1. CH 11 Financial Markets
11.1 Saving and Investing

2. Investment and Free Enterprise
Investment - something bought for future financial benefit
OR - the use of assets to earn income or profit
Promotes economic growth
Personal - Banks
Banks - Businesses
Businesses - Jobs

3. Savers and Borrowers
Financial system allows transfer of money between savers and borrowers
Financial intermediaries connect savers to borrowers
Financial assets (securities)- claim on income or property or income of a borrower

4. Financial Intermediaries
Banks, Credit Unions, Savings and Loans
Finance Companies - give loans to people and small businesses
Usually charge higher interest
Mutual Funds - pool of savings invested in various markets, bonds

5. Financial Intermediaries
Life Insurance - collect premiums
Pay out to compensate for lost income
Pensions - $ collected or taken from employees
Invested into stocks, bonds

6. Advantages to Intermediaries
Shared Risk -
Savings Accounts - almost no risk
Stock - high potential for gain/ loss
Diversification
Prevents possibility of losing all $$$
Information -
Prospectus- investment report to potential investors
Helps people build portfolio
Liquidity

7. Trade offs Savings Account vs CDs Return vs Risk Return on Investment
Liquidity
Return vs Risk
CDs and stocks
Higher potential for return = higher risk

8. Chapter 11.2 Bonds and Other Financial Assets
Bonds as financial assets
Different types of bonds
4 types of financial asset markets

9. Bonds Certificates sold by businesses or governments to raise money
Basically loans or IOU’s
Low risk, guarantee return

10. Three components of bonds
1. Coupon Rate - interest rate which the bond will pay
2. Maturity - time at which payment is due
Usually will mature in 10, 20 or 30 yrs
3. Par value - amount paid for the bond
Face value

11. Bonds can be bought and sold while maturing
Based on yield
Annual rate of return on a bond
Buying a bond on discount
Discount on par
Why sell bonds?

12. Interest rates constantly change Bond Ratings
Rates go up - more potential for $
Bond Ratings
Standard and Poor’s
Moody’s
Rate bonds based on the ability of a issuer to repay
AAA (Aaa) to D
Higher rating, lower interest
Higher rating will sell for more

13. Advantages to Issuer 1. Coupon rate won’t fluctuate
Fixed payments for 10 years
2. Bonds do not entitle buyer to part of the profit, like stocks do
Business will keep more profit

14. Disadvantages to Issuer
1. Fixed interest rates, even in bad years
Interest rates on bonds go down
2. Bond ratings may go down
Harder to sell

15. Types of bonds 1. Savings bonds 2. Treasury Bonds, Bills, Notes
$50 - $10,000
Issued by Govt
Bought at a discount
2. Treasury Bonds, Bills, Notes
$1000 minimum
Exempt from state and local taxes
Different maturity times

16. 3. Municipal Bonds 4. Corporate Bonds
Issued by local govts to finance public works
Tax free at Federal level
4. Corporate Bonds
Larger denominations
Risky
Securities and Exchange Commission regulates

17. 5. Junk Bonds
High yield, low rating
Up to 12% interest

18. Other types of Financial Assets
Certificates of Deposit
Money Market Mutual Funds
Not covered by FDIC
Pay higher interest rates

19. Financial Asset Markets
Bonds, CD’s and Money Market Mutual Funds are all traded for
Capital Markets - money lent for long periods of time
Take more than a year to mature
Money Markets
Short term, less than a year

20. Primary Market Secondary Market
Assets redeemed only by original holder
Nontransferable
Secondary Market
Can be resold
More liquidity

21. CH 11.3 The Stock Market Benefits and Risks of buying stock
How are stocks traded
How is performance measured
The Crash

22. Buying Stock Stock represents ownership in a company Benefits
SHARES - Portions of stock
EQUITIES - claims of ownership in a company
Benefits
DIVIDENDS - Usually paid quarterly
Size depends on profit made
CAPITAL GAINS - selling stock for more than you paid
CAPITAL LOSS - selling for less than you paid

23. TYPES OF STOCK 2 types based on whether they pay dividends or not
Income Stock - pays dividends at regular times throughout the year
Growth Stock - does NOT pay dividends
Reinvests the stock into the business which makes the business more valuable

24. TYPES OF STOCK 2 types that allow stockholders to have a vote or not
1. Common Stock - voting owners of the company
Use vote to elect Board of Directors
One person may own enough to control the entire company
Stock Split - dividing one share into more
Brings price of stock down, more available

25. 2. Preferred Stock - NONVOTING members
Will receive money before common stock holders

26. Risks of Buying Stocks Firm may lose money
Stocks go down - Capital loss
Company goes under, sells all of its assets, pays bondholders first

27. Trading Stocks
Stockbrokers - person who links buyers and sellers of stocks
Work for brokerage firms
Charge commission on sales
Buy stock at a discount and sell it for a higher price

28. Stock Exchange - secondary markets for stocks and bonds
1. New York Stock Exchange - (NYSE) largest most powerful exchange
Started in 1792
Seats sold to investors so they can trade on the market
Serves largest and best known companies

29. 2. NASDAQ-AMEX
National Association of Securities Dealers’ Automated Quotation system +
American Stock Exchange (AMEX)
Combined list of companies with internet technology
Specialized in high tech and energy
Risky

30. 3. OTC Market 4. Futures and Options Over The Counter (electronically)
Smaller companies
Most do NOT pay dividends
4. Futures and Options
Futures - contract to buy/sell at a future date
Options - Buy/sell for a certain amount of time
Call option (Buy)/ Put Options (Sell)

31. 5. Daytrading
Buying and selling many stocks the same day, within hours sometimes in an attempt to make a profit
Trading Places

32. Performance Bull Markets Bear Markets Dow Jones Industrial Average
Stocks go up over a long period of time
Bear Markets
Stocks prices fall for a long period of time
Dow Jones Industrial Average
1896
Shows 30 specific large companies

33. S&P 500
Standard and Poor’s 500
Mostly NYSE, some NASDAQ and OTC

34. CRASH of 1929 1929 - Started off great Buying on credit
From 1925 to 1929 grew from $27 to $87 Billion
Buying on credit
New technology, led to overproduction
Speculation - high risk investments with borrowed money
Buying on Margin - paying part of the price for stock, borrowing the rest

35. The Crash -
Prices of stock rose above actual value of the companies – Speculation + buying on margin
Brokers demanded payment as prices began to fall
More and more sales drove prices down even further
October 29, 1929

36. Aftermath Contributed to the Great Depression
First the Fed cuts interest rates to encourage growth
Then decreased money supply
Discouraged lending
Today - people are still cautious about investing
New regulations help ensure confidence