Financial Markets
Saving & Investing
• Investment: the use of assets to earn income
or profit.
– Ex. Paying for college.
• Financial System: the system that allows the
transfer of money between savers and
borrowers.
• Financial Asset: claim on the property or
income of a borrower.
Does money grow on trees?
Saving & Investing
• Savers, financial intermediaries, and
borrowers all function together to generate
more money in our economy.
• Financial Intermediaries Include:
– Banks, Saving and Loans Associations, and Credit
Unions.
– Finance Companies
– Mutual Funds
– Life Insurance Companies
– Pension Funds
Saving & Investing
• What these financial intermediaries do is
collect funds from savers.
• Savers entrust these financial intermediaries
to take care of their money.
• The financial intermediaries then loan out
some of this money to borrowers.
The Cycle
Savers
Financial
Intermediaries
Borrowers /
Investors
The Cycle
Saving & Investing
• There is always risk when investing, “no such
thing as a sure thing”.
• Diversification, the strategy of spreading out
investments, is the best way to lower risk.
Saving & Investing
• Savings Accounts are very low risk, and very
liquid (easy access to cash), but they receive
low interest rates.
• The return, or money received in addition to
initial investment, is guaranteed.
• CDs, or certificates of deposit, give you less
liquidity, but a higher interest rate and thus a
greater return.
Bonds and Other Financial Assets
• Bonds are IOUs.
– They are sold by the government or corporations.
– They pay a fixed amount of interest at regular
intervals.
– They are established with a fixed amount of time.
Bonds and Other Financial Assets
• Three Components of Bonds:
1. Coupon Rate: the interest rate the issuer will pay
the holder.
2. Maturity: the time at which payment to the
bondholder is due.
3. Par Value: original amount paid for bond. AKA
face value or principal.
Bonds and Other Financial Assets
• Bonds are frequently bought and sold at
discounted price. This is usually done because
of changing interest rates.
Types of Bonds
• Treasury Bonds, Bills, and Notes
– Bonds: long-term, 10-30 years, safe, min.
purchase $1000
– Notes: intermediate term, 2-10 years, safe, min.
purchase $1000
– Bills: short-term, 3-6-or 12 months, liquid and
safe, min. purchase $1000.
Types of Bonds
• Municipal Bonds: bonds issued by state and
local governments.
– Relatively safe because government can tax.
– Also are tax-exempt at state and federal level.
• Corporate Bonds: bonds issued by
corporations to help them expand their
business.
– Sold in large denominations.
– No tax base as guarantee places them in moderate
risk levels.
Types of Bonds
• Junk Bonds: (AKA high-yield securities). They
are bonds issued by companies that are rated
low because they have a very high risk.
However, they do potentially have a higher
payout.
Other Types of Financial Assets
• Certificates of Deposit: (CDs) Available
through banks. Banks lend out the funds for
fixed time, 6 months or a year.
– Available for as little as $100. Ex. Student Loan.
• Money Market Mutual Funds: (M4)
Intermediaries buy short-term financial assets.
May receive higher interest, but not covered
by FDIC.
Financial Asset Markets
Financial Asset Markets
• Capital and Money Markets
– Capital Markets: Markets where money is lent for
longer than a year.
• Long-term CDs, corporate and government bonds.
– Money Markets: Markets where money is lent for
less than a year.
• Short-term CDs, Treasury bills, and money market
mutual funds.
Financial Asset Markets
• Primary and Secondary Markets
Primary markets: financial assets that can be
redeemed only by the original holder.
– Secondary markets: financial assets that can be
resold.
War Bonds
War Bonds
War Bonds
War Bonds
Stock Market
Ch.11 Sec. 3
By: Mr. Skinner
Buying Stock
• Stock are also called equities, and issued in
portions known as shares.
• Stockholders can make profit in two ways:
1. Dividends: corporations pay out profits to
stockholders.
2. Capital Gains: When stock is sold for more than
the owner paid. Can also have a Capital Loss.
Types of Stock
• Income Stock: Pays dividends at regular times
during the year.
• Growth Stock: Pays few or no dividends.
Earnings are reinvested in the business.
Types of Stock
• Common Stock: Voting owners of stock. 1 vote
per share of stock.
• Preferred Stock: Nonvoting owners of the
company. Receive dividends before owners of
common stock.
How Stocks Are Traded?
How Stocks Are Traded?
• Where is stock traded?
– At stock exchanges, markets for buying and selling
stock.
Where are stocks traded?
• New York Stock Exchange: It handles the
largest and most established companies in the
country.
– It began in 1792
• OTC (over the counter) Market: an electronic
marketplace for stocks and bonds.
Where are stocks traded?
• NASDAQ: American market for OTC securities.
– Began in 1971
– By 1990 became second largest securities market
in the United States.
– It does not actually have a trading floor, but is
connected by computer terminals across the
world.
• U.S. , Asia, and Europe
Measuring Stock Performance
• Bull Market: steady rise in the market over
time.
• Bear Market: steady drop in the market over
time.
Measuring Stock Performance
• The Dow Jones Industrial Average
– Shown how certain stocks have traded every
business day since 1896.
– Today the Dow represents 30 large companies.
• S & P 500 (Standards and Poor’s 500)
– Measures 500 different stocks and measures
overall stock performance.
The Great Crash of 1929
• Set-up by a long-term bull market.
• Did not result from a single cause, and lessons
still used today from the collapse.
The Great Crash of 1929
• Speculation: the practice of making high-risk
investments with borrowed money in hopes of
getting big returns.
• Too much of the wealth in only a few hands.
• Buying on margin:
– Paying a fraction of price
and borrowing the rest
from the brokerage firm.
– 1928 -$5 million
– 1929- $850 million
The Great Crash of 1929
• Stocks reached peak in September, but began
to slowly fall.
• October 23rd the Dow dropped 21 points in an
hour. Worry set in and investors began to sell
the next day.
• Black Tuesday, October 29th a record 16.4
million shares were sold. Nearly four times the
average. This is the crash.
Aftermath
• The stock market was affected for years
afterwards.
• Even in the 1980s only 25% of American
households held stock.
• “Black Monday”- October 19th, 1987. Dow lost
22.5% of its value.
– The Fed assisted this time much more efficiently. Within
two years returned to previous status.
• This again rose in the 1990s with the advent of
new technologies and internet companies.