financial markets overview
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Financial Markets Overview. IEMS 326. Why this Lecture?. Goals: financial literacy financial numeracy Will this be on the exam? Yes. Know orders of magnitude, relative sizes. Stocks vs. Flows vs. Trades Market functions. Debt versus Budget. - PowerPoint PPT PresentationTRANSCRIPT
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Financial Markets OverviewIEMS 326
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Why this Lecture? Goals:
financial literacy financial numeracy
Will this be on the exam? Yes. Know orders of magnitude, relative sizes. Stocks vs. Flows vs. Trades Market functions
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Debt versus Budget What’s bigger, the debt or deficit of the US?
U.S. federal debt: over $11T U.S. federal deficit 2009: about $1½T
In general, distinguish among 3 things: stocks—e.g. how much has been invested? flows—an increase or decrease in stocks trades—exchanges of ownership
(may not affect the real economy)
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Debt, Deficit, Bonds The U.S. federal debt is a…
stock—total amount borrowed The U.S. federal deficit is a…
flow—this year’s increase in the debt When I buy a U.S. Treasury bond, it’s a…
trade—if I buy it from you flow—if I buy it from the U.S. Treasury
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Budgets The U.S. federal budget is…
about $3T about twice the U.S. federal deficit about $10K per person (population ~300M)
Illinois has population ~13M and its state budget is… about $50B about $4K per person
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Budgets The City of Evanston’s budget is…
$191M about $2.5K per person (population ~75K)
Northwestern’s budget is… $1.6B about $100K per student (~16K students)
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Values of Investments What’s worth more, American Airlines or
Northwestern’s endowment? Our endowment: about $6B (~$400K/student) American Airlines (AMR):
market capitalization $2.2B = (# shares of stock)*(price of a share) = 333M shares * $6.70/share
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Shareholding and Market Cap If I buy 333 shares of American Airlines…
a trade on the NYSE stock exchange …I’ll own 1 millionth of the corporation
If NU tries to buy all 333M shares… the price would probably go up
Market capitalization: valuation of the whole company based on small trades now.
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Typical share prices From $1 to $100s Not too low…
(penny stocks) …or too high!
Berkshire Hathaway
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How to make money in stocks buy low sell high
…or collect dividends When the share price goes up, (trade)
the company is more expensive shareholders are happy
real economy vs. financial trades
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Primary&Secondary Equity Market primary equity market: (flow)
e.g. initial public offering (IPO) Google issued new shares sold them to investors for $30B invested $30B in cool stuff
secondary equity market (exchanges): (trade) shares and $$ change hands brokers get ¢ (~0.1% of value)
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Bond Market primary bond market:
U.S. Treasury or G.E. borrows money by issuing bonds to investors
secondary bond market: bonds and $$$ change hands brokers get $ (1-2% value) trades: $1T/day
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Global Bond Market $80T oustanding
(stock) about $13K/person
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Foreign Exchange Market currency: trade $ for euros
open 24/7 trades: about $3T/day
about $500/person/day about $200K/person/year
purposes: international trade hedging speculation
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Foreign Exchange Market
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Commodities Markets spot vs. futures exchanges:
CME/CBoT NYMEX, etc.
pork bellies 20 tons, frozen physical delivery
hedging, speculation
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Derivatives
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Backup slides
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How companies make money successful business projects…
create positive earnings increase book value make it possible to pay higher dividends
real economy vs. financial trades
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Bonds issued
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Nationality of bond issuer
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Nationality of bond holder
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Government Bonds
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Bond market
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Foreign Exchange Market: What?
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Foreign Exchange Market: Where?