Presentation is loading. Please wait.

Presentation is loading. Please wait.

CH 11 Financial Markets 11.1 Saving and Investing.

Similar presentations

Presentation on theme: "CH 11 Financial Markets 11.1 Saving and Investing."— Presentation transcript:

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

Download ppt "CH 11 Financial Markets 11.1 Saving and Investing."

Similar presentations

Ads by Google