Money, Banking and the Markets

1. Money, Banking and the Markets Lesson 4 Financial Markets

2. About Financial Markets Aim: • How do financial markets help savers reach their financial goals? Do Now: • Estimate how many years you’ll have a full-time career and how much you’ll save each year for retirement.

3. About Financial Markets Do Now answer: Simple math says: • Begin your career at age 25 (after getting an advanced degree) • Retire at age 65 • 40 years of workin the middle! • Save, say, a solid $500 per month?($6,000 per year)

4. About Financial Markets • 40 years * $6,000 saved yearly = ? • A not-so-large $240,000 • You could spend that in a few years! • You may have noticed something missing from our analysis. Any ideas? • Saved money earns interest, which can help us!

5. About Financial Markets • With interest, our money makes money. The earlier we save it, the more time it has to earn interest. • Let’s say that the bank will pay us 2% interest per year.

6. About Financial Markets • Instead of growing like this:

7. About Financial Markets • It can grow like this:

8. About Financial Markets • $369,000 at retirement is better than $240,000, but it’s still not enough. What’s the problem? • We need to earn more each year than a bank will pay! • Any ideas on how we can achieve this? • Put our money into financial investments such as stocks and bonds

9. About Financial Markets • A person buying a bond is lending money. • What big-time borrowers issue bonds? • Corporations • Governments • Why do bonds pay more interest than a bank will pay on money you give it? • There’s a greater risk that something could go wrong.

10. About Financial Markets • A person buying stock wants to be an owner. • Who issues stock? • Corporations, only • Corporations can thrive or fail, making stock investing more rewarding but also riskier than bond investing.

11. About Financial Markets • Over several decades, by investing in a combination of stocks and bonds, a person can reasonably earn 8% per year. • What’s your guess as to how much we’d have after 40 years if we could earn 8% per year?

12. About Financial Markets • More than $1.5 million!

13. About Financial Markets • Ok now, so where can we find stocks and bonds? • On financial markets

14. About Financial Markets • Financial markets, like banks, are intermediaries Corporations wanting to raise money by issuing stock Savers (aka Investors) wanting to invest in stock

15. About Financial Markets • Initial investors buy shares directly from a corporation. Later, when they want to cash out, they become... Buyers,whobelieve the stock will go higher, purchase it …Sellers who make the shares available on a market.

16. About Financial Markets • Primary Market • Secondary Market • A Public Offering occurs when a corporation sells shares to the public to raise money • The first time it does this is the Initial Public Offering, or IPO • After the shares are in the hands of investors, they trade between buyers and sellers • Includes:

17. About Financial Markets • Millions of investors participating in the secondary financial market means: • Investors wanting to sell will find many buyers • Selling: • can done quickly … • without having to lower the selling price • These positive characteristics are known as: Liquidity

18. About Financial Markets There are physical exchanges: • The world’s largest exchange • Has an exchange floor where stock transactions are completed The New York Stock Exchange

19. Where are Financial Assets Traded? There are electronic exchanges • Computerized exchange where approximately 3,300 companies trade • Most technologystocks are traded National Association of Securities Dealers Automated Quotations System

20. Lesson Summary 1 of 3 • Banks allow us to safely save and accumulate money. What’s the catch? • What type of investment is basically a loan to a corporation or government? • What type of investment is partial ownership of a corporation?

21. Lesson Summary 2 of 3 • Where do buyers and sellers of these investments go trade with each other? • With the financial markets, is this trading said to occur in the primary or secondary market? • What, then, happens in the primary market?

22. Lesson Summary 3 of 3 • What is the leading physical stock exchange? • What is the leading electronic stock exchange? • What do we call the ability to quickly sell an investment we no longer want to own quickly and at fair value? • How do financial markets help savers reach their financial goals?

23. Web Challenge #1 Q: The trading floor of the NYSE has been shrinking for many years. Why? • A: Computerized trading it taking over and there are less and less people helping match buyers and sellers • Challenge:Computers work very fast at matching buyers and sellers. Research the arguments for why human experts should still be involved in trading.

24. Web Challenge #2 Q: At Google’s IPO, the stock price was $80. It’s gone up over 10 times (the 2 for 1 split makes it not appear this way). How much of the increase was Google itself able to collect? • A: Not a dime! Once public, the stock trades among buyers and sellers who achieved. • Challenge:Research companies that did a “secondary offering” to take advantage of a soaring stock price.

25. Challenge #3 (cont.) Q: In what way the does a high stock price benefit a corporation such as Google? • A: #1: If the corporation wants to buy a competitor, it can pay in high-priced stock instead of cash. #2: Options it may have granted to employees will have made them wealthier and hopefully loyal to the corporation.

26. Explorations #4 Q: What is high frequency trading (HFT), and how does it help or hurt markets? • A: It’s complicated, but they profit from greater speed and small price differences. While they claim that they add liquidity to markets, critics say they mostly manipulate and “front run” markets. • Challenge:Research the pros and cons of HFT, as well as what the SEC’s stance is on it.