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.