Financial Markets

Saving & Investing

• Investment: the use of assets to earn income or profit.– Ex. Paying for college.

• Financial System: the system that allows the transfer of money between savers and borrowers.

• Financial Asset: claim on the property or income of a borrower.

Does money grow on trees?

Saving & Investing

• Savers, financial intermediaries, and borrowers all function together to generate more money in our economy.

• Financial Intermediaries Include:– Banks, Saving and Loans Associations, and Credit

Unions.– Finance Companies– Mutual Funds– Life Insurance Companies– Pension Funds

Saving & Investing

• What these financial intermediaries do is collect funds from savers.

• Savers entrust these financial intermediaries to take care of their money.

• The financial intermediaries then loan out some of this money to borrowers.

The Cycle

The Cycle

Saving & Investing

• There is always risk when investing, “no such thing as a sure thing”.

• Diversification, the strategy of spreading out investments, is the best way to lower risk.

Saving & Investing

• Savings Accounts are very low risk, and very liquid (easy access to cash), but they receive low interest rates.

• The return, or money received in addition to initial investment, is guaranteed.

• CDs, or certificates of deposit, give you less liquidity, but a higher interest rate and thus a greater return.

Bonds and Other Financial Assets

• Bonds are IOUs. – They are sold by the government or corporations.– They pay a fixed amount of interest at regular

intervals.– They are established with a fixed amount of time.

Bonds and Other Financial Assets

• Three Components of Bonds:1. Coupon Rate: the interest rate the issuer will pay

the holder.2. Maturity: the time at which payment to the

bondholder is due.3. Par Value: original amount paid for bond. AKA

face value or principal.

Bonds and Other Financial Assets

• Bonds are frequently bought and sold at discounted price. This is usually done because of changing interest rates.

Types of Bonds

• Treasury Bonds, Bills, and Notes– Bonds: long-term, 10-30 years, safe, min.

purchase $1000– Notes: intermediate term, 2-10 years, safe, min.

purchase $1000– Bills: short-term, 3-6-or 12 months, liquid and

safe, min. purchase $1000.

Types of Bonds

• Municipal Bonds: bonds issued by state and local governments. – Relatively safe because government can tax. – Also are tax-exempt at state and federal level.

• Corporate Bonds: bonds issued by corporations to help them expand their business.– Sold in large denominations. – No tax base as guarantee places them in moderate

risk levels.

Types of Bonds

• Junk Bonds: (AKA high-yield securities). They are bonds issued by companies that are rated low because they have a very high risk. However, they do potentially have a higher payout.

Other Types of Financial Assets

• Certificates of Deposit: (CDs) Available through banks. Banks lend out the funds for fixed time, 6 months or a year.– Available for as little as $100. Ex. Student Loan.

• Money Market Mutual Funds: (M4) Intermediaries buy short-term financial assets. May receive higher interest, but not covered by FDIC.

Financial Asset Markets

Financial Asset Markets

• Capital and Money Markets– Capital Markets: Markets where money is lent for

longer than a year. • Long-term CDs, corporate and government bonds.

– Money Markets: Markets where money is lent for less than a year.

• Short-term CDs, Treasury bills, and money market mutual funds.

Financial Asset Markets

• Primary and Secondary MarketsPrimary markets: financial assets that can be

redeemed only by the original holder.– Secondary markets: financial assets that can be

resold.

War Bonds

War Bonds

War Bonds

War Bonds

Stock MarketCh.11 Sec. 3

By: Mr. Skinner

Buying Stock

• Stock are also called equities, and issued in portions known as shares.

• Stockholders can make profit in two ways:1. Dividends: corporations pay out profits to

stockholders.2. Capital Gains: When stock is sold for more than

the owner paid. Can also have a Capital Loss.

Types of Stock

• Income Stock: Pays dividends at regular times during the year.

• Growth Stock: Pays few or no dividends. Earnings are reinvested in the business.

Types of Stock

• Common Stock: Voting owners of stock. 1 vote per share of stock.

• Preferred Stock: Nonvoting owners of the company. Receive dividends before owners of common stock.

How Stocks Are Traded?

This guy is a stockbroker, he links

buyers and sellers of stock.

He works at a brokerage firm,

a business that specializes in

trading stocks.

How Stocks Are Traded?

• Where is stock traded?– At stock exchanges, markets for buying and selling

stock.

Where are stocks traded?

• New York Stock Exchange: It handles the largest and most established companies in the country. – It began in 1792

• OTC (over the counter) Market: an electronic marketplace for stocks and bonds.

Where are stocks traded?

• NASDAQ: American market for OTC securities.– Began in 1971– By 1990 became second largest securities market

in the United States.– It does not actually have a trading floor, but is

connected by computer terminals across the world.

• U.S. , Asia, and Europe

Measuring Stock Performance

• Bull Market: steady rise in the market over time.

• Bear Market: steady drop in the market over time.

Measuring Stock Performance

• The Dow Jones Industrial Average– Shown how certain stocks have traded every

business day since 1896.– Today the Dow represents 30 large companies.

• S & P 500 (Standards and Poor’s 500)– Measures 500 different stocks and measures

overall stock performance.

The Great Crash of 1929

• Set-up by a long-term bull market. • Did not result from a single cause, and lessons

still used today from the collapse.

The Great Crash of 1929

• Speculation: the practice of making high-risk investments with borrowed money in hopes of getting big returns.

• Too much of the wealth in only a few hands. • Buying on margin:

– Paying a fraction of priceand borrowing the restfrom the brokerage firm.

– 1928 -$5 million– 1929- $850 million

The Great Crash of 1929

• Stocks reached peak in September, but began to slowly fall.

• October 23rd the Dow dropped 21 points in an hour. Worry set in and investors began to sell the next day.

• Black Tuesday, October 29th a record 16.4 million shares were sold. Nearly four times the average. This is the crash.

Aftermath• The stock market was affected for years

afterwards.• Even in the 1980s only 25% of American

households held stock.• “Black Monday”- October 19th, 1987. Dow lost

22.5% of its value. – The Fed assisted this time much more efficiently. Within

two years returned to previous status.

• This again rose in the 1990s with the advent of new technologies and internet companies.