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Financial Markets

Financial Markets. Chapter 11. Objectives. Differentiate between savings and investing. Analyze the impact of savings on our economy. Compare stocks, mutual funds, and bonds. Create a diversified portfolio. Savings.

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Financial Markets

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  1. Financial Markets Chapter 11

  2. Objectives • Differentiate between savings and investing. • Analyze the impact of savings on our economy. • Compare stocks, mutual funds, and bonds. • Create a diversified portfolio.

  3. Savings Dollars available when people abstain from consumption – comes from disposable income. Disposable Income - funds left over after taxes/benefits are paid

  4. Types of Savings • Checking Account • Savings Account • Money Market • Certificate of Deposit • Mattress/Cookie Jar

  5. U.S. PERSONAL SAVINGS RATE

  6. Savings and Economic Growth Financial system brings savers and borrowers together and helps economy grow. Businesses can borrow saved funds to produce new goods/services, build new plants, buy new equipment, and create more jobs. Individuals can borrow saved funds to buy a house, buy a car, go to college, etc.

  7. Investing Using saved money to make more money. Involves risk GREATER THE RISK, GREATER THE RETURN?

  8. Investment Pyramid

  9. Types of Investments • Stocks • Mutual Funds • Bonds

  10. Stocks • Stock – ownership in a corporation • Common Stock • Preferred Stock

  11. Stocks Con’t

  12. New York Stock Exchange (NYSE) • Called the “Big Board” – market of choice for the largest companies in America • Largest and most prestigious in world • Founded in 1792 • Auction-based • Sample of Companies Traded: • Wal-mart • General Electric • McDonalds • Citigroup Biba S. Kavass, Rossview High School

  13. American Stock Exchange (AMEX) • 3rd largest exchange in the U.S. • Has merged with NASDAQ • Trades mostly in small-cap stocks • Auction-based • Samples of stock traded: • Alcoa, Inc. • Emerson Radio Corp. • Golf Trust of America Biba S. Kavass, Rossview High School

  14. NASDAQ (National Association of Securities Dealers Automated Quotations ) • Founded in 1972 • OTC (over-the-counter) electronic exchange – buyers and sellers connected by computers • More than 3,200 companies represented – used to be just technology – now has expanded • Sample companies: • Microsoft • Oracle • 1-800-flowers.com • Nathan’s Hot Dogs Biba S. Kavass, Rossview High School

  15. Why Bears and Bulls? Bears – stocks are going down – 20% decline in prices over time- bears hibernate Bulls – stocks are going up – 20% increase in prices over time - Bulls charge Biba S. Kavass, Rossview High School

  16. FACTORS AFFECTING STOCK PRICES • Corporate • Economy • Consumer Sentiment

  17. Factors Affecting Stock Prices • Corporate • Profitability • Sound business management • Growth potential • Size of debt • Dividend Yield • Price-Earnings (P/E) ratio Biba S. Kavass, Rossview High School

  18. FACTORS AFFECTING STOCK PRICES • Economic • Inflation/Recession • Interest Rates • Consumer Spending • Employment Biba S. Kavass, Rossview High School

  19. FACTORS AFFECTING STOCK PRICES • Consumer Sentiment Index • Compiled monthly by University of Michigan • Query at least 500 U.S. households via telephone • Focuses on 3 areas: • How consumers view prospects for their own financial situation • How they view prospects for the general economy over the near term • Their view of prospects for the economy over the long term

  20. Consumer Sentiment Index

  21. Mutual Funds An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, moneymarket instruments and similar assets. Allows people to invest in the market without risking all they have in one or a few companies.

  22. Bonds Loan for a defined period of time at a fixed interest rate to a corporation, U.S. and foreign governments. Commonly referred to as fixed income securities. Used to finance projects and activities.

  23. Types of Bonds • Corporate Bonds • Municipal Bonds • Government Savings Bonds • Treasury Notes and Bonds • Treasury Bills

  24. Corporate Bonds • Monies loaned to corporations • Usually purchased as long-term investments but can be quickly sold • Interest (dividends) are taxable income per IRS

  25. Municipal Bonds • Referred to as “munis” • Issued by state and local governments • Regarded as safe • Tax-exempt on interest paid to investors

  26. Government Savings Bonds • Low denomination, nontransferable bonds issued by the US government • Safe but very little return

  27. T-Notes: US government obligations with maturities of 2-10 years. • T-Bonds: maturity dates ranging from 10 – 30 years. • Both come in denominations of $1,000 • Safest of all investments – lowest return because minimal risk. Treasury Notes and Bonds

  28. Referred to as T-bill • Short-term obligation with a maturity of 4, 13, or 26 weeks • Minimum denomination of $1,000 • No interest – sold on discount basis • Ex. Buy at $960.00/Sell at $1,000.00/Return of $30.00 Treasury Bills

  29. Portfolio Diversification • Developing a portfolio that allocates assets using a variety of investment vehicles • Most common are cash, stocks, mutual funds, and bonds. • Spread the risk to receive a higher average rate of return.

  30. Change is the investor’s only certainty. Thomas Rowe Price, Jr.

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