Goldman SachsCapital Markets Program

Teaching Capital MarketsTo

High School Students

Dr. Ira SilverNeeley School of Business at TCU

Questions to Answer

• What are capital markets?• Why are they important to me?• Why will they be more important to me in the

future?• How can learning about capital markets be

fun?

2

What are Capital Markets?

• Primary capital markets are where debt securities (bonds/loans) and equity securities (stock/ownership) are first sold to investors

• Secondary capital markets (exchanges) are where existing debt and equity securities are traded between investors– Provides liquidity– Establishes prices

3

Why are Capital Markets Important to You?

• Today’s high school students will need to rely more on private savings than the generations before them– Social Security will be in financial trouble before they

retire and benefits will probably be cut– Some part of Social Security may become private

accounts– Most company pensions have been eliminated and

replaced by private retirement savings plans (401k, 403b)

– Other private retirement plans exist (IRAs) and will probably be expanded

4

Knowledge of Capital Markets is Critical to your Ability to Get Stuff* • The difference between earning 5% on a

savings account (debt) and 10% on stocks (equity) is very large over long periods of time– High school students have a lot of time– If you save $5,000/ yr at 5% for 20 years you end

up with $165,000– If you save $5,000/ yr at 10% for 20 years you end

up with $286,000 (difference is a very nice car)

* Cars, houses, boats, vacations

5

What About Retirement ?

• It’s not for a long time, but the sooner you start the more you end up with– If you save $5,000/ yr at 5%

for 40 years you end up with $604,000

– If you save $5,000/ yr at 10% for 40 years you end up with $2,213,000

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Why Do I have to Worry About It?

• The private retirement savings plans require you to decide what to invest in

• Getting the 10% rather than the 5% requires knowledge of capital markets

• Safe low return investments are less risky than higher return more risky investment

• Debt securities (bonds) are less risky than equity securities (stocks) and have a lower return

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What Determines Bond & Stock Prices?• Security prices are the present value of future

cash flows• Stock cash flows are dividends and price

increases• Bond cash flows are interest and any change in

price• Cash in the future is worth less than the same

cash now – You give up present spending– Higher prices reduce future spending power

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What Determines Future Cash Flows?

• Future economic growth generates more sales, earnings, and stock dividends

• Although interest is fixed, weak economic conditions can lead to corporate failures and default on bond payments

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What Determines How Much You Reduce Future Cash Flows?

• Future cash flows are reduced by a discount factor

• The present value (current price) of future cash flows are reduced more if:– Interest rates are higher– Inflation is higher– Uncertainty (risk) about the

future is greater

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How Can You Make Learning Fun?

• Based on our experience at the Neeley School of Business with the Investor Challenge teaching high school students and my experience teaching undergraduates– They need to get involved by picking

stocks and analyzing them– They need to participate in a stock

market simulation with a prize for teams that do best

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What Are Stock Simulations?

• Individual or team is given an amount of cash• They can invest that sum plus what they are

allowed to borrow in stocks, bonds, mutual funds, and other allowed securities

• The simulation software keeps track of the value of their account based on actual market prices

• Individual/team rankings are available each day

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What Simulations Are Available?

http://www.smg2000.org/

http://www.stocktrak.com/

http://www.smartstocks.com/

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What Is Stock Trak?

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What Is Wall Street Survivor?

http://www.wallstreetsurvivor.com/?ad=0108-04122-01&utm_source=StockTrak&utm_medium=Web&utm_term=RON&utm_campaign=StockTrakGroup+web+site

15

What Is National SMS?

http://www.nationalsms.com/ 16

Goldman SachsCapital Markets Program

Teaching Capital MarketsTo

High School Students

Dr. Ira SilverNeeley School of Business at TCU