Standard 3: Understand Economic Systems

1. Standard 3: Understand Economic Systems EQ 3.03 Explain the Stock Market

2. THE FEDERAL RESERVE • The Federal Reserve System is the central bank of the United States. • It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

3. Today, the Federal Reserve’s duties fall into three or four general areas • Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates • Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

4. Federal Reserve and its influence • A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, who serve on a rotating basis. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence overall monetary and credit conditions.

5. The Stock Market • A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange, as well as those only traded privately.

6. Purpose of a Stock Market • The stock market is one of the most important sources for companies to raise money. • This allows businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market.

7. Functions of a Stock Market • History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. • An economy where the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development.

8. you raise money from selling those "pieces" of your business which can be used to build new plants and facilities, pay down debt, or acquire another company. smart owners will keep at least 51% of the stock, which will allow them to retain control of the day to day activities (controlling shareholder) Stock is ownership in a company. (Equity) If you were to divide your business up into small pieces and sell those pieces, you would essentially have issued stock. Stocks help . .. Stocks are . ..

9. What is the Dow Jones Industrial Average? • An index of thirty, blue chip stocks that are traded in the United States. • A “blue chip stock” is stock in a corporation that has a national reputation for quality, reliability, and the ability to operate profitably in good times and bad. • It is believed that by looking at the companies on the list, a person can get a general picture of how the market as a whole is performing. • The DJIA is the most quoted and followed index in the world, and dates back to May 26, 1896.

10. The Dow Jones Industrial Average™Updated as of: Oct 26, 2006 @ 2:37 pm ET Bear or Bull Market? The use of  "bull" and "bear" to describe markets comes from the way in which each animal attacks its opponents. That is, a bull thrusts its horns up into the air, and a bear swipes its paws down. These actions  are metaphors for the movement of a market: if the trend  is up, it is considered a bull market. And if the trend is down, it is considered a bear market.

11. A prolonged period in which investment prices fall, accompanied by widespread pessimism Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly 1929 Crash most famous crash in U.S. history Dow Industrials hit a high of 386 in September, 1929. It did not get back to that level until November, 1954 Dow dropped 89% 1987 – The Market fell dramatically. 2008 the start of the Great Recession caused by the failure of the financial markets. Bear Market

12. Bull Market • long term uptrend (months to years) price movement in any market • An extended period of generally rising prices • characterized by optimism, investor confidence and expectations that strong results will continue.

13. Impact of E-Commerce on the Economy • In recent years, e-commerce has emerged as the fastest growing sector of the U.S. marketplace. Despite the contraction in the high-tech industry during the recent recession, firms have continued to enter and expand their presence in e-commerce, and consumers have increased the number of purchases made online.

14. E-Commerce • E-commerce currently represents a very small share of overall commerce, but it is expected to continue to expand rapidly in coming years. As e-commerce grows, so will its impact on the overall economy. ; The primary route by which e-commerce will affect the economy at large is through its impact on productivity and inflation.

15. E-Commerce Influence • Businesses and consumers that use e-commerce benefit from a reduction in costs in terms of the time and effort required to search for goods and services and to complete transactions. This reduction in costs results in higher productivity.