1. Financial Markets Chapter 11
Ms. Eraqi

2. Financial Intermediaries
TYPES OF INVESTMENTS
Includes banks, S&Ls, credit unions
also finance companies, pension funds, life insurance companies
Mutual fund—pools individuals’ money to buy range of financial assets
investors own shares of entire fund
Financial Intermediaries

3. Financial Intermediaries
Example: Nonbank Financial Intermediaries
Finance companies make small loans to households, small businesses
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
Financial Intermediaries

4. Financial Asset Markets
Financial Markets
Financial markets categorized according to time, resalability
Capital market—for buying and selling long- term financial assets
Money market—for buying and selling short- term financial assets
Primary market—for financial assets that original buyer must redeem
Secondary market—where financial assets are resold
Financial Asset Markets

5. Financial Asset Markets
Time
Capital markets—assets held for over a year
include stocks, bonds, mortgages, long-term CDs
Money markets—loans made for less than a year
include short-term CDs, Treasury bills
Financial Asset Markets

6. Financial Asset Markets
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
Financial Asset Markets

7. Risk and Return 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
Risk and Return

8. Risk and Return What Kind of Return Do You Want?
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
Risk and Return

9. Why Buy Stock? The Stock Market
Buy to earn dividends, share of company profits
investors who want income, want dividends
Buy to earn capital gains through resale of stock
investors who want growth look for potential for capital gains
The Stock Market

10. 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
The Stock Market

11. 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
2006 merger with Archipelago Exchange allowed electronic trades
American Stock Exchange (AMEX) companies smaller than on the NYSE
Trading Stock

12. 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
second largest exchange in world in number of companies, shares traded
companies from many sectors of U.S. economy, most in technology
OTC Bulletin Board is electronic market for smaller companies
Trading Stock

13. Trading Stock Recent Developments
1990s regulations allow any firm to trade stocks in any exchange
Through electronic communications networks (ECNs), 24-hour trading
Investors access Internet; huge growth in online brokerage companies
lower commissions than traditional brokers
computer technology matches buyers, sellers automatically; rapid trades
Trading Stock

14. Measuring How Stocks Perform
Stock Indexes
U.S. indexes: DJIA, Standard & Poor’s 500, NASDAQ Composite Global indexes: Hang Seng, DAX, Nikkei 225, TSE 300, FTSE 100
Since 1896, Dow Jones Industrial Average changed with U.S. economy
includes most successful companies in most important economic sectors
uses points to measure changes in prices at which stocks traded
Measuring How Stocks Perform

15. 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
1972 to 2000 longest bull market in history; most last two to three years
Dow affected by previous close, Fed, foreign indexes, trade balance
About 21 stock markets overseas with over 1,000 large companies each
Measuring How Stocks Perform

16. 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
Other Financial Instruments

17. 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
Other Financial Instruments