Stocks, Bonds, and other Financial Instruments CHAPTER 11.3, 11.4

The Stock Market Companies issue stock, sell to investment bankers in primary market initial public offering (IPO) is sale that raises money for corporation Stock exchange--secondary market where securities resold and bought buyers expect stock price to rise, so they can resell for a profit Capital gains--profit made from sale of stock

Why Buy Stock? Buy to earn dividends, share of company profits investors who want income, want dividends Buy to earn capital gains through resale of stock investors who want growth look for potential for capital gains Types of Stock Common stock--gives shareholders voting rights, share of profits one vote per share owned to elect board of directors Preferred stock--gives shareholders share of profits, no voting rights investors get guaranteed dividends, paid off first if company closed dividends do not increase if stock increases in value

Trading Stock Most people buy stock to earn capital gains Stock prices determined by demand and supply; influencing factors: company profits or losses, technological advances, overall economy Stockbroker buys and sells securities for customers, earns commission

Trading Stock Most investors do not trade futures and options Future--contract to buy, sell on specific future date at preset price Option--contract giving right to buy, sell in future at preset price investor pays small fraction of stock's current price for option

Measuring Stock Performance About half of U.S. households own stocks Stock index measures, reports the change in prices of a set of stocks measures individual stocks and stock market as a whole U.S. indexes: DJIA, Standard & Poor's 500, NASDAQ Composite Tracking the Dow Bull market--prices rise steadily over a relatively long period Bear market--prices decline steadily over a relatively long period Dow affected by previous close, Fed, foreign indexes, trade balance

Bonds Bonds issued by companies, governments Par value--amount issuer must pay buyer at maturity Maturity--date when bond is due to be repaid Coupon rate--interest rate bondholder gets every year until maturity Investors buy bonds for interest paid and gains made by selling Yield--annual rate of return on a bond If bond sold at par value, yield is same as coupon rate if sold for less, yield is higher; if sold for more, yield is lower Bonds with longer maturity dates have higher yields than with shorter

Types of Bonds U.S. government issues Treasury bonds, notes, bills; very safe Safety of foreign government bonds depends on the country State, local governments issue bonds; no federal income tax Corporate bonds higher risk than government, pay higher coupon rate Junk bond are high-risk, high-yield corporate bonds

Other Financial Instruments Certificates of deposit (CDs), money market mutual funds (MMMFs): are very low risk; provide interest income not generally sold for profit Certificates of deposit: CDs offered primarily by banking institutions; have maturity date Pay fixed or variable interest, reinvested for compound interest longer maturity dates pay higher interest rates Federal government insures funds up to $100,000 Risks: can lose interest, some principal if funds withdrawn early

Other Financial Institutions Money Market Mutual Funds: MMMFs' financial assets have maturities of one year or less Give higher yield than savings accounts with similar liquidity can redeem shares by check, phone, electronic transfer Funds not insured but tightly regulated, so principal considered safe Yield varies based on yield of assets in fund