Transcript Chapter 11 Financial Markets

Chapter 11 Financial Markets
Section One
Savings and the Financial System
Pages 289 - 294
Saving and Economic Growth
• For an economy to grow they must produce Capital
and in order to produce Capital Saving must take
place.
• A Financial system is a network of savers,
investors, and financial institutions that work
together to transfer savings to investors.
• Financial intermediaries are the institutions that
lend the funds that savers provide.
• Everyone benefits from the financial system.
Individuals buy houses. Businesses buy capital, and
government provides services.
Three Parts of a financial System
• Funds that a saver transfers to a borrower.
• Financial Assets that certify conditions of a
loan.
• Organizations that bring the surplus funds
and financial assets together.
Ways People Can Save
• Savings Account
• Buy Bonds
• Purchase a certificate of Deposit
Non Bank Financial Intermediaries
• Finance Companies
• Life Insurance Companies
• Pensions Funds
Basic Investment Considerations
• Consistency
• Simplicity
• Risk
• Investment Objectives
Chapter 11 Financial Markets
Section Two
Financial Assets and Their Markets
Pages 296-303
Bonds as Financial Assets
• Three main components of a Bond
– Coupon Rate, or stated interest rate
– Maturity, or the life of the Bond
– Par Value, the principal or the total amount that
must be repaid.
Bonds as Financial Assets
• Bond Ratings AAA = good D = bad
• Junk Bonds = High risk may lose all of your
money rating of BB, Bb or lower.
• Municipal Bonds – state & local gov. bonds
– Regarded as safe investments
– Because governments have the power to tax they
will be able to pay future interest.
– These bonds are generally tax Exempt.
Bonds as Financial Assets
• Savings Bonds – low denomination
nontransferable bonds EE savings Bond
• Treasury Notes – maturities of 2 to 10 years
• Treasury Bonds – maturities more than 10
years to 30 years.
• Treasury Bills – short term maturity of 4,13,
or 26 weeks
IRA’s
• Long term, tax sheltered time deposits that
can be set up as an Individual Retirement
Plan
Markets for Financial Assets
• Capital Markets - market in which money is
loaned for more than one year.
• Money Markets – market in which money is
loaned for less than one year.
• Primary Markets – a market where only the
original issuer can sell or repurchase a
financial asset.
• Secondary Markets. – where existing financal
assets can be resold to new owners.
Chapter 11 Financial Markets
Section Three
Investing in Equities and Options
Pages 305 - 311
Stocks and Efficient Markets
• Equities , or shares of common stock that
represent ownership of corporations.
• Stock Broker – a person who buys or sells
equities for clients.
• Efficient Market Hypothesis – stocks are
usually priced correctly and bargains are hard
to find because they are followed closely by
many investors.
Stocks and Efficient Markets
• Portfolio diversification – practice of holding
a large number of different stocks so that
increases in some can offset declines in
others.
• Mutual Fund – a company that sells stock in
itself and invests the money it receives.
• 401K – tax deferred investment that acts as a
personal pension fund. Many times has
matching funds from an employer.
Stock Markets and Their Performance
• Stock or securities exchange where buyers
and sellers meet to trade stocks.
• New York Stock Exchange (NYSE)
• American Stock Exchange (AMEX)
• Over Counter Markets – an electronic
marketplace for securities that are not traded
on an organized exchange. (NASDAQ)
Stock Performance
• Dow Jones Industrial Average – DJIA
• Standard & Poor’s 500 ( S&P 500)
• Bull Market – prices moving up for several
months or years in a row
• Bear Market – mean or nasty market with the
prices falling sharply for several months or
years.
Trading in the Future
• Spot Market – buying and selling in the
present.
• Futures Market – an agreement to buy or sell
at a specific future date at a predetermined
price.
• Call Option – you buy the right to cancel a
contract to buy something.
• Put Option – you buy the right to cancel a
contract to sell something