FINANCIAL MARKETS

1. FINANCIAL MARKETS Financial institutions through which savers can directly provide funds to borrowers. Stock and Bond Markets

2. Investing in a friend’s Internet company could double your money, but there is the riskof the company failing. • In general, the higher potential return of the investment, the greater the risk involved.

3. Types of Risk • Capital Loss Risk – when the price of the asset falls below the purchase price (stocks) • Buy for $50 sell for $40 ) : • Credit or Default Risk – you may not get paid back all of your money • I buy a corporate bond and then the company goes bankrupt

4. Types of Risk • Inflation Risk – the longer you have your money in savings the more inflation erodes its value • I earn 2% on my savings but prices rise by 4% • Liquidity Risk – you may need cash and if your money is tied up in a long term investment you may not be able to get it without paying a penalty • A five year certificate of deposit charges me a 3% penalty for early withdrawal

5. Financial Markets and Risk Junk Bonds Growth Stocks RISK Income Stocks Corporate Bonds Municipal Bonds Savings Bonds Treasury Bills RETURN

6. Bond Market Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor with interest.

7. Bonds and Risk • Bonds have different levels of risk depending on: • Who issued the bond • Federal government is the lowest risk • Length of time before bond matures • Longer the time frame the greater the risk (most bonds have a maturity of 10-30 years)

8. Making Money with Bonds • Bondholders earn interestfor the life of the bond. • Bondholders can sell their bond for MOREthen for what they bought them. • Bond ratingsand current interest ratescan change demand for bonds and thus their selling prices

9. Government Bonds • Savings bonds are the least expensive bond; they cost only $25, but they take 18+ years to mature making them an inflation risk. • U.S. Treasury Bills are a little more expensive - $100 minimum, but they mature in 26 weeks, making them one of the safest of all investments

10. Government Bonds • Municipal bonds are issued by state or local governments to finance improvements. Issued in $5,000 increments. • Municipal bonds are tax free so they have less inflation risk. • These take 5-15 years to mature.

11. Corporate Bonds • Corporations issue bonds to raise money to expand their business. • They mature in 10-30 years. • Corporate bonds are rated according to risk • AAA is lowest risk • CCC is highest risk • Corporate bonds cost $1,000 and up.

12. Corporate Bonds • Junk bondsare the most risky type of corporate bond, but they are potentially higher-paying bonds. • These bonds usually are being sold by companies on the verge of bankruptcy

13. STOCK A Study of Risk & Reward

14. What is stock? • Stock represents ownership of a corporation Why do companies issue stock? • By selling SHARES, corporations can raise money to: • Start • Run • Expand their business

15. There are TWO ways for shareholders to make a profit! • DIVIDENDS • A portion of the corporation’s profits are paid to shareholders • Higher Profits = Higher Dividends per share • CAPITAL GAINS • The difference in the purchasing price & selling price • Selling @ a HIGHER price = gain • Selling @ a LOWER price = loss

16. STOCK SPLITTING Stock prices reflect the value of a corporation to buyers. But if prices become too high, buyers won’t want to buy the company’s stock. • If stock prices become too expensive a board of directors may vote for a STOCK SPLIT • This would double the number of shares you hold, but cuts their price in half.

17. HOW DO I PURCHASE STOCK? • Contact a STOCKBROKER • This is a person that links potential sellers & buyers. • Stockbrokers charge fees for conducting the sale.

18. TYPES OF STOCK • Income stock • These are usually large well-established firms. • Pays dividends. • Growth stock • These are new start-up companies • Pays few dividends, profits are reinvested in the company.

19. STOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK

20. MARKETS FOR BUYING AND SELLING STOCK • New York Stock Exchange (NYSE) • The oldest, largest and most prestigious exchange in the US • A company must have 300,000 shares of stock that are owned by at least 1,500 people • The biggest companies are known as blue chip companies

21. STOCK EXCHANGES Over-the-Counter Markets

22. Over-the-Counter (OTC) Markets • Stocks are bought and sold over computer terminals, not on the floor of an exchange • Stocks are listed on NASDAQ (the 2nd largest exchange in the US)

23. MEASURING STOCK PERFORMANCE

24. MEASURING STOCK PERFORMANCE • BULL MARKET • Stock market is rising steadily over a period of time. • BEAR MARKET • Stock market is steadily falling over a period of time.

25. MEASURING STOCK PERFORMANCE • Dow-Jones Industrial Average (DJIA) • Publishes a daily average of the closing prices of 30 stocks listed on the NYSE • Standard and Poor’s 500 • Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

26. DOW Jones Industrial Average

27. Risk IS Involved!!! • Corporations cannot guarantee profits • The Stockholder may experience a CAPITAL LOSS • Bond holders are paid FIRST!!! • ***Remember*** • A BOND represents DEBT that is owed by the corporation

28. Differences in Risk • Bonds are less risky because the corporation or government mustpay you back UNLESS they go bankrupt. • Stocks are more risky because corporations only pay dividends if they make a profit and if they decide to not put the profits back into the business. • Capital gains are made only if the demand for your stock goes up.