Investments & The Stock Market Chapter 11

Investments Nations must have a Financial System for investments to work. 2 ways investments help: Allow people to make a profit Promote economic growth & contributes to the nation’s wealth Always remember: Your return on an investment, usually depends on the type & risk, of the investment.

Investments Types of investments through saving: Financial Assets CD Certificate of Deposits Financial Assets (securities) Savings account Bonds

Financial Intermediaries Can help with investments Share the risk to avoid loss of all savings through diversification Provide Information through prospectus to avoid research, time & money spent Provide liquidity, to avoid having to find buyers to turn items into cash.

Types of Financial Intermediaries Banks Mutual Funds Pension Funds Credit Unions Savings & Loan Association Life Insurance Companies Finance Companies

Types of investments Bonds Cds (Certificates of Deposits) Mutual Funds Stocks

Think of it as a loan, that you are giving, to the government or a company. Bond A certificate a company or government issues in exchange for borrowed money Promises to repay a stated borrowed amount plus interest over a period of time (when maturity is met)

Bonds A person can sell their bond for less or par value to another person. Issuers pros & cons Pros Cons Holders do not own a part of company Fixed payment plans & interest rates, no matter how company is doing Fixed payment plans

Researching bonds Research Companies: What to look for? Standard & Poore’s Moody’s What to look for? Rated by: issuers ability to pay AAA/ Aaa (highest) to D (lowest) Higher the rate of the bond, the lower the interest rate is. (Less risky) Higher rate bonds sell at higher prices or par value of the bond, at all times.

3 Components to a bond Coupon Rate (Interest Rate) Maturity Par Value

Types of Bonds Government Bonds Issued by the government to borrow money from the public and businesses Types of government bonds include: *savings bonds *treasury bills * T-notes *T-bonds

Types of Bonds Savings Bonds Range from $50-10,000 Investor pays half of the bond’s face value and it’s value increases every 6 months until it reaches full face value Usually matures in 10 to 15 years Not taxed until turned in for the face value (exempt from state and local) If cashed in before maturity a penalty is applied and will only get par value. Government uses for projects No default risk and no annual payments

Types of Bonds Municipal Bonds Issued by a state, local, or city government to raise money for highways, government buildings, libraries, parks, and schools Not subject to federal income tax or the state income taxes (where it was issued) Risk is low, depending on government standing.

Types of Bonds Treasury Bills Only given in $1,000.0 denominations Safe from default Mature in 3 months to 1year $10,000 minimum amount of investment Federal taxes due when the t-bill matures Exempt from state and local

Types of Bonds Treasury Notes Safe from default Only given in $1,000.0 denominations Types of Bonds Treasury Notes Matures in 2 to 10 years $1,000 to 5,000 minimum amount of investment Federal taxes due when the T-Notes matures Exempt from state and local

Types of Bonds Treasury Bonds Only given in $1,000.0 denominations Safe from default Types of Bonds Treasury Bonds Matures in 10 or more years $1,000 to 5,000 minimum amount of investment Federal taxes due when the T-Notes matures Exempt from state and local

Types of Bonds Corporate Bonds Used to expand & improve businesses Value $1,000.00 to $10,000.00 Taxed as additional income (income tax) Moderate risk Depends on sells/ service of business Watched closely and researched by companies & the Securities & Exchange Commission (SEC) Prohibits fraud & dishonest investment practices & enforces laws

Types of Bonds Junk Bonds (High-Yield Securities) Low rate bonds B or lower rating and “speculative” Higher interest rates Risky

CD/ Certificate of Deposit Similar to a savings account and bond Purchaser places money into account, but you are not allowed to withdraw until maturity date is met. If withdraw before maturity date, penalties will accrue. Must hold within 6 month increments, with a minimum of $100.00

Mutual Funds (easiest way to invest with a little money) Investment company that pools the money of many individuals to buy stock, bonds, or investments Risk is higher than a savings account, but decreases through diversification

Financial Asset Markets Capital Markets offer CDs, and Corporate/ Government Bonds; that must be held for at least 1 year. Money Markets offer short-term CDs, T-bills & mutual funds Primary Markets offer savings bonds & CDs Secondary Markets provide liquidity to investors)

Stock Sold in shares which are pieces of a corporation sold to raise money for resources A Stockbroker that works for brokerage firm must be used to buy stocks they are licensed to sell and trade between sellers and buyers Helps with research of companies stocks Remember!!!!!! Every time a stockbroker has to buy or sell stock for their clients; they will take a commission, no matter if you make or loose money.

Benefits of Buying stock Dividends – money paid to stockholders for their share of the corporations profits. Paid every quarter Capital gain –profit made when selling a stock at a higher price than you purchased it for. Capital loss – the money loss when you sell your stock for less than Happens OFTEN

Types of Stocks Get Dividends Get Votes in the Company Income Stock How do you choose a stock ? Research – newspapers, internet or brokerage firms Get Dividends Get Votes in the Company Income Stock Growth Stock Reinvest earnings in its business, which increases its value. Preferred Stock Get dividends before common stock owners Get paid 1st after bond owners, if company goes bankrupt. Common Stock 1 vote per share & voting on stock split Due because price is to high, to where people not buying stock Price later rise again. Most Popular Stocks Blue chip Stocks (safe bet) Penny Stocks ( very risky, but can make huge profits)

Places where stocks are bought & sold New York Stock Exchange (NYSE) Largest stock and bond market where only the largest companies in the country are traded American Exchange (AMEX) second largest stock and bond market

Places where stocks are bought & sold NASDAQ The over the counter market (electronic trading) of stocks and bonds of smaller companies Shares of stock are sold in shares of a 100

Securities Exchange Commission (SEC) Federal Regulatory Agency that regulates the trading of stocks and bonds Established after the Great Depression Investigate any Inside Information, which is illegal

Where daytrading is shown Most risky: because people are buying & selling dozens of stocks in a day, to try and make a profit Dow An average of the top 30 largest companies stock price values that are traded on the NYSE S+P 500 Includes the average of the stock price changes of 500 companies sold on the NYSE and the NASDAQ

Bull Market When investors and brokers believe that stocks will continue to rise, due to a steady rise in the stock market over a period time

Bear Market When investors and brokers believe that stocks will continue to drop, due to a steady drop in the stock market over a period time.