Chapter 11

Financial Markets

Investment

• Investment is the act of redirecting resources from being consumed today so that they may create benefits in the future.

• It is the use of assets to earn income or profit

Investment

• Investment promotes economic growth and contributes to a nations wealth.

The financial System

• A financial system includes savers and borrowers and allows the transfer of money to take place.

• Financial assets, or securities, are documents that represent claims on property or income of the borrower. If a borrower fails to pay back the loan – they serve as proof in court that repayment is expected.

Financial intermediaries

• These are institutions that help channel funds from savers to borrowers:– Banks, credit unions– Finance companies– Mutual funds– Life insurance– Pension funds

Sharing Risk

• About 60% of all new businesses fail – so you want to spread out your money…

• Diversification – the strategy of spreading out investments to reduce risk

• Portfolios, collections of financial assts

Define Rate of Return

Risk Liquid? AD+ Dis -

savings

CD

Savings Bond

Munis

Corp

Junk

Bonds

Mutual Fund

Risk, Liquidity, Return

• Return is the money an investor receives above and beyond the sum of money initially invested.– Savings accounts pay very low, but they are liquid…

meaning you can get cash easily for immediate use.– CD’s you give up liquidity for a period of time, but they

have a higher interest rate. They are attractive to small investors, and you can choose term of maturity. (college, retirement, etc)

– ** the higher the point return – the higher the risk**

11.2Bonds & Financial Assets

• Bonds are IOU’s, loans that represent debt that the government or corporation must repay to an investor.

• They are low risk, and the rate of return in higher.

IN SEPARATE Groups

• Read about types of bonds & fill out your chart – place your findings on the board– Savings– Treasury– Municipal– Corporate– Junk

11.3The Stock Market

• Stock is issued in portions known as shares. Stocks are also called equities or claims of ownership.

• Advantages:– Dividends: paid quarterly based on profit.– Capital Gains: the difference between the

higher selling price and the lower purchase price…capital loss – when seller loses

Types of Stock

• Income stock

• Growth stock

• Common stock

• Preferred stock

Stock Split

Risks

• Stocks are risky. If a company goes bankrupt it pays its bills first – and its stockholders last…higher risk = higher return

How Traded

• Stockbrokers work for brokerage firms and buy and sell stock on the stock exchange.

• The NYSE started in 1792!! As an informal, outdoor exchange.

• Those on the NYSE are called blue chip companies. They are in high demand.

Nasdaq

• The National Association of Securities Dealers Automated Quotations…whew

• This is the American market for over-the=-c0o0unter securities. Developed in 1971 it is the 2nd largest securities market in the US…3rd in the world. There is no trading floor it is all electronic.

Futures, Options, Daytrading

• Futures are contracts to buy or sell commodities at a specific date in the future at a price today…most are with grain and livestock – gas & oil too

• Options are contracts giving the choice to buy or sell at a certain price up to a certain time in the future (like buying on margin)

• Daytrading – minute by minute making dozens of trades…very high risk

Bull & Bear Market

• When the stock market rises – it is a bull market…when it falls for a period of time it is called a bear market.

• In a bull market – profits increase

• In a bear market – investors sell stock

Dow Jones

• Stocks on the Dow represent 30 large companies in various industries such as food, entertainment and technology.

The S&P 500

• Tracks the price changes of 500 different stocks as a measure of stock market performance.