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Chapter 11. Financial Markets. Chapter 11. Section 1. Private Enterprise and Investing. Investment - the act of redirecting resources from being used today so they can be used to create future benefits When people save or invest, that money is used by business to expand=economic growth.
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Chapter 11 Financial Markets
Chapter 11 Section 1
Private Enterprise and Investing Investment- the act of redirecting resources from being used today so they can be used to create future benefits When people save or invest, that money is used by business to expand=economic growth
The Financial System Financial assets are documents that show a person made an investment A financial system allows the transfer of money between savers and borrowers
Financial Intermediaries • Financial Intermediaries are institutions that help channel funds from savers to borrowers • Banks, credit unions • Finance Companies • Mutual Funds • Life Insurance Companies • Pension Funds
Services Provided by Financial Intermediaries Diversification is the spreading out of investments to reduce risk Financial Intermediaries save time/money because they do the research for investments
Risk and Return Return is the money an investor receives above and beyond the sum of money initially invested
Risk and Return Remember, investing in a friend’s company could double your money, but the company could fail The higher the potential return of the investment, the great the risk involved
Chapter 11 Section 2
Bonds as Financial Assets Bonds are loans that the government or a corporation must repay to the investor. Bonds pay a fixed amount of interest for a set amount of time
Advantages and Disadvantages of Bonds • Advantages: • Unlike stocks, bonds are not shares of ownership in a company, meaning the price does not go up or down
Advantages and Disadvantages of Bonds • Disadvantages: • Whoever issues the bond must make fixed payments, even if times are tough • If issuer cannot maintain financial health, difficult to sell bonds
Types of Bonds Savings- issues by the US government Treasury- US Treasury Department Municipal- state and local governments Corporate- corporation issued (to expand business
Chapter 11 Section 3
Buying Stock Corporations raise money by issuing stock, which represents ownership in the company. A portion of stock is called a share.
Buying Stock • Stockowners earn a profit in two ways: • 1) Dividends- payments made to the stockholder by the company (earned profit) • 2) Capital gain- sell stock for more than they paid for it
Types of Stock Those who buy common stock are voting members Those who buy preferred are nonvoting members
Stock Risks Buying stock is RISKY! If the company experiences economic downturn, that means less dividends (profit) and reduces the value of the stock
How Stocks Are Traded A stockbroker is a person who links buyers and sellers of stock Stockbrokers work for brokerage firms, or business that specialize in trading stock Stocks are sold on the stock exchange, which are markets for buying and selling stock
Stock Exchanges The New York Stock Exchange (NYSE) is the world’s largest stock exchange.
Measuring Stock Performance Bull Market- when the stock market rises steadily over a period of time Bear Market- when the stock market falls steadily over a period of time
Measuring Stock Performance The Dow Jones Industrial Average ,”The Dow” measures how stocks are doing
The Great Crash In 1929, the stock market crashed due to speculation, the practice of making high-risk investments with borrowed money in hopes of getting a big return As of the 1980s, only 25% of American households own stock
