Presentation Transcript

1. Savings and the Financial System To the economist, saving means the absence of spending, while savings refers to the dollars that become available when people abstain from consumption. When people save money, they make funds available to borrowers who then use them to produce new goods and services, build new plants and equipment, and create more jobs.
2. Financial Assets and the Financial System Financial system – a network of savers, investors, and financial institutions that work together to transfer savings to investors. Financial asset – claims on the property and the income of the borrower Financial intermediaries are financial institutions that lend the funds that savers provide to borrowers.
3. Circular Flow of Funds Savers provide their funds directly or indirectly to the borrower. The borrowers then generate the financial assets, which return to the lender. Any sector of the economy can borrow, but governments and businesses are the largest borrowers.
4. Financial Intermediaries Finance company – a firm that specializes in making loans directly to consumers and in buying installment contracts from merchants who sell goods on credit. Life insurance companies – collects a premium from policy holders in exchange for protection in case of death. Mutual funds – a company that sells stock in itself to individual investors and then invests the money it receives in stocks and bonds issued by other corporations Pension funds – a fund set up to collect income and disburse payments to those persons eligible for retirement, old-age, or disability benefits Real estate investment trust – a company organized primarily to make loans to construction companies that build homes.
5. Investment Strategies and Financial Assets Risk – a situation in which the outcome is not certain As an investor, your first consideration should be the level of risk that you can tolerate. If you are comfortable with the required level of risk, then you can consider investment. Investors will be more likely to want assets that get more valuable when saving for the long-term, such as retirement. Most investment advisors tell people to stay with what they know. If an investment seems too complicated, then ignore it, and know that some things are too good to be true. 401(k) plan – a tax-deferred investment and savings plan that acts as a personal pension fund for employees.
6. Bonds as Financial Assets Bonds are long-term obligations that pay a stated rate of interest for a specified number of years. 3 components of bonds Coupon – the stated interest on the debt Maturity – the life of the bond Par value – the principal or the total amount borrowed that must be repayed to the lender Investors should consider two things before they decide what to offer for a bond Changes in future interest rates The risk that the company will default
7. Financial Assets and Their Characteristics Certificate of Deposit (CD) – one of the most common forms of investments available. A receipt showing that an investor has made an interest bearing loan to a bank. Municipal bond – bonds issued by state and local governments Savings bond – low-denomination, nontransferable bonds issued by the U.S. government, usually through payroll-savings plans Individual Retirement Account (IRA) – long-term, tax-sheltered time deposits that an employee can set up as part of a retirement plan. A Roth IRA is an IRA whose contributions are made after taxes so that no taxes are taken out at maturity.
8. Markets for Financial Assets Capital market – a market where money is loaned for more than one year. Money market – a market where money is loaned for periods of less than one year. Primary market – a market where only the original issuer can repurchase or redeem a financial asset. Secondary market – a market in which existing financial assets can be resold to new owners.
9. Investing in Equities, Futures, and Options Equities – stocks that represent ownership shares in corporations. Efficient Market Hypothesis – the argument that stocks are always priced about right and that bargains are hard to find. Portfolio diversification – the practice of holding a large number of different stocks so that increases in some can offset unexpected declines in others. Stockbroker – a person who buys or sells equities for clients.
10. Organized Stock Exchanges Securities exchanges – places where buyers and sellers meet to trade securities New York Stock Exchange – the oldest, largest, and most prestigious of the organized stock exchanges. Located on Wall Street in NYC. Lists stocks from more than 3000 companies. American Stock Exchange (AMEX) – Lists stocks from approximately 1000 companies Regional stock exchanges – Located in place like Chicago, California, Philadelphia, Boston, and Memphis. Designed to meet the needs of the smaller and middle-sized corporations in their regions. Global stock exchanges – located in cities like Sydney, Tokyo, Hong Kong, Singapore, Johannesburg, and Frankfurt. Over-the-counter markets (OTC) – an electronic marketplace for securities that are not traded on an organized exchange.
11. Measures of Stock Performance Dow Jones Industrial Average – the most popular and widely publicized measure of stock market performance on the NYSE. Publishes the average of 30 of the most active stocks on the market. Bull market – a “strong” market with the prices moving up for several months or years in a row. Bear market – a “mean” market with the prices of equities moving sharply down for several months or years in a row.
12. Trading in the Future Options – contracts that provide the right to purchase or sell commodities or financial assets at some point in the future at a price agreed upon today. Call options – the right to buy a share of stock at a specified price some time in the future. Put options – the right to sell a stock at a specified price in the future.