1. Making more money than you know what to do with!!!
Ch. 11 Financial Markets
Making more money than you know what to do with!!!

2. INVESTMENT
The act of redirecting resources from being consumed today so that they ma create benefits in the future
IN HUMAN LANGUAGE: using your assets to earn income or profit
Using your money to make more of it

3. Investing and Free Enterprise
Financial System: includes savers and borrowers and where money is transferred
Financial Assets: claim on the property or income of a borrower (document that provides proof someone owes you money)

4. Financial Intermediaries
Help channel funds from savers to borrowers (you to companies for example)
Banks, Savings and Loans, Credit Unions
Finance Companies
Mutual Funds
Life Insurance Companies
Pension Funds

5. Sharing Risk Don’t put all of your eggs in one basket
Invest in several things, so if one goes bad you don’t lose everything!

6. Return and Risk
The higher the potential return, the riskier the investment
CD’s: low risk low return
Stocks: high risk & potential for big returns

7. Intermediaries and Information
Portfolios: collection of financial assets
What investments you have
Prospectus: information provided by investors to let you know how investments are doing. REQUIRED BY LAW

8. Return & Liquidity
Return: the money an investor receives above and beyond the sum of money initially invested
Liquidity: an investment is more liquid the easier it is for you to get to it
Savings Accounts: very liquid
CD’s: not liquid

9. Bonds & Other Financial Assets
Bonds: are similar to loans or IOUs
Debt that the government or corporations must repay the investor
Typically pay a fixed amount of interest at regular intervals for a fixed amount of time
Generally lower risk, lower rate of return

10. 3 Components of Bonds
Coupon Rate: interest rate the bond issuer pays the bond holder
Maturity: time at which payment to the bondholder is due
Par Value: amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity (face value or Principle)

11. More Bond Info
Yield: annual rate of return on the bond if the bond were held to maturity
Important because not all bonds are held to maturity. Why?
Buying bonds at a Discount
People sometimes sell bonds at less than par value because of changing interest rates
You want the money to spend, so you sell at a discount if interest rates have went up

12. Bond Ratings
The higher the bond rating the lower the interest rate (less risk, less return)
The lower the bond rating the higher the interest rate
Bond ratings come from 2 main places
Standard & Poor’s
Moody’s

13. Advantages of Bonds to the Issuer
Once the bond is sold, the coupon rate will not go up and down (interest rate is fixed)
You know ahead of time about your payments
Bondholders do not own part of the company
Company does not have to share profits with bondholders if it does well

14. Disadvantages of Bonds to Issuers
Must make fixed interest payments even in bad years
Cannot change interest rates
If firm does not do well, bond rating could be downgraded and could become harder to sell

15. Types of Bonds Savings Bonds: issued by the government
Used to help pay for buildings, roads, & dams
Virtually no risk
Bondholders do not get interest payments
You buy them below par value
A $50.00 bond may cost $25.00

16. More Types of Bonds Treasury Bonds, Bills, & Notes
Also Called T-Bills & T-Notes
One of the safest investments
Backed by the “full faith & credit” of the US government
Many Americans invested in these after 9/11

17. Bond Types Pt. 3 Municipal Bonds State and local governments
Used to finance highways, state buildings, libraries, parks, and schools
Most are considered safe as long as the financial health of the state or town is good
Interest paid on these is not subject to income tax!!!!!!!!!!!!!!!!!! Rock on!

18. And more bonds
Corporate Bonds: usually large and interest is taxed as income
Corporations have no tax base to guarantee repayment, so risk level is higher
Corporation’s must rely on sales of goods and services to pay back bonds.

19. Another Bond Junk Bonds High-yield Lower rated
Potentially higher paying
Popular during the 80’s & 90’s
Have been known to pay over 12% interest
Speculative ratings
Strong possibility some firms will default

20. Other Financial Assets
CD’s
Certificates of Deposit
Available through banks
Popular & inexpensive (low risk)
Money Market Mutual Funds
Businesses collect money from investors & then buy stock, bonds, & financial assets
Higher interest rate than savings account, but not covered by the FDIC

21. Financial Asset Markets
Capital Markets
Money is lent for longer than one year
Long-term CD’s, Bonds that require more than 1 year to mature
Money Markets
Money is lent for periods less than one year
Short-term CD’s, treasury bills, and money market mutual funds

22. More Markets Primary Market Secondary Market
Financial assets that can be redeemed only by the original holder
Savings bonds, small CD’s
Secondary Market
Financial assets that can be resold
Stocks

23. The Stock Market Buying Stock
Shares: stock is issued in portions called shares
Equities: stocks are equities, claims of ownership in a corporation
Dividends: corporations pay out part of their profits to stockholders (usually 4 times/year)
Capital Gain: Sell a stock for more than you paid for it (Capital Loss)

24. Types of Stock
Income Stock: pays dividends during regular times during the year
Growth Stock: pays few or no dividends, reinvests earnings into business
Common Stock: investors are voting owners, one vote per share owned
Preferred Stock: nonvoting owners of company, receive dividends before the owners of common stock

25. Risks of Stocks
Stock values can decrease after you purchase them because you are a dark cloud and bad luck
This means you will lose money when you go to sell the stock

26. Trading Stock Stockbroker: a person who links buyers and sellers
Brokerage Firms: stockbrokers work for brokerage firms, these firms earn a profit by charging a commission on each stock transaction
They buy shares at a lower price than what they sell them to you for

27. Stock Exchanges New York Stock Exchange (NYSE) The OTC Market Nasdaq
Largest & most powerful (began in 1792)
Largest and most established companies
The OTC Market
Over the counter markets
Get stocks not traded at stock exchanges
Nasdaq
National Association of Securities Dealers Automated Quotations
Links OTC markets around the world by computer

28. Futures & Options
Futures: contracts to buy or sell commodities at a specific date in the future at a price specified today
Grain & Livestock
Options: contracts that give investors the choice to buy or sell stock and other financial assets
Gives you the right to buy the stock at that price until sometime in the future
Not an obligation

29. Bull and Bear Markets
Bull Market: stock market rises steadily over a period of time
Investors buy stock because they expect prices to increase
Bear Market: stock market falls for a period of time
Investors sell stock because the expect prices to decrease

30. Measuring the Market The Dow Jones Industrial Average S & P 500
Shows how certain stocks have traded on every business day
Today has approximately 30 large companies
S & P 500
Broader perspective of stock performance
Measures over 500 stocks