1. Financial Markets
Investing: Chapter 11

2. Saving and Investing
Investment – use of assets to earn an income or profit
The Financial System
Financial Assets (or securities)
Flow of Savings and Investments
Savers make deposits to Financial Institutions
Financial Institutions make loans to Investors

3. Saving and Investing Financial Intermediaries
Banks, Saving and Loan Associations, Credit Unions, Finance Companies
Mutual Funds
Hedge Funds
Life Insurance Companies
Pension Funds

4. Saving and Investing Sharing Risk Providing information
Credit risk, liquidity risk, inflation rate risk, and time risk
DIVERSIFY!!!! – spread out your investments
Providing information
Portfolio – collection of one’s financial assets
Prospectus – investment report that provides info to potential investors
Providing Liquidity

5. Saving and Investing Liquidity, Return, and Risk Liquidity and Return
Return – the money an investor receives above and beyond the sum of money initially invested
More liquid, usually lower return
Return and risk
Typically, higher return, higher risk
Must weigh potential return with risk

6. Bonds and Other Financial Assets
Bonds as Financial Assets
Three components of Bonds
1. Coupon Rate – interest rate that bond issuer will pay to a bondholder
2. Maturity – time at which payment to a bondholder is due
3. Par value – the amount to be paid at maturity (face value or principal)
- Yield – the annual rate of return on a bond if held to maturity

7. Bonds and Other Financial Assets
Buying Bonds at a Discount
Interest change, so price of a bond must change as well
Bond Ratings
Standard & Poor’s; Moody’s
AAA (highest)
Advantage of Bonds to Issuer
Fixed coupon rate once sold
Not part of a company
Disadvantage of Bonds to Issuer
Must make fixed payments
Bonds can be downgraded

8. Bonds and Other Financial Assets
Treasury Bond
Treasury Note
Treasury Bill
Term
Long-term
Middle-term
Short-term
Maturity
30 years
2, 5, or 10 yrs
4, 13, 26, 52 weeks
Liquidity and Safety
Safe
Liquid and safe
Minimum Purchase
$100
Denomination
Types of Bonds
Savings bonds
Treasury Bonds, Bills,
and Notes
Municipal Bonds
Corporate Bonds
Junk Bonds

9. Bonds and Other Financial Assets
Other Types of Financial Assets
Certificates of Deposits (CDs)
Very common; through banks; very flexible
Money Market Mutual Funds
Higher interest than savings account but no FDIC

10. Bonds and Other Financial Assets
Financial Assets Markets
Capital Markets and Money Markets
Capital Market – market in which money is lent for periods longer than a year
Ex: Long-term CDs and bonds (over 1 yr)
Money markets – market in which money is lent for less than a year
Ex: short-term CDs, T-Bills, and money market mutual funds
Primary and Secondary Markets
Primary Market- a market for selling financial assets that can be redeemed only by the original holder
Secondary Market – a market for reselling financial assets

11. Buying Stock Shares – a portion of a stock Benefits of Buying Stock
Dividends – portion of company profit (quarterly)
Capital Gains – sell for more than purchased
Capital loss

12. Buying Stock Types of Stock Stock Splits Income Stock Growth Stock or
Common Stock
Preferred Stock
Stock Splits
Split single shares to lower price of single stock

13. Buying Stock Risks of Buying Stock Company may lose money
Dividend is smaller, stock price drops
If Company goes bankrupt, shareholders are paid last

14. How Stocks Are Traded
Stockbroker – person who links buyers and sellers of stock
Brokerage Firm – a business that specializes in trading stocks
Stock Exchange
The market for buying and selling stock
NYSE, Nasdaq

15. How Stocks Are Traded Futures and Options Day Trade??????
Futures – contracts to buy or sell commodities at a particular date in the future at a price specified today
Options – contracts that give investors the right to buy or sell stock and other financial assets at a particular price until a specified future date
Call/Put Option – contract to buy/sell stock at a particular price until a future date
Day Trade??????

16. Measuring Stock Performance
Bull and Bear Markets
Bull Market – a steady rise in the stock market over a period of time
Bear Market – a steady drop or stagnation in the stock market over a period of time
Dow Jones Industrial Average
30 large companies in various industries
Meant to represent the whole market
S&P 500
500 stocks to measure performance