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Financial Markets

Financial Markets. Saving and Capital Formation. Saving money makes economic growth possible One’s person savings can represent another person’s loan Savings make investments possible . Financial Assets and the Financial System. Consist of a network, including Savers Investors

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Financial Markets

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  1. Financial Markets

  2. Saving and Capital Formation • Saving money makes economic growth possible • One’s person savings can represent another person’s loan • Savings make investments possible

  3. Financial Assets and the Financial System • Consist of a network, including • Savers • Investors • Financial institutions • Work together to Transfer savings to investors

  4. Financial Assets and the Financial System • Financial assets • Claims on the property and the income of the borrower • Open a Savings accounts • Certificates of deposits • Government bonds • Corporate bonds

  5. Financial Assets and the Financial System • Financial Intermediaries • Financial institutions that bring together savers and lenders • Commercial banks • Savings and loan Asso. • Savings bank • Mutual savings banks • Credit unions • Life insurance companies • Mutual funds • Pension Funds • Real Estate Investment Trust • Finance Companies

  6. Circular flow of funds: shows how funds are transferred from savers to borrowers • Any part of the economy can supply and borrow savings • Largest Borrowers = Government and businesses

  7. Nonbank Financial Intermediaries • Non-depository institutions that channel savings to borrowers • Finance companies • Life Insurance • Mutual Funds • Pension Funds • Real Estate Investment Trust

  8. Investment Strategies and Financial Assets

  9. Basic Investment Considerations • Risk: a situation in which the outcome is not certain but can be estimated • Higher risk = higher rate of return • Low risk = lower rate of return

  10. Basic Investment Considerations • Investments depends on goals of the investor • Consistent investment can yield large returns • Avoid complex investments • 401K Plan: tax deferred investment plan that acts as a personal pension fund for employees

  11. Basic Investment Considerations

  12. Bonds as Financial Assets • Three main components • The Coupon: stated interest on debt • The Maturity: life of the bond • The par value: principal or the total amount initially borrowed that must be repaid at maturity • Prices are determined by supply and demand • Yield = annual interest rate divided by the purchase price

  13. Bond Ratings • Rated on • the financial health of the investor • The ability to make future coupon • Principal payments • Issuer’s past credit history • Range from D (lowest) to AAA (highest) • Default = the issuer has not kept up with the interest of the par value payments

  14. Financial Assets and Their Characteristics • Most common form of investment = Certificates of deposit • Corporate Bonds • Issued by corporations • Usually used for long term investment • Municipal bonds • Issued by the state and local gov’t • Safe, tax exempt investment

  15. Financial Assets and Their Characteristics • Savings bonds • Low-denomination, non-transferable • Issued by federal gov’t • Virtually no risk • Treasury and Bonds • Long-term obligations • Issued by fed gov’t • Safest of all financial assets

  16. Financial Assets and Their Characteristics • Treasury Bills • Short-term obligations • Issued by federal gov’t • Individual Retirement Accounts (IRA’s) • Long-term • Tax sheltered time deposits • Intended for retirement

  17. Markets for Financial Assets • Capital markets: money is loaned for more than one year • Money Markets: money is loaned for more less one year • Primary Markets: only the original issuer can repurchase or redeem a financial asset • Secondary Markets: financial assets can be resold to new owners

  18. Markets for Financial Assets

  19. Investing in Equities, Futures, and Options

  20. Market Efficiency • Efficient Market Hypothesis (EMH) • Argument that stocks are always priced about right and that bargains are hard to find • It is not possible to “beat the market” regularly • Investors should diversify their portfolios • Or enlist the assistance of a stock broker

  21. Organized Stock Exchanges • New York Stock Exchange (NYSE) • List share of 2,800 large companies • 1,400 seats or memberships • American Stock Exchange (AMEX) • List shares of 750 companies • Regional Stock Exchanges • list shares too small or to new to be listed on NYSE or AMEX • Global Stock Exchange • Include stock exchanges around the world

  22. Over the Counter Markets (OTC) • Electronic Marketplace for securities not traded on an organized exchange • I.E. National Association of Securities Dealers Automated Quotation (NASDAQ) • List information on companies traded on (OTC)

  23. Measure of Stock Performance • Dow-Jones Industrial Average (DJIA) • Index made up of 30 stocks • Most popular and widely publicized measure of stock market performance on the NYSE • Standard & Poor’s 500 • Index made up of 500 representative stocks • Bull Market: prices are rising • Bear Market: prices are falling

  24. Trading in the Future • Spot Market • “Spot” meaning immediate • Transactions are made at the prevailing price • Futures contract • Futures market

  25. Trading in the Future • Option Market • Put and Call options are bought and sold • Call option • Gives the owner the right to buy at a specific price in the future • Put option • Gives the owner the right to sell at a specific price in the future

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