FINANCIAL MARKETS

Financial Markets The Stock Market – Stock represents a claim to partial ownership in a firm and a claim to the profits that the firm makes. – The sale of stock to raise money is called equity financing. Compared to bonds, stocks offer both higher risk and potentially higher returns. – The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

Share of stock-- represents ownership in a corporation or a claim on the assets of a corporation

LARGE CAP : OVER $10 BILLION MID CAP: BETWEEN $2-$10 BILLION SMALL CAP: BETWEEN $300 MILLION -$2 BILLION THE “CAP” IS AN ABBREVIATION FOR “MARKET CAPITALIZATION” CALCULATED BY MULTIPLYING # OF SHARES X PRICE PER SHARE LARGELARGE MID-CAP SMALL-CAP

Dividends -- optional payments of annual profits to stockholders. Normally distributed quarterly.

Growth Stock -- stock where the dividends are reinvested into the company.

DEFENSIVE STOCKS A company that produces something people will buy regardless of the health of the economy. These stocks will hold their value in a bear market but won’t have sharp price increases in a bull market.

CYCLICAL STOCKS Each of the market sectors are numbered and indicate at which point in the market cycle the sector’s value may be maximized. Cyclical stocks mirror the highs and lows in the economy.

Initial Public Offering (IPO) --when stock is initially offered to the public. Companies are seeking capital to grow by selling shares of ownership.

Stock split -- when a stock’s high price is discouraging new investors, the company splits the stock to a lower price; thus creating more shares at a lower price.

You own 100 shares of ABC stock and it’s currently selling for $100 per share…comprising $10,000 of value. The company announces a 2:1 split. You now own 200 shares of ABC stock and each share is worth $50 per share…still a $10,000 value

Would you invest in this company?

History of Microsoft Stock SplitsSymbol: MSFT IPO: March 13, 1986 Last updated: August 18, 1998 FirstSep 21, for 1 Sep 18 = Sep 21 = Second Apr 16, for 1 Apr 12 = Apr 16 = ThirdJun 27, for 2 Jun 26 = Jun 27 = FourthJun 15, for 2 Jun 12 = Jun 15 = Fifth May 23, for 1 May 20 = May 23 = SixthDec 9, for 1 Dec 6 = Dec 9 = Seventh Feb 23, for 1Feb 20 = Feb 23 = Eighth March 26, for 1 Mar 26 = Mar 29 = Ninth February 14, for 1 Feb 14 = Feb 18 = Purchasing two shares on 9/21/87 for $107 and then watching. My investment would be worth $ on 2/18/03 2 shares = $ shares = $ shares = $ shares = $ shares = $ shares = $ shares = $ shares= 144 shares= $ $ shares= 288 shares= $ $

THE GREAT RECESSION OF 2008 THE NEXT SLIDE ILLUSTRATES THE CYCLICAL AND DEFENSIVE NATURE OF STOCKS. THE FIRST COLUMN INDICATES THE MAJOR INDUSTRIES IN AMERICA. THE SECOND COLUMN ILLUSTRATES HOW FAR STOCKS IN EACH INDUSTRY FELL IN VALUE IN THE THIRD COLUMN SHOWS THE BOUNCE BACK IN VALUE AS THE ECONOMY BEGAN TO RECOVER IN IN MOST CASES, THE INDUSTRIES WITH THE GREATEST SWINGS ARE CYCLICAL THE INDUSTRIES WITH SMALLER SWINGS ARE DEFENSIVE IN NATURE THE FINANCIAL INDUSTRY’S RESULTS WERE EXAGGERATED BECAUSE OF THE CRISIS IN HOUSING.

HOW TO READ A STOCK TABLE Columns 1&2- high and low for the year 3- Company name 4- ticker symbol 5- Dividend that quarter 6- Percentage yield (similar to bank interest) 7- Price to Earnings ratio 8- Daily volume of shares 9, 10 &11- Price activity that day 12- Change from yesterday

BUYING AND SELLING IN THE MARKET SHORT SELLING The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Investors speculate that they’ll be able to buy the stock back at a lower price. BUYING ON MARGIN Buying a stock with borrowed money. An investor is limited to borrowing 50% of the total value, the remainder is known as the margin requirement. CAPITAL GAIN The profit from buying an equity low and selling it high.

THE ORIGINAL DOW-JONES INDEX COMPANIES  American Cotton Oil Company  American Sugar Company,  American Tobacco Company,  Chicago Gas Company  Distilling & Cattle Feeding Company  General Electric  Laclede Gas Company  National Lead Company  North American Company  Tennessee Coal, Iron and Railroad Company  U.S. Leather Company  United States Rubber Company TAKE A LOOK AT THE 12 COMPANIES ON THIS SLIDE AND THE 30 COMPANIES ON THE NEXT SLIDE. THEY REPRESENT THE MOST WIDELY HELD STOCKS IN 1896 AND 2011 RESPECTIVELY. EXPLAIN HOW THE CHANGES IN THESE TWO LINE-UPS ARE A REFLECTION OF THE CHANGES THAT HAVE OCCURRED IN THE STRUCTURE OF THE U.S. ECONOMY.

THE 30 COMPONENTS OF THE DOW JONES INDUSTRIAL AVERAGE INDEX 3M · Alcoa · American Express · AT&T · Bank of America · Boeing · Caterpillar · Chevron · Cisco Systems · The Coca-Cola Company · DuPont · ExxonMobil · General Electric · Hewlett-Packard · The Home Depot · Intel · IBM · Johnson & Johnson · JPMorgan Chase · Kraft Foods · McDonald's · Merck & Co. · Microsoft · Pfizer · Procter & Gamble · The Travelers Companies · United Technologies Corporation · Verizon Communications · Wal-Mart · The Walt Disney Company 3MAlcoaAmerican ExpressAT&TBank of AmericaBoeingCaterpillarChevronCisco SystemsThe Coca-Cola CompanyDuPont ExxonMobilGeneral ElectricHewlett-PackardThe Home DepotIntelIBMJohnson & Johnson JPMorgan ChaseKraft FoodsMcDonald'sMerck & Co.MicrosoftPfizerProcter & GambleThe Travelers CompaniesUnited Technologies CorporationVerizon CommunicationsWal-Mart The Walt Disney Company

STOCK EXCHANGES

INVESTMENT BANKER An investment bank is a financial institution that raises capital, trades securities and manages corporate mergers and acquisitions. Another term for investment banking is corporate finance. Investment banks work for, and profit from, companies and governments, by raising money through issuing and selling securities in capital markets

WHAT ARE BONDS? A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer. In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due. INTERESTINTEREST LENGTH OF TIME

TYPES OF BONDS U.S. Treasuries Corporate Municipal Build America Bonds High-Yield Bonds

BONDS ARE RATED FOR RISK LOW RISK, LOW RETURN HIGH RISK, HIGH RETURN

What Is A Mutual Fund? MOST AMERICANS INVEST IN THESE FOR THEIR RELATIVE SAFETY AND PROFESSIONAL MANAGEMENT $$ COMPANY “A” COMPANY “B” COMPANY “C”

Mutual Funds – A collection of stocks, bonds, or other securities bought by a group of investors and managed by a professional investment company.

Why Own a Mutual Fund? Professional Money Management Diversification/Variety of Objectives Marketability Control/Flexibility

TYPES OF MUTUAL FUNDS Money Market Funds Bond/Income Funds Balanced Funds Equity Funds Global/International Funds Specialty Funds (Sector, Regional, Socially Responsible Index Funds

EXCHANGE TRADED FUNDS LARGE FIXED BASKET OF DIVERSIFIED SECURITIES THEY TRADE LIKE STOCKS SO TRANSACTIONS CAN OCCUR THROUGHOUT THE DAY LOWER MAINTENANCE FEES TYPICALLY THAN MUTUAL FUNDS NOT PROFESSIONALLY MANAGED EVERY TRADE WILL INCLUDE A BROKER’S FEE DIVIDENDS AND CAPITAL GAINS ARE NOT REINVESTED

Best to invest in when there is a long future ahead Can be volatile in the short-run An investor’s age and their risk tolerance should be inversely related. Stocks have historically offered better returns over long periods of time.