1. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. 10 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Finance: Acquiring and Using Funds to Maximize Value 2 LO1What is the role of financial markets in the U.S. economy? Who are the key players? LO2What are the key laws that govern the way financial markets operate and what is the impact of these laws? LO3What are the major types of securities that are traded in securities markets? LO4How are securities issued in the primary market and traded in secondary markets? LO5What strategies do investors use to invest securities? LO6How do you interpret the information provided in the stock quotes available on financial websites?

3. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Role of Financial Markets Financial markets transfer funds from savers to borrowers Companies access financial resources to invest, meet payroll, and develop new products Individuals, organizations and YOU are all key players in financial markets 3

4. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Institutions Depository Institutions  Commercial banks  Credit unions  Savings and loan associations Nondepository Financial Institutions  Institutional investors  Securities brokers  Securities dealers  Investment Banks 4

5. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Regulating Financial Markets to Protect Investors and Improve Stability Savers and borrowers need confidence in financial institutions The crisis of 2008 is an example of the financial markets malfunctioning U.S. experienced bank failures in 1907, early 1930s, and 1908s 5

6. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Regulation Early Efforts:  Federal Reserve Act of 1913 – created the FED  Banking Act of 1933/Glass-Steagall Act – established the Federal Deposit Insurance Corporation  Financial Services Modernization Act of 1999/Gramm- Billey-Leach Act – reversed Glass-Steagall Recent Developments:  Sarbanes-Oxley Act of 2002 – fair external audits  Dodd-Frank Act of 2010 – extended authority over nondepository institutions 6 Source: Public Company Accounting Oversight Board website: http://pcaobus.org/Pages/default.aspx,“Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” United States Senate Committee on Banking, Housing and Urban Affairs website: http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf

7. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Investing in Financial Securities 7 Three major types of securities that are traded in markets:  Common Stock  Preferred Stock  Bonds

8. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporate Ownership 8

9. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Common Stock 9 Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets The basic form of ownership in a corporation

10. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preferred Stock: Getting Preferential Treatment 10 Stock that gives its holder preference over common stockholders Claim on Assets Payment of Dividends (stated amount) Cumulative Feature

11. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bonds: Earning Your Interest 11 Long-term debt issued by a corporation or government Maturity Date – the date the bond comes due Par Value – face value Premium – bond is above par Discount – bond is below par Coupon Rate – interest payment as percentage of par value Current Yield – interest payment as percentage of current market price Bonds are a legal obligation. Companies issued century bonds in the 1990s. Source: “Are Bond Buyers This Crazy?” by Dan Caplinger, Motley Fool website: http://www.fool.com/investing/dividends-income/2010/08/26/are-bond-buyers-this-crazy.aspx

12. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Could Your Best Investment Be a Piece of Junk? Junk bonds are bonds issued by companies with poor credit ratings Junk bonds offer a higher rate of interest (and risk) In 2007, only 22 companies in the world defaulted in their bonds  During the recession in 2008, the number soared to 126 In late 2008, investing in junk bonds became a hot strategy 12 Source: Defaults Stacking Up in the Junk Bond Market by Tom Petruno, Los Angeles Times website: http://latimesblogs.latimes.com/money_co/2009/01/junk-bonds-the.html January 26, 2009; There’s Plenty of Juice in Junk Bonds by Mina Kimes, Fortune magazine, March 2, 2009, p. 40; Junk Bond Yields Are Crazy High, But Tread Carefully by John Waggoner, USA Today, December 5, 2008, Money Section, p. 3b.

13. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Convertible Securities Convertible securities – bonds or preferred stock that investors exchange for common stock Conversion ratio is the number of shares exchanged for each convertible security  Conversion ratio of 20  Each security can be exchanged for 20 shares 13

14. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mutual Funds and ETFs: Diversification Made Easy Mutual Funds  Diversification  Professional Management  Variety  Liquidity 14 Exchange Traded Funds Features of stocks and mutual fund Ownership in a “market basket” of stocks You can buy and sell ETFs any time of the day, unlike Mutual Funds

15. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Primary Securities Market: Where Securities Are Issued 15 Public Offering: Securities are sold to anyone in the investing public Private Placement: Ownership by a small number of people

16. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trading Securities: The Secondary Market 16 © The Studio Dog/Photodisc/Getty Images  Security Exchanges New York Stock Exchange NASDAQ Currently the two largest exchanges in the U.S. A wave of mergers of exchanges are taking place  Over the Counter Market  Electronic Communication Networks ©Songquan Deng / Shutterstock.com

17. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Over-the-Counter Market Many corporations do not meet requirements to list on organized exchanges  Listing can be expensive OTC are traded through a system of market makers The market for OTC stocks is much less active than exchanges 17

18. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Electronic Communications Networks Computer-based securities market ECNs automatically match buyers and sellers Individuals open an account with a broker-dealer Investors can trade “after hours” 18 © iStockphoto.com/Skip Odonnell © The Studio Dog/Photodisc/Getty Images

19. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Teaching Personal Finance Many states have adopted personal finance requirements in High School/College Four states require a course for graduation, other states integrate lessons into other classes Studies show courses help college students Many students are learning from household woes While three-quarters of students report money management knowledge, only 52% have savings accounts 19 Source: http://www.usnews.com/education/blogs/high-school-notes/2011/08/26/states-push-to-teach-personal-finance-in-schools

20. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Personal Investing 20  What are your short-term and long-term goals?  Given your budget, how much are you able to invest?  How long can you leave your money invested?  How concerned are you about the tax implications of your investments?  How much tolerance do you have for risk?  DIVERSIFICATION © The Studio Dog/Photodisc/Getty Images

21. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Symbolic Logic: Do You LUV this HOG’s DNA? 21 GOOGHOG MMMDNA JAVALUV Google Harley-Davidson 3M Genentech Sun Microsystems Southwest Airlines © Rubberball/ Jupiterimages Source: What Is a Stock Symbol and How Do I Find the Symbol for a Company?, BusinessKnowledgeSource.com website: http://businessknowledgesource.com/investing/what_is_a_stock_symbol_and_how_do_i_find_the_symbol_for_a_company_021903.html, accessed August 29, 2008; Stock Symbol Identifiers, StockMaven.com website, http://www.stockmaven.com/symbols.htm, accessed August 29, 2008; Stock Tickers and Ticker Symbols, Money-zine.com website, http://www.money-zine.com/Investing/Stocks/Stock-Tickers-and-Ticker-Symbols/, accessed August 9, 2009. Every publicly traded corporation is identified by a unique combination of letters known as stock symbols. Can you Guess These?

22. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing a Broker: Access to the Markets 22 Individuals must use a broker to trade stocks on the organized exchanges and OTC market Full Service Brokers Provide a range of services Discount Brokers Basic buy/sell capabilities The competition between brokers is intense and both attempt to offer more services Once you decide on a broker, you open an account © The Studio Dog/Photodisc/Getty Images © Tetra Images/ Jupiterimages

23. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Buying Securities 23 Market Orders – buy or sell a security at the current market price Limit Orders – Place limits on the price at which orders are executed

24. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategies for Investing in Securities Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding 24

25. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Stock Indices: Tracking the Trends 25 Stock Index: Tracks how the prices of a specific set of stocks have changed Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by The Wall Street Journal editors. Standard and Poor’s 500: Tracks 500 stocks and weighs the total market value of each stock

26. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Stock Price Indices 26

27. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Tracking the Performance of Specific Securities 27

28. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Looking Back What is the role of financial markets in the U.S. economy? Who are the key players? What are the key laws that govern the way financial markets operate and what is the impact of these laws? What are the major types of securities that are traded in securities markets? How are securities issued in the primary market and traded in secondary markets? How do you interpret the information provided in the stock quotes available on financial websites? 28