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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.

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Presentation on theme: "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."— Presentation transcript:

1 FINANCIAL MARKETS

2 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.

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

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

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

6 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.

7 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.

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

9 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

10 Would you invest in this company?

11 History of Microsoft Stock SplitsSymbol: MSFT IPO: March 13, 1986 Last updated: August 18, 1998 FirstSep 21, 1987 2 for 1 Sep 18 = 114.50 Sep 21 = 53.50 Second Apr 16, 1990 2 for 1 Apr 12 = 120.75 Apr 16 = 60.75 ThirdJun 27,1991 3 for 2 Jun 26 = 100.75 Jun 27 = 68.00 FourthJun 15, 1992 3 for 2 Jun 12 = 112.50 Jun 15 = 75.75 Fifth May 23, 1994 2 for 1 May 20 = 97.75 May 23 = 50.63 SixthDec 9, 1996 2 for 1 Dec 6 = 152.875 Dec 9 = 81.75 Seventh Feb 23, 1998 2 for 1Feb 20 = 155.13 Feb 23 = 81.63 Eighth March 26, 1999 2 for 1 Mar 26 = 178.13 Mar 29 = 92.38 Ninth February 14, 2003 2 for 1 Feb 14 = 48.30 Feb 18 = 24.96 2 shares = $107.00 4 shares = $243.00 6 shares = $408.00 9 shares = $681.75 18 shares = $910.74 36 shares = $2943.00 72 shares = $5877.36 144 shares=144 shares= $13302.72 $13302.72 288 shares=288 shares= $7188.48 $7188.48

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13 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.

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

15 BONDS ARE RATED FOR RISK

16 What Is A Mutual Fund? $$ COMPANY “A” COMPANY “B” COMPANY “C”

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

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

19 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

20 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

21 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.

22 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

23 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 Company3MAlcoaAmerican ExpressAT&TBank of AmericaBoeingCaterpillarChevronCisco SystemsThe Coca-Cola CompanyDuPont ExxonMobilGeneral ElectricHewlett-Packard The Home DepotIntelIBMJohnson & JohnsonJPMorgan ChaseKraft Foods McDonald'sMerck & Co.MicrosoftPfizer Procter & GambleThe Travelers Companies United Technologies CorporationVerizon CommunicationsWal-MartThe Walt Disney Company

24 STOCK EXCHANGES

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