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Financial Markets Chapter 11

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Presentation on theme: "Financial Markets Chapter 11"— Presentation transcript:

1 Financial Markets Chapter 11
Ms. Eraqi

2 Financial Intermediaries
TYPES OF INVESTMENTS Includes banks, S&Ls, credit unions also finance companies, pension funds, life insurance companies Mutual fund—pools individuals’ money to buy range of financial assets investors own shares of entire fund Financial Intermediaries

3 Financial Intermediaries
Example: Nonbank Financial Intermediaries Finance companies make small loans to households, small businesses Mutual funds let individuals own many assets; managers make decisions Pension funds invest employees’ money, so will have more at retirement Life insurance companies invest income in financial assets let people save by building cash values, protect them against loss Financial Intermediaries

4 Financial Asset Markets
Financial Markets Financial markets categorized according to time, resalability Capital market—for buying and selling long- term financial assets Money market—for buying and selling short- term financial assets Primary market—for financial assets that original buyer must redeem Secondary market—where financial assets are resold Financial Asset Markets

5 Financial Asset Markets
Time Capital markets—assets held for over a year include stocks, bonds, mortgages, long-term CDs Money markets—loans made for less than a year include short-term CDs, Treasury bills Financial Asset Markets

6 Financial Asset Markets
Resalability Primary markets—financial assets can be redeemed only by original buyer include savings bonds, small denomination CDs also market where first issue of stock sold through investment bankers Secondary markets—resale markets; offer liquidity to investors include stocks, bonds Financial Asset Markets

7 Risk and Return What Kind of Risk Are You Willing to Take?
Risk usually means loss of part of initial investment, or principal no-risk investments: insured savings and CDs, U.S. government bonds Safe investments risk interest rate may not keep up with inflation Return on riskier investments depends on how profitable company is bonds less risky than stocks; bondholders paid off first Risk and Return

8 Risk and Return What Kind of Return Do You Want?
Safe investments have lowest return through fixed interest rates Stocks, bonds—no guaranteed rates; stocks—higher return over time If investing over long period, can risk losses in stock some years if less time and money, may want safer investment Diversification gives better chance of offsetting a loss with a gain Risk and Return

9 Why Buy Stock? The Stock Market
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 The Stock Market

10 The Stock Market 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 The Stock Market

11 Trading Stock Organized Stock Exchanges
New York Stock Exchange (NYSE) on Wall Street; oldest, largest in U.S. traditionally, each stock auctioned from trading post on exchange floor today, hand-held computers used to execute many trades 2006 merger with Archipelago Exchange allowed electronic trades American Stock Exchange (AMEX) companies smaller than on the NYSE Trading Stock

12 Trading Stock Electronic Markets
Over-the-counter (OTC) market for stocks not traded on NYSE or AMEX NASDAQ is centralized computer system for OTC trading second largest exchange in world in number of companies, shares traded companies from many sectors of U.S. economy, most in technology OTC Bulletin Board is electronic market for smaller companies Trading Stock

13 Trading Stock Recent Developments
1990s regulations allow any firm to trade stocks in any exchange Through electronic communications networks (ECNs), 24-hour trading Investors access Internet; huge growth in online brokerage companies lower commissions than traditional brokers computer technology matches buyers, sellers automatically; rapid trades Trading Stock

14 Measuring How Stocks Perform
Stock Indexes U.S. indexes: DJIA, Standard & Poor’s 500, NASDAQ Composite Global indexes: Hang Seng, DAX, Nikkei 225, TSE 300, FTSE 100 Since 1896, Dow Jones Industrial Average changed with U.S. economy includes most successful companies in most important economic sectors uses points to measure changes in prices at which stocks traded Measuring How Stocks Perform

15 Measuring How Stocks Perform
Tracking the Dow Bull market—prices rise steadily over a relatively long period Bear market—prices decline steadily over a relatively long period 1972 to 2000 longest bull market in history; most last two to three years Dow affected by previous close, Fed, foreign indexes, trade balance About 21 stock markets overseas with over 1,000 large companies each Measuring How Stocks Perform

16 Other Financial Instruments
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 Instruments

17 Other Financial Instruments
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 Other Financial Instruments

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