2 I. WHAT IS “INVESTMENT”THE ACT OF REDIRECTING RESOURCES FROM BEING USED TODAY SO THEY CAN CREATE BENEFITS IN THE FUTURE.a. Promotes economic growth
3 II. THE FINANCIAL SYSTEM I. ALLOWS FOR THE TRANSFER OF MONEY FROM SAVERS TO BORROWERS.Savings is a method to make money available for borrowers,Savers obtain a document that confirms the amount they have saved.i. Passbooks / savings account booksii. Stock or bond recordsiii. Portfolio reportsc. These documents are called ASSETS
4 Financial Intermediaries People / institutions that channel money from the saver to the borrower.Savers and borrowers are linked together byFINANCIAL INTERMEDIARIES!THERE ARE SEVERAL TYPES OF “FINANCIAL INTERMEDIARIES”
5 1. Banks, S & L’s, Credit Unions Receive deposits from savers and lend a per cent to borrowers (individuals or business)Borrowers pay back loans at higher rates of interest.Savers paid interests on their deposits.
6 2. Finance Companies Rates close to 22-24% Lend money to consumers or small businesses. A higher degree of risk so their interest rates and fees are very high
8 Mutual FundsPool the savings / deposits of the investors and invests them in a variety of stocks and bonds. Key goal is diversification.
9 4. Hedge FundsA private investment organization that invests in high risk ventures to make profit for their clients. Not regulated by the SEC.A hedge fund is a lightly regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the fund's investment manager.
10 5. Life Insurance Companies Provides financial protection for the family if the insured dies suddenly. 2 types of insurance:1. Universal—premiums applied toward insurance and a variable investment strategy. Policy can be surrendered for cash value when the policy matures.2. Term Life—premiums paid insure a life only, no investment. Premiums are lower and based on a number of mortality factors.
12 6. Pension fundscollect funds which then are invested and allowed to grow.The funds are dispersed thru payments for injury, retirement, or death.
13 WHAT STRATEGIES DO YOU EMPLOY IN DETERMINING WHAT OR HOW TO INVEST ? Diversification—Spreading out your investments in order to reduce risk and possible loss.Find information—Intermediaries will provide the client with information about their investments:i. Prospectus—A report that gives information about the investment and how it has performed recently.ii. Portfolios—A collection of all the assets the client owns or controls.Insure Liquidity—an investment should have the ability to be quickly converted to cash.Examine the Risk / Return Ratio—The higher the risk, the higher the rate of return. As an investor, you have to decide if the risk is worth the return.
14 III. TYPES OF RISKCredit Risk—Borrowers may be late with payments or may not make make payments.Liquidity Risk—May not be able to convert your investment into cash.Inflation rate risk—Inflation erodes the value of your investmentTime risk—You may miss better investment opportunities because your funds are already invested somewhere else.
15 CHAPTER 11—SAVING AND INVESTING SECT. 2—BONDS AND OTHER ASSETS I. BONDS AS FINANCIAL ASSETSa.1942 –U.S. starts a War Bond driveb.Bonds act like loans.c.Bonds pay a fixed rate of interest at regular intervalsd.Bonds rank low on the risk / return ratio.
16 I. THE COMPONENTS OF A BOND a. Par Value—The amount the investor pays to purchase the bond. Also called face value or the principal.b. Coupon Rate—The amount of interest the bond issuer pays the bondholder.c. Maturity—The time at which payment to a bondholder is due. Lengths vary according to the bond.d. Yield—The annual rate of return on an interest paying bond if the bond were held to maturity.
17 I. BUYING BONDS ON DISCOUNT Buy bonds at below full par value.Example -Purchase a $100 bond for $80Bondholder may need cash.Then redeem the bond at full value!Profit of $20
19 RATING THE BONDS—CHECK THE QUALITY OF THE INVESTMENT a. Standard & Poor’s and Moody’s are companies that rate bondsb.Ranks go from AAA (Highest) to D (Usually in default)c.Higher rating has a lower risk and return, lower rating has a higher rate and return.
20 ADVANTAGES AND DISADVANTAGES OF THE BOND ISSUER i. Interest rate will not vary—Know that you have fixed paymentsii. Selling bonds does not give up ownership of your company.DISADVANTAGESi. Must make fixed payments even when the company is not doing well.ii. If your bond rating goes down it will be harder to sell them in the future.
21 TYPES OF BONDS U.S. SAVINGS BOND i. Denominations of $50 to $10000 issued by U.S. Govt. The par value is only one half of the face value ($50 bond costs $25)ii. Funds used to finance public projectsiii. Next to No risk of defaultiv. Interest payments are paid when the full maturity date is reached.v. Specific tax advantage
23 The Treasury BondDenominations / minimum purchase of $1000 issued by U.S. GovernmentSafe investment since backed by U.S. GovernmentMaturity date ranges from years—considered a long term investment.Specific tax advantage
24 The Treasury NoteDenominations / minimum purchase of $1000 issued by U.S. GovtSafe investment since backed by U.S. Gov’t.Maturity date ranges from 2-10 years—mid term investmentSpecific tax advantage
25 The Treasury BillDenominations / minimum purchase of $1000 issued by U.S. GovtSafe investment since backed by U.S. Gov’t.Maturity date ranges from 3-12 months, the most liquid of these types of investments.(Short term investment)Specific tax advantage
26 The Municipal Bond (the Muni’s) Issued by state and local governments to finance public worksConsidered reasonably safe investmentDenominations usually begin at $100**Maturity can range from a few months to as high as yrs.Exempt from income taxes
27 This means their interest rate does not change with inflation. *** Most government Bonds are NOT Inflation indexed BondsThis means their interest rate does not change with inflation.
28 Corporate Bonds Used by corporations to raise capital. Denominations range from $1000 and up(set by corporation)Maturity date is also set by corporationBond sales are monitored by :a) Standard and Poor’sb) Moody’sc) Securities and Exchange Comm.
29 Junk Bonds—High Yield &High Risk Securities The return may be 12% or higherThe rating is lower for the chance of default is greaterTerm ranges from less than 1 year to 5 years in rare occasionsDenominations set by each company, usually start at $
31 International BondsIssued by foreign countries at units that begin at $1millionInterest payments made in foreign countries/ currencySubject to being affected by international politics.
32 VII. OTHER TYPES OF INVESTMENTS The Pros and Cons of Alternative Investment+They can diversify your overall portfolio+ provide some tax advantages+ provide strong cash flow and/or appreciation.- your liquidity is very limited until the program goes full cycle and returns your principal along with whatever gain or loss it generated.- As with all investments, the return of your principal is not guaranteed.
33 Certificates of Deposit (C.D.’s) Time sensitive accts. where investors can invest for as little as $100 at a higher rate than regular savings acct.Investors can vary the term of the CDPenalty paid on early withdrawals
34 MONEY MARKET MUTUAL FUNDS SHORT TERM FINANCIAL ASSETS ARE PURCHASED (LIQUIDITY)RATE OF RETURN IS HIGHER THAN A REGULAR SAVINGS ACCOUNT AND MOST C.D.’SHIGHER RISK FOR HIGHER RETURN
35 The IRA (Individual Retirement Account) 1)Basic IRA2) Educational IRA3) Roth IRA4) 401 plan
37 FINANCIAL ASSET MARKETS BASED UPON THE LENGTH OF TIMES THAT FUNDS ARE LENT.A. Capital Markets—Where investments last more than 1 yearB. Money Markets-Where investments reach maturity(Money is lent) for less than 1 year.
38 FINANCIAL ASSET MARKETS ) BASED UPON HOW ASSETS ARE SOLD TO OTHER BUYERSPrimary Markets—Financial assets that can be redeemed ONLY by the original ownerSecondary markets—A market where the assets can be traded
39 SECTION 3—THE STOCK MARKET 1. BUYING / INVESTING IN STOCK1) PURCHASING STOCK IN THE MARKETa) Each stock represents a share of ownershipb) Also called Equities–based on ownership.
40 2) BENEFITS OF STOCK PURCHASES—PROFITS A) Dividends—share of a profit made by a corporation.B) Capital Gains-selling stock at more that you paid for it.C) Net Worth--increase the overall financial standing of your portfolio
41 TYPES OF STOCK 1) COMMON STOCK a) A share of ownership b) One corporate vote per share2) PREFERRED STOCKa) Nonvoting share of stockb) Receive dividends before common stockholders3) INCOME STOCKa) Pays dividends when a profit is shown—at regular intervals4) GROWTH STOCKa) Pays no dividends—profit is reinvested into the companyb) Stock value rises over time.5) WHEN A STOCK SPLITSa) Purchase price so high that investors are discouragedb) Price lowered so that more investors can afford stock.c) Each previously owned share now splits into two.d) More investing will drive stock prices back up.
42 SELLING STOCK 1) STOCKBROKERS—LINK COMPANIES TO INVESTORS a) Work for Brokerage firmsb) Sell products as OTC –Over the Counter stockc) Also buy / sell on the major markets like theNew York Stock Exchange (NYSE) or electronically (NASDAQ.)
43 SELLING STOCK a) Buy and sell stock by the hour or less DAY TRADERSa) Buy and sell stock by the hour or lessb) Quick profit on price changesc) High risk trading!
44 FUTURES AND OPTIONSa) Futures—contracts to buy or sell stocks at a set future date.1) Listed on the New York Mercantile Exchange and the Chicago Board of Trade.b) Options—contracts to buy or sell stocks at a future date based on a set price, but with the option to buy or sell at a better price and bypass the contract.1) Put Option—The option to sell stocks at a specified time in the future.2) Call Option-- The option to buy stocks at a specified time in the future.
47 THE BULL AND BEAR MARKETS 1) THE BULL MARKET** Refers to any Market that shows a prolonged rise in prices or sales.2) THE BEAR MARKET** Refers to the market that shows a decrease in prices and sales.** May lead to a recession or depression!
48 THE GREAT CRASH OF 1929 & BEYOND 1) CAUSES OF THE GREAT CRASHa) Inequal distribution of wealthb) Overproduction caused demand to drop and unemployment to risec) Credit buying of consumer goodsd) Buying stocks on Margin—SPECULATING2) MARGIN CALLS--Demands to repay “borrowed money used to purchase stocks.Margins not met--money not repaid!
49 EFFECTS OF THE CRASH a) High Unemployment-25% b) Homes and Lands lost c) Hoovervilles erectedd) New Deal programs established
50 THE STOCK MARKET IN MODERN TIMES. a) 1930’s thru the 1980’s people lost confidence in market.b) Market now highly regulated by the Governmentc) Oct, 1987—Black Monday. Market crashes, loses 23% of value but rebounds with government help.
51 STOCK MARKET FLUCTUATIONS AFFECTED BY 1) Technology stocks—Dot.com stocks2) Sept. 11 terrorist attacks3) Enron Bankruptcy4) Corporate buyouts—collapse of the housing market