ch 11 financial markets 11.1 saving and investing
TRANSCRIPT
CH 11 Financial MarketsCH 11 Financial Markets
11.1 Saving and Investing11.1 Saving and Investing
Investment and Free EnterpriseInvestment and Free Enterprise
Investment - something bought for future financial benefitOR - the use of assets to earn income or profit
Promotes economic growth Personal - Banks Banks - Businesses Businesses - Jobs
Investment - something bought for future financial benefitOR - the use of assets to earn income or profit
Promotes economic growth Personal - Banks Banks - Businesses Businesses - Jobs
Savers and BorrowersSavers and Borrowers
Financial system allows transfer of money between savers and borrowers
Financial intermediaries connect savers to borrowers Financial assets (securities)- claim on income
or property or income of a borrower
Financial system allows transfer of money between savers and borrowers
Financial intermediaries connect savers to borrowers Financial assets (securities)- claim on income
or property or income of a borrower
Financial IntermediariesFinancial Intermediaries
Banks, Credit Unions, Savings and Loans Finance Companies - give loans to people and
small businesses Usually charge higher interest
Mutual Funds - pool of savings invested in various markets, bonds
Banks, Credit Unions, Savings and Loans Finance Companies - give loans to people and
small businesses Usually charge higher interest
Mutual Funds - pool of savings invested in various markets, bonds
Financial Intermediaries Financial Intermediaries
Life Insurance - collect premiums Pay out to compensate for lost income
Pensions - $ collected or taken from employees Invested into stocks, bonds
Life Insurance - collect premiums Pay out to compensate for lost income
Pensions - $ collected or taken from employees Invested into stocks, bonds
Advantages to IntermediariesAdvantages to Intermediaries
Shared Risk - Savings Accounts - almost no risk Stock - high potential for gain/ loss
Diversification Prevents possibility of losing all $$$
Information - Prospectus- investment report to potential investors Helps people build portfolio
Liquidity
Shared Risk - Savings Accounts - almost no risk Stock - high potential for gain/ loss
Diversification Prevents possibility of losing all $$$
Information - Prospectus- investment report to potential investors Helps people build portfolio
Liquidity
Trade offsTrade offs
Savings Account vs CDs Return on Investment Liquidity
Return vs Risk CDs and stocks Higher potential for return = higher risk
Savings Account vs CDs Return on Investment Liquidity
Return vs Risk CDs and stocks Higher potential for return = higher risk
Chapter 11.2 Bonds and Other Financial Assets
Chapter 11.2 Bonds and Other Financial Assets
Bonds as financial assets
Different types of bonds
4 types of financial asset markets
Bonds as financial assets
Different types of bonds
4 types of financial asset markets
BondsBonds
Certificates sold by businesses or governments to raise money
Basically loans or IOU’s
Low risk, guarantee return
Certificates sold by businesses or governments to raise money
Basically loans or IOU’s
Low risk, guarantee return
Three components of bondsThree components of bonds
1. Coupon Rate - interest rate which the bond will pay
2. Maturity - time at which payment is due Usually will mature in 10, 20 or 30 yrs
3. Par value - amount paid for the bond Face value
1. Coupon Rate - interest rate which the bond will pay
2. Maturity - time at which payment is due Usually will mature in 10, 20 or 30 yrs
3. Par value - amount paid for the bond Face value
Bonds can be bought and sold while maturing Based on yield
Annual rate of return on a bond
Buying a bond on discount Discount on par Why sell bonds?
Bonds can be bought and sold while maturing Based on yield
Annual rate of return on a bond
Buying a bond on discount Discount on par Why sell bonds?
Interest rates constantly change Rates go up - more potential for $
Bond Ratings Standard and Poor’s Moody’s Rate bonds based on the ability of a issuer to
repay AAA (Aaa) to D Higher rating, lower interest Higher rating will sell for more
Interest rates constantly change Rates go up - more potential for $
Bond Ratings Standard and Poor’s Moody’s Rate bonds based on the ability of a issuer to
repay AAA (Aaa) to D Higher rating, lower interest Higher rating will sell for more
Advantages to IssuerAdvantages to Issuer
1. Coupon rate won’t fluctuate Fixed payments for 10 years
2. Bonds do not entitle buyer to part of the profit, like stocks do Business will keep more profit
1. Coupon rate won’t fluctuate Fixed payments for 10 years
2. Bonds do not entitle buyer to part of the profit, like stocks do Business will keep more profit
Disadvantages to IssuerDisadvantages to Issuer
1. Fixed interest rates, even in bad years Interest rates on bonds go down
2. Bond ratings may go down Harder to sell
1. Fixed interest rates, even in bad years Interest rates on bonds go down
2. Bond ratings may go down Harder to sell
Types of bondsTypes of bonds
1. Savings bonds $50 - $10,000 Issued by Govt Bought at a discount
2. Treasury Bonds, Bills, Notes $1000 minimum Exempt from state and local taxes Different maturity times
1. Savings bonds $50 - $10,000 Issued by Govt Bought at a discount
2. Treasury Bonds, Bills, Notes $1000 minimum Exempt from state and local taxes Different maturity times
www.treasurydirect.gov
3. Municipal Bonds Issued by local govts to finance public works Tax free at Federal level
4. Corporate Bonds Larger denominations Risky Securities and Exchange Commission regulates
3. Municipal Bonds Issued by local govts to finance public works Tax free at Federal level
4. Corporate Bonds Larger denominations Risky Securities and Exchange Commission regulates
5. Junk Bonds High yield, low rating Up to 12% interest
5. Junk Bonds High yield, low rating Up to 12% interest
Other types of Financial AssetsOther types of Financial Assets
Certificates of Deposit
Money Market Mutual Funds Not covered by FDIC Pay higher interest rates
Certificates of Deposit
Money Market Mutual Funds Not covered by FDIC Pay higher interest rates
Financial Asset MarketsFinancial Asset Markets
Bonds, CD’s and Money Market Mutual Funds are all traded for Capital Markets - money lent for long periods
of time Take more than a year to mature
Money Markets Short term, less than a year
Bonds, CD’s and Money Market Mutual Funds are all traded for Capital Markets - money lent for long periods
of time Take more than a year to mature
Money Markets Short term, less than a year
Primary Market Assets redeemed only by original holder Nontransferable
Secondary Market Can be resold More liquidity
Primary Market Assets redeemed only by original holder Nontransferable
Secondary Market Can be resold More liquidity
CH 11.3 The Stock MarketCH 11.3 The Stock Market
Benefits and Risks of buying stock
How are stocks traded
How is performance measured
The Crash
Benefits and Risks of buying stock
How are stocks traded
How is performance measured
The Crash
Buying StockBuying Stock Stock represents ownership in a company
SHARES - Portions of stock EQUITIES - claims of ownership in a company
Benefits DIVIDENDS - Usually paid quarterly
Size depends on profit made
CAPITAL GAINS - selling stock for more than you paid CAPITAL LOSS - selling for less than you paid
Stock represents ownership in a company SHARES - Portions of stock EQUITIES - claims of ownership in a company
Benefits DIVIDENDS - Usually paid quarterly
Size depends on profit made
CAPITAL GAINS - selling stock for more than you paid CAPITAL LOSS - selling for less than you paid
TYPES OF STOCKTYPES OF STOCK
2 types based on whether they pay dividends or not
Income Stock - pays dividends at regular times throughout the year
Growth Stock - does NOT pay dividends Reinvests the stock into the business which
makes the business more valuable
2 types based on whether they pay dividends or not
Income Stock - pays dividends at regular times throughout the year
Growth Stock - does NOT pay dividends Reinvests the stock into the business which
makes the business more valuable
TYPES OF STOCKTYPES OF STOCK
2 types that allow stockholders to have a vote or not
1. Common Stock - voting owners of the company Use vote to elect Board of Directors One person may own enough to control the entire company
Stock Split - dividing one share into more Brings price of stock down, more available
2 types that allow stockholders to have a vote or not
1. Common Stock - voting owners of the company Use vote to elect Board of Directors One person may own enough to control the entire company
Stock Split - dividing one share into more Brings price of stock down, more available
2. Preferred Stock - NONVOTING members
Will receive money before common stock holders
2. Preferred Stock - NONVOTING members
Will receive money before common stock holders
Risks of Buying StocksRisks of Buying Stocks
Firm may lose money Stocks go down - Capital loss
Company goes under, sells all of its assets, pays bondholders first
Firm may lose money Stocks go down - Capital loss
Company goes under, sells all of its assets, pays bondholders first
Trading StocksTrading Stocks
Stockbrokers - person who links buyers and sellers of stocks Work for brokerage firms Charge commission on sales Buy stock at a discount and sell it for a higher
price
Stockbrokers - person who links buyers and sellers of stocks Work for brokerage firms Charge commission on sales Buy stock at a discount and sell it for a higher
price
Stock Exchange - secondary markets for stocks and bonds 1. New York Stock Exchange - (NYSE) largest
most powerful exchange Started in 1792 Seats sold to investors so they can trade on the
market Serves largest and best known companies
Stock Exchange - secondary markets for stocks and bonds 1. New York Stock Exchange - (NYSE) largest
most powerful exchange Started in 1792 Seats sold to investors so they can trade on the
market Serves largest and best known companies
2. NASDAQ-AMEX National Association of Securities Dealers’
Automated Quotation system + American Stock Exchange (AMEX) Combined list of companies with internet
technology Specialized in high tech and energy Risky
2. NASDAQ-AMEX National Association of Securities Dealers’
Automated Quotation system + American Stock Exchange (AMEX) Combined list of companies with internet
technology Specialized in high tech and energy Risky
3. OTC Market Over The Counter (electronically) Smaller companies
Most do NOT pay dividends
4. Futures and Options Futures - contract to buy/sell at a future date Options - Buy/sell for a certain amount of time
Call option (Buy)/ Put Options (Sell)
3. OTC Market Over The Counter (electronically) Smaller companies
Most do NOT pay dividends
4. Futures and Options Futures - contract to buy/sell at a future date Options - Buy/sell for a certain amount of time
Call option (Buy)/ Put Options (Sell)
5. Daytrading Buying and selling many stocks the same day,
within hours sometimes in an attempt to make a profit
5. Daytrading Buying and selling many stocks the same day,
within hours sometimes in an attempt to make a profit
Trading Places
PerformancePerformance
Bull Markets Stocks go up over a long period of time
Bear Markets Stocks prices fall for a long period of time
Dow Jones Industrial Average 1896 Shows 30 specific large companies
Bull Markets Stocks go up over a long period of time
Bear Markets Stocks prices fall for a long period of time
Dow Jones Industrial Average 1896 Shows 30 specific large companies
S&P 500 Standard and Poor’s 500 Mostly NYSE, some NASDAQ and OTC
S&P 500 Standard and Poor’s 500 Mostly NYSE, some NASDAQ and OTC
CRASH of 1929CRASH of 1929
1929 - Started off great From 1925 to 1929 grew from $27 to $87 Billion
Buying on credit New technology, led to overproduction
Speculation - high risk investments with borrowed money
Buying on Margin - paying part of the price for stock, borrowing the rest
1929 - Started off great From 1925 to 1929 grew from $27 to $87 Billion
Buying on credit New technology, led to overproduction
Speculation - high risk investments with borrowed money
Buying on Margin - paying part of the price for stock, borrowing the rest
The Crash - Prices of stock rose above actual value of the
companies – Speculation + buying on margin Brokers demanded payment as prices began to
fall More and more sales drove prices down even
further October 29, 1929
The Crash - Prices of stock rose above actual value of the
companies – Speculation + buying on margin Brokers demanded payment as prices began to
fall More and more sales drove prices down even
further October 29, 1929
AftermathAftermath
Contributed to the Great Depression First the Fed cuts interest rates to encourage
growth Then decreased money supply Discouraged lending
Today - people are still cautious about investing New regulations help ensure confidence
Contributed to the Great Depression First the Fed cuts interest rates to encourage
growth Then decreased money supply Discouraged lending
Today - people are still cautious about investing New regulations help ensure confidence