U.S. economy
Includes most successful companies in most important economic sections
Uses points to measure changes in prices at which stocks are traded
Bull market-prices rise steadily over a relatively long period of time
Bear market-prices decline steadily over a relatively long period of time
longest bull market in history; most last 2-3 years
Dow affected by previous close, Fed, foreign indexes, & trade balance
About 21 stock markets overseas with over 1,000 larger companies each

9. Bonds and Other Financial Instruments
Bonds are issued by companies and governments
Par value- amount issuer must pay buyer at maturity
Maturity- date when bond is due to be repaid
Coupon rate- interest rate bondholder gets every year until maturity

10. Why Buy Bonds?
Investors buy bonds for interest paid and gains made by selling
Yield- annual rate of return on a bond
If bond sold at par value, yield is same as coupon rate
If sold for less, yield is higher; if sold for more, yield is lower
Bonds with longer maturity dates have higher yields than with shorter

11. Why Buy Bonds? Types of Bonds Buying Bonds
U.S. government issues treasury bonds, notes, & bills; very safe
Safety of foreign government bonds depend on the country
State & local governments issue bonds; no federal income tax
Corporate bonds higher risk than government, pay higher coupon rate
Junk bonds-are high-risk, high yield corporate bonds
Buying Bonds
Most buyers want guaranteed returns
Investors who sell before maturity want to make profit
As market interest rates rise, price of bonds with lower rate falls
Main risk to investors is default
Governments, companies get evaluated by credit-rating companies

12. Other Financial Instruments
Certificates of Deposit
CDs primarily offered from banking institutions
Pay fixed or variable interest, reinvested for compound interest
FDIC insures funds up to $100,000
Money Market Mutual Funds
Have maturities of one year or less
Higher yield than savings accounts
Funds not insured
Tightly regulated
Yield varies

13. Vocabulary
Stock Exchange
secondary market where securities are resold and bought
Capital Gain
profit made from the sale of stock
Common Stock
gives shareholders voting rights, share of profits
Preferred Stock
givers shareholders share of profits but no voting rights
Stockbroker
buys and sells securities for customers, earns a commission
Future
contract to buy, sell on specific future dates at preset price
Option
contract giving the right to buy & sell in the future at a preset price
Stock Index
measures & reports the change in prices of a set of stocks

14. Vocabulary
Bull Market
prices rise steadily over a relatively long period of time
Bear Market
prices decline steadily over a relatively long period of time
Par Value
amount issuer must pay buyer at maturity
Maturity
Date when bond is due to be paid
Coupon Rate
interest rate bondholder gets every year until maturity
Yield
annual rate of return on a bond
Junk Bond
high-risk, high yield corporate bonds