1. Financial Markets
Chapter 11
Sections 1 & 2

2. Savings and Investment
Savings-income not used for consumption
Investment-use of income now in a way that provides a future benefit
Economic investment: money lent to businesses
Personal investment: individuals putting savings into financial assets
Financial System-Transfer funds between savers and investors

3. Bringing Savings and Investment Together
People & businesses save funds; receiver issues written confirmation
Confirmation called financial asset-claim on borrower’s property
Financial Market-where buyers and sellers exchange assets directly
Financial Intermediary-collects funds from savers, invest in financial assets

4. Financial Intermediaries
Includes banks, S&Ls, & Credit Unions
Also finance companies, pension funds, & life insurance companies
Mutual Fund-pools individuals’ money to buy a range of financial assets
Investors own shares of entire fund

5. Financial Intermediaries
Example:Banking
Example:Nonbanking
Provide checking, savings, money market accounts, & CDs
Depositors earn interest
FDIC insures money
Make loans; to make profit they charge a higher interest rate than they pay to depositors
Offer uninsured money market mutual funds, stock bonds, & insurance
Finance companies make small loans to households & small businesses
Mutual funds let individuals own many assets; managers make decisions
Pension funds invest employees’ money
Life insurance companies invest income in financial assets

6. Financial Asset Markets
Financial markets are categorized according to time & resalability
Capital market-for buying and selling long-term financial assets
Money market-for buying and selling short-term financial assets
Primary market-for financial assets that original buyer must redeem
Secondary market-where financial assets are resold

7. Financial Asset Markets
Factor 1: Time
Capital markets-assets held for over a year
Include stocks, bonds, mortgages, & long-term CDs
Money Markets- loans made for less than a year
Includes short-term CDs & treasury bills
Factor 2:Resalability
Primary markets-financial assets can be redeemed only by original buyer
Includes saving bonds & small denomination CDs
Also market where first issue of stock sold through investment 6bankers
Secondary markets- resale markets offer liquidity to investors
Includes stocks & bonds

8. Investing in a Market Economy
Personal investing is saving
Individual must first determine own investment objective: financial goals investor uses to decide if an investment is appropriate

9. Why are you Investing? Main considerations: when money will be needed
Other issues: need to pay off debts, tax concerns
Savings for emergencies should be liquid
Long-term investments goods for retirement and college
Can choose CDs to coincide with timing of savings goals

10. Risk and Return Risk-possibility for loss on an investment
Return-profit or loss on an investment
Refers to interest paid on savings or increase in value of stock
Diversification-investing in different financial assets
Purpose: maximize returns & minimize risk

11. Risk and Return What kind of risk are you willing to take?
What kind of return do you want?
Risk usually means loss of part of initial investment or principal
No-risk investments: insured savings and CDs, U.S. Bonds
Safe investments risk interest rate & may not keep up with inflation
Return on riskier investments depends on how profitable company is
Bonds are less risky than stocks, bondholders are paid off first
Safe investments have lowest returns through fixed interest rates
Stocks, bonds-no guaranteed rates
Bonds-higher returns over time
If investing over a long period, you can risk losses in some years
If less time and money, may want safer investment
Diversification gives better chance of offsetting a loss with a gain

12. Vocabulary
Savings
income not used for consumption
Investment
use of income now in a way that provides a future benefit
Financial System
Transfer funds between savers and investors
Financial Asset
claim on borrower’s property
Financial Market
where buyers and sellers exchange assets directly
Financial Intermediary
collects funds from savers, invest in financial assets
Mutual Fund
pools individuals’ money to buy a range of financial assets

13. Vocabulary
Capital Market
for buying and selling long-term financial assets
Money Market
for buying and selling short-term financial assets
Primary Market
for financial assets that original buyer must redeem
Secondary Market
where financial assets are resold
Investment Objective
financial goals investor uses to decide if an investment is appropriate
Risk
possibility for loss on an investment
Investment
The use of income now that allows for a future benefit
Diversification
investing in different financial assets
Return
Gain or loss on original investment