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

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 SplitsHistory of Microsoft Stock Splits Symbol: MSFTSymbol: MSFTIPO: March 13, 1986 Last updated: August 18, 1998IPO: March 13, 1986 Last updated: August 18, 1998

First Sep 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 = 60.75Third Jun 27,1991 3 for 2 Jun 26 = 100.75

Jun 27 = 68.00Fourth Jun 15, 1992 3 for 2 Jun 12 = 112.50

Jun 15 = 75.75Fifth May 23, 1994 2 for 1 May 20 = 97.75

May 23 = 50.63Sixth Dec 9, 1996 2 for 1 Dec 6 = 152.875

Dec 9 = 81.75Seventh Feb 23, 1998 2 for 1 Feb 20 = 155.13

Feb 23 = 81.63

Eighth March 26, 1999 2 for 1 Mar 26 = 178.13 Mar 29 = 92.38Ninth 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

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.

TYPES OF BONDS

• U.S. Treasuries• Corporate• Municipal• Build America Bonds

• High-Yield Bonds

BONDS ARE RATED FOR RISKMoody’s Standard

& PoorsMeaning

Aaa AAA

Best quality, with the smallestrisk, issuers are exceptionallystable and dependable.

Aa AA

High quality, with a slightlyhigher degree of long-term risk.

A A

High-to-medium quality, withmany strong attributes butsomewhat vulnerable tochanging economic conditions

Baa BBB

Medium quality, currentlyadequate but perhaps unreliableover the long term.

I NVESTMENTGRADEBONDS

Ba BB

Some speculative element withmoderate security, but not wellsafeguarded.

B B

Able to pay now but at risk ofdefault in the future.

Caa CCC

Poor quality, clear danger ofdefault.

Ca CC

Highly speculative quality, oftenin default.

C C

Lowest rated, poor prospect ofrepayment, though may still bepaying.

__ D I n default.

JUN KBONDS

What Is A Mutual Fund?

$$

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

HOW TO READ A STOCK TABLE

Columns 1&2- high and low for the year3- Company name 4- ticker symbol 5- Dividend that quarter6- Percentage yield (similar to bank interest)7- Price to Earnings ratio 8- Daily volume of shares9, 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.

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

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

STOCK EXCHANGES