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Ch 11 Financial Markets. Section 1 Saving & Investing. STGs: Describe/Explain: How investing contributes to the Free Enterprise System How the financial system brings savers and borrowers together How financial intermediaries link savers and borrowers
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Section 1 Saving & Investing • STGs: Describe/Explain: • How investing contributes to the Free Enterprise System • How the financial system brings savers and borrowers together • How financial intermediaries link savers and borrowers • Trade offs between risk, liquidity and return on investment (ROI)
Borrowers & Savers • Financial Institutions provide a place to deposit your money and GROW IT(And sometimes lose some of it – thru investing) • Deposits are then Invested or loaned out to Borrowers
Investing & the Free Enterprise System • These Investments (from Savers’ Deposits) Are used to: • Start new businesses • Buy inventory to be sold in retail stores • Expand existing businesses Without these funds, the Free Enterprise System would be limited to the Personal Savings of each Business Owner to start or grow a business.
Financial Intermediaries • Financial Institutions that take your money and invest it:
Diversify your Portfolio • In other words, invest in more than one place and type of investment. • Ex: a Diversified Portfolio: • Savings Account(s) • Mutual Fund(s) • Bonds: Government and Corporate • Real Estate • Certificates of Deposit • Stocks
Risk, Liquidity & Return on Investment • The higher the Risk, the Higher the Return (Interest rate paid to you or Amount of Profit) • The longer the Term (less liquid), the Higher the Rate • The shorter the Term (more liquid), the Lower the Rate
Section 2: Bonds & Other Financial Assets • STGs: Describe/Explain • Characteristics of Bonds • Types of Bonds • Characteristics of other types of financial assets • Four different types of financial asset markets
Three Components of Bonds: • Coupon Rate – Interest rate the issuer pays • Maturity – The date (length of time) after which the issuer will pay you the face value of the bond • Par Value – The face value the issuer will pay the bondholder when the bond matures Ex: Coupon Rate: 5% Maturity: 10 years Par Value: $1,000
Corporate Bonds: How it Works Buy $1,000 Bond (Face or Par Value) issued by a Corporation 5% Coupon Rate, 10 year Maturity • The bondholder receives $50 yearly (interest earned) • For 10 years • At the end of the 10 years (Maturity), the bondholder gets $1,000 from the Issuer. • Bottom Line: The Bondholder has earned $500 over 10 years on a $1,000 investment in the bond.
Sub Par – Buying Bonds at a Discount • Pg 278, Figure 11.3 • Buy a Bond from a Bondholder not the Issuer • The Bondholder may need the cash of the Par Value BEFORE the Maturity Date • So, the Bondholder sells the Bond at Sub Par (a discount)
Bond RatingsPg 279, Figure 11.4 • Indicate the credit worthiness of a bond • The Rating is made by Standard & Poors, and Moody’s, who track how well companies are doing, the amount of debt they carry and management of the companies. • The less risk = the lower the Coupon Rate • AAA/Aaa = Highest quality, lowest risk bond
Other Types of Financial Assets • Certificates of Deposit • Money Market Mutual Funds (Money Markets)
Certificates of Deposit • Offered by Banks,… • Similar to a regular savings accounts except: • The rate is locked in (set %) • You commit to leave the $ in the account for a pre-set length of time (term) • FDIC insured • The shorter the term, the lower the rate paid to you • The longer the term, the higher the rate
Mutual Funds • Financial Institutions pool your money and that of other investors • Invest it in a variety of Financial Assets: • Stocks • Bonds, … • You can choose the type of Mutual Fund: • Blue Chip • Utilities • Alternative Energy • Real Estate • NOT insured by FDIC so, they are riskier than a Savings account and CDs • Higher Rate of Return than on a Savings account
Financial Asset Markets • Capital Markets – Term longer than one year • Corporate & Gov’t Bonds • Long term CDs • Money Markets – Term less than one year • Short term CDs • Treasury Bills • Money Market Mutual Funds
Financial Asset Markets • Primary Markets – can be redeemed ONLY BY THE ORIGINAL HOLDER. They are NOT transferrable, cannot be resold. • Savings Bonds • Certificates of Deposit (CDs) in low $ amounts • Secondary Markets – CAN be resold • Stocks!!! This is how Common Stockholders make money - by selling it in the Secondary Market (The Stock Market) to another investor.
Section 3: The Stock Market • STGs: Describe/Explain: • Benefits & Risks of buying stock • How stocks are traded • How stock performance is measured • Causes & Effects of the Great Crash of 1929
Stocks • Ownership in a Company, but you don’t run the company. A stock is called a Share as in shared ownership. Aka Equities. • A Prospectus is provided by the Company • Provides financial information such as income, expenses and liabilities • Discusses future outlook • Is used by Financial Planners, Stock Brokers and Investors to decide if a company is one in which they want to invest
Types of Stock • Common Stock How do Stockholders make money? 2. Preferred Stock How do Stockholders make money?
Stock Splits • What is it? • Why do companies split stocks?
How Stocks are Traded • Through Stock____________ • On the Stock ____________ or Stock Market • New York Stock Exchange (NYSE) • OTC (Over the Counter) Market • Electronic online purchase • Nasdaq (National Association of Securities Dealers Automated Quotations) • Daytrading – Buying & Selling stocks in the short term rather than hold for growth. • Very risky • Buyer may buy and sell daily – several stocks
How do you know how well a stock is doing? • Look at Stock Indexes: • The Dow Jones Industrial Average • S & P 500 • Pg 289, Figure 11.8 • Bull Market • Bear Market (Grin and Bear It)
The Stock Market Crash of 1929 • Stock Market Crash of 1929 Causes: • Speculation – High Risk investments purchased on credit • Overspending & buying on credit • Loans to German businesses & Gov’t defaulted on • Nation’s wealth concentrated in relatively few hands (a few companies & a few families)
Aftermath of Stock Market Crash 1929 • Bull Market crash led to Bear Market • People hesitant to buy stocks • Widespread unemployment (25%) • Tight Money Supply Policy led to less spending • Less Spending dampened Economic Recovery (fewer jobs needed to produce goods & services) • Regulations to prevent Crashes & Runs
Stock Market in Recent Times • Steady growth with peaks and valleys • Mutual Funds make it possible for more people to afford to buy stocks • Black Monday – October 19, 1987 • The Dow lost 22.5% of value in one day • Rebounded over the next two days • 9/11/2001 - • Trading temporarily halted • Economy did not crash