Financial Markets Chapter 12

Section 1: Savings and the Financial System What are Savings? Dollar that becomes available when people abstain from consuming.

Financial Assets and the Financial System Financial system- A network of savers, investors, and financial institutions that work together to transfer savings to investors. Assets (property that has value) v. Liability (being responsible for something car, house..) Main Part of Financial System: Financial Assets: People can save in different ways… Savings Account Certificate of Deposit: a receipt showing that an investor has made an interest loan to a bank. Financial Intermediaries – financial institutions that lend the funds that savers provide to borrowers. (Ex. Life insurance, pension funds, and other institutions that channel savings from savers to borrowers)

Nonbank Financial Intermediaries Government and business are the largest borrowers. Financial Company- Is a firm that specializes in making loans directly to consumers and in buying installments (paying) contracts from merchants who sell goods on credit. EX. Debt Consolidation loans Life Insurance Companies- provide financial protection for survivors of the insured. -Premium is the price the insured pays for this policy and is usually paid monthly, quarterly, or annually for the length of the protection. Mutual Funds- is a company that sells stocks in itself to individual investors and then invest the money it receives in stock and bonds issued by other corportation. Pension Funds: Regular payments to provide income security to someone who has worked a certain amount of years. (Ex. Persons eligible for retirement, old-age, disability) Real Estate Investment Trust- A company organized primarily to make loans to constructions companies that built homes.

Section 2: Investment Strategies and Financial Assets Risk- situation in which the outcome is not certain, but probabilities for each possible outcome can be estimated. Why people invest??? Save for retirement… Simplicity… “if an investment seem too complicated, then ignore it and invest in something else.” Consistency… investors invest consistently over long period of time. 401 (k)… a tax-deferred investment and saving plan that acts as a personal pension fund for employees.

Bonds as Financial Assets Government and business borrow money through bonds and pay a stated rate of interest rate for a specified number of years. Bond Components: Coupon (stated interest of the debt), maturity (life of the bond), Par value (principal or the total amount initially borrowed that must be repaid to the lender) Bond Prices: -$30 twice a yr for 20 years plus par value.

Bond Ratings 2 Main companies to check quality of bonds: Standard’s & Poor’s and Moody’s -AAA – D (issuer has not kept up with the interest or the par value payments) - The higher the grade the more demand the bond has. AAA-bond has a par value of $1,500 but sells for $1,700. (Demand)

Certificates of Deposit (CDs) Loan investors make to financial institutions such as banks These institutions impose penalties if cashed early by investors. They cost as little at $100, investors can select the life of the bond. CDs are usually for long-term savings….such as college tuition, buying a home…. They are protected by FDIC and by National Credit Union Association.

Types of Bonds Par value as low as $1,000 Corporate Bonds (private) Municipal Bonds Par value as low as $1,000 “Junk” bonds- exceptionally risky bonds BB or lower. Investors purchase corporate bonds as long- term investments, but can be liquidated, or sold if investor needs cash. This is taxable income tax by the IRS. States issue bonds to finance highways, state building, public works. 1. They are safe 2. Tax-exempt- fed (IRS) do not tax the interest paid to investor.

Types of Bonds Saving Bonds Treasury Notes and Bonds Issued by the U.S. government EX. They rage from $50- $10,000: The U.S. government pays interest for the bonds but builds the interest rate until redemption, instead of sending a check on a regular basis. They can’t be sold, but can be redeemed early, with loss of interest. Most people hold on to them as a “savings account”. Treasury notes are U.S. government obligations with maturities raging from 2 to 10 years. Treasury bonds have maturities raging from more than 10 years as many as 30 years. Start at $1,000 and can be purchased from the U.S. Treasury. However, they have are the safest but have the lowest returns. http://www.treasurydirect.gov/ T-bill has a maturity (life) of 13,26,52 weeks

Types of Bonds Individual Retirement Accounts (IRAs) Long-term deposit that employees can setup as part of a retirement plan. If the worker’s spouse does not work outside the home, up to $3,000 can be saved per year. Money is deducted from salary and is non-taxable until the worker is retired.

Markets for Financial Assets Capital Markets- Long term CD and corporate/ gov bonds that take more than a year to mature. What is a money market?? When money is loaned for periods of less than one year. Primary Markets- market where only the original issuer can purchase or redeem a financial asset. -Ex. Government saving bonds and IRA can not be sold or transfer to another person. Secondary Markets- market in which existing financial assets can be resold to new owners.

BussinessWeek: Dow Posts Record Point Loss Why do you think many people were anxious to sell off their stock when the market reopened?

Sec. 3 Investing in Equities, Futures, and Options. Additionally to financial assets, investors may buy equities. - stocks that represent ownership share of a corporation.

Market Efficiency What influences the price of equities? -Many factors but mostly EXPECTATIONS!! Efficient Market Hypothesis (EMH)- the argument that stocks are always priced about right and that bargains are hard to find because they are followed closely by investors.

Who’s a broker? A broker is a person who is licensed to buy and sell stocks, provide investment advice, and collect a commission on each purchase or sale.

Buying Stocks How can I buy stocks? 1. Opening an account with a broker firm - can buy, sell, manage portfolio 2. Stockbroker- a person who buys and sells equities for clients. http://www.sharebuilder.com/ https://us.etrade.com/home https://www.tdameritrade.com/welcome1.html

Corporation Stocks Common Stock basic ownership of a corp. (elect board members and control the company) Preferred Stock - Represents nonvoting ownership shares of the corporation.

Organized Stock Exchanges Securities exchanges- places where buyers and sellers can meet to trade securities. 1. NEW YORK STOCK EXCHANGE (NYSE) The oldest, largest, and prestigious of the organized stock exchanges. Located in New York City Has about 1,400 seats, or memberships, that allow access to the trading floor. Members pay several million dollars for the seat. List stocks for about 2,800 companies, these companies should meet the standards (such as size and financial stability).

2. AMERICAN STOCK EXCHANGE AMEX, located in NYC has about 750 listed stocks. 2nd largest in the country Companies listed tend to be smaller than those on the NYSE 3. REGIONAL STOCK EXCHANGES Usually list companies very new or small to be listed on the top two exchanges. 4. GLOBAL STOCK EXCHANGES Can be found throughout the world Technology linked these markets so that major stocks can be traded around the clock, in the world.

Bull vs. Bear Markets Bull market- is a strong market with the prices moving up for several months or years in a row. Bear market- is a “mean” market with the prices of equities falling sharply for several months of years in a row.

Over the counter markets (OTC) Majority of the stocks in the U.S. are not traded on exchanges. Instead they are traded on an over-the-counter market and electronic marketplace for securities that are no an organized exchange. National Association of Securities Dealers Automated Quotation (NASDAQ) - world’s largest electronic stock market, cover over 80 countries. - More than 4,000 companies are listed on NASDAQ. What is the difference between NYSE and NASDAQ? Almost the same… an investor who open and account with a broker firm may buy and sell stocks in both markets. When an investor places an order over the Internet to buy shares, the broker forwards the order to the exchange where the stock is traded and purchase is made there -NYSE- AMEX- NASDAQ

Measures of Stocks Performance DOW JONES INDUSTRIAL AVERGAE (DJIA) The most popular measure of stock market performance on NYSE STANDARD & POOR’S 500 It uses the price changes of 500 representatives stocks as an indicator of overall market performance - Measure stocks performance on NYSE, AMEX, OTC