Chapter 11Financial Markets

Saving and Investing

• Investing – using assets now to make profit later.– Promotes economic

growth– Contributes to a nation’s

wealth• HOW?

Your $$ Banks Businesses Better products/Jobs…

Investing continued

• Financial Assets – you lend your $$$ thru savings accounts, bonds, c.o.d.’s, etc.

• Financial intermediaries – banks, credit unions, life insurance, pension funds, etc. – Share risk (diversification)– Provide info (prospectus)– Liquidity (savings acct. vs.

c.o.d.)• Return vs. Liquidity

The Stock Market

• Corporations sell stock to raise money– Start up costs– Running company or

expanding business

• Why buy stock?– Dividends (paid ~4 times

annually)– Capital Gains

Types of Stock

• Income stock (pays dividends)• Growth stock (profit reinvested…)• Common stock (1 vote per share)• Preferred stock

(non-voting; receive $$ 1st)

• Greater risk = greater rate of return • Lesser risk = lower rate of return• (Like horse racing)

Stock Exchange

• Contact stockbroker – links buyers/sellers of stock.

-brokerage firm gets

fee/commission*New York Stock Exchange

(largest companies)*Nasdaq – OTC (electronic)*Daytrading (very risky)

Measuring Performance>Bull market (80’s and 90’s)>Bear market (2000’s…)

• Dow Jones Industrial Avg. – ~30 large companies/various

industries

• Standard & Poor’s 500 (S&P 500)– Measures ~500 different stocks

From Jay Gatsby to Tom From Jay Gatsby to Tom JoadJoad

• The Roaring 20’s (only for the super wealthy)– Stock values skyrocketing– Flappers, Speakeasies, and the

Charleston– “Get rich quick – buy stocks”

• Speculation (some used life savings)

• Buying on the margin

– Farmers and workers were suffering

The Great CrashThe Great Crash• September 2, 1929 – Dow reached

all-time high then began to fall• October 23 – worried investors

began to sell – prices fell more – panic ensued

• October 28 – stock prices plummeting

• October 29 – Black Tuesday– Record 16.4 million shares sold in

single day

The Great DepressionThe Great Depression

• Millions lost jobs, then homes and farms.

• Unemployment rate = ~ 25%• Millions homeless, starving, etc.

Help on the way???• FDR and the New Deal?• Get rid of prohibition!• WW-II

Market today• October 18, 1987 – “Black Monday”

• 2000 – Dot com bubble– 9/11 attacks

• 2002 – Enron, WorldCom, etc.– Falsified financial reports

• 2008 – Subprime mortgage bubble– Citibank, Bear Stearns, Lehman Bros.,

Fannie Mae, Freddie Mac, AIG– “Too big to fail…” = $700,000,000,000

bailout

• Auto industry bailouts???