Saving : The absence of spending. Savings : Dollars that become available in the absence of spending. For investment to take place, someone in the economy must save.
Financial System : A way to transfer saved dollars to investors. Financial Assets : Receipts that certify certain properties have value. Can be a CD or deposit slip. Financial Intermediaries : Institutions that channel savings from savers to borrowers. Includes all types of banks. Borrowers also make up the financial system as they are the recipients, creators, and users of financial capital. Investments.
Finance Companies : Makes loans directly to consumers and specializes in installment contracts. Bill Consolidation Loans : Consolidating loans under one monthly payment. Life Insurance Companies Mutual Funds: Companies that sell stock in themselves and then invests money in other companies. Pension Funds: Set up to collect income and disburse retirement payments. Money collected is invested in stocks and bonds and then paid to people who retire. Real Estate Investment Trusts: Borrow money from banks to build buildings, and make their earnings off of the rent and/or sales of those buildings.
1. Why is it important for people to save money? 2. What sort of ways can you save money without going through the banks?
When investing, consider the following: The relationship between risk and return. Risk : Situation in which the outcome is not certain. Financial assets can go up and down in price. Usually, riskier assets offer higher returns (if there ARE any returns)
What is the reason to invest? Wealth for retirement? Steady stream of income? Get rich quick? What is the source of income? Payroll deduction (401k/mutual fund/pension) If an investor receives periodic payments such as bonuses or royalties (bonds) Everyone has their own reason for investing and their own unique way to pay for it.
Consistency : Successful investors invest consistently over long periods of time and avoid “trendy”. Avoiding Complexity: Investors advise others to “stick with what they know”.
3. Why is there always a risk when it comes to investing money? 4. What is the goal of investing? 5. Would you consider yourself to be a safe investor or a risky investor?
Bond : long-term obligations that pay a certain interest rate for a specified number of years. Coupon : interest on the debt Maturity : how long the bond is Par Value : the principal (original amount) Current Yield : Annual interest divided by purchase price Bond Ratings : Rated by two companies, from AAA (best) all the way to D (worst). Lower rated bonds usually cost less and get higher interest. Bonds usually don’t make a great amount of money, but never lose money either.
Certificates of Deposit : Short term loans made to banks. Low cost with different maturity rates. Corporate Bonds : Taken out by companies. Some are Junk Bonds. Municipal Bonds : Taken out by towns or counties, usually to pay for a major construction project. Government Savings Bonds : No yearly interest payments, they are all rolled in at the maturity date.
Capital Market : Where money is loaned for periods of time more than one year. Money Market : Where money is loaned for periods of time less than one year. Primary Market : Where the original issuer can only redeem the financial asset. (savings bonds and IRA’s) Secondary Market : Where existing securities can be re-sold.
EEfficient Market Hypothesis : States that most stocks are priced correctly, and deals are hard to find. PPortfolio Diversification : Holding a number of different types of stocks.
6. What are bonds? 7. What are the different type of bonds that are out there? 8. Why is it good to have a diversified portfolio?
New York Stock Exchange : Oldest and largest companies listed. American Stock Exchange : 1,000 listed stocks. Regional and Global Stock Exchanges NASDAQ: Up and coming exchange, many tech stocks. Over the counter market : not listed on any exchange. Nikkei: Stock market based in Tokyo Japan. Usually is an indicator of how stocks in NY will perform.
Bull Market: A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains).capital gains A bullish trend in the stock market often begins before the general economy shows clear signs of recovery. A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. A generally accepted measure is a price decline of 20% or more over at least a two-month period.
Dow Jones Industrial Average : measure of 30 large trading companies on the NYSE Standard and Poor 500: The day to day price change of 500 stocks in several exchanges.
Buy low, sell high. Speculation: buying high risk stocks to sell them later. Margin: buy a stock at only a fraction of the price with banks or stockbrokers lending rest—up to 75%. When you sell, you divide the profits up evenly. If they fell, you owed the lender.
As the summer of 1929, the stock prices kept rising. By Sept., they leveled out. Some felt that tough times were ahead and began to sell their stocks. On October 24, 1929, the stock market had a small crash as more investors began to pull out. On Black Tuesday, the stock market plunged. 16 million shares were “dumped”
NOT The Depression did NOT happen just because of the stock market crash alone. It was the catalyst. Banks lost money in market. Banks either forced people to payback loans, or the banks went bankrupt. People lost life savings. Creditors needed money badly. People were living beyond their means. Inequality in economic classes.
Spot Market : When a transaction is made at the prevailing price. Futures : Buying or selling something for a certain price in the future, at a price specified today. You can’t back out of the deal. Options : Buying or selling something for a certain price in the future, at a price specified today. You CAN back out of the deal.
9. What is a bull market? 10. What is a bear market? 11. What was behind the stock market crash of 1929? 12. What is the future of investing?