Capital Market BETHEL UNIVERSITY SIFE What is a capital market The capital markets are where companies or a government can raise money. Two of the most popular markets are in the form of stock exchanges. New York Stock Exchange Nasdaq Capital markets provide liquidity, the ability to get money out of something you own, your assets. House= Low liquidity Stocks= High liquidity Why are capital markets important Capital markets can be very beneficial when saving for retirement. Social Security has a good chance of not existing when you are ready to retire. Must take your future in your own hands These markets control prices for every day commodities: oil, corn, soybeans, and cotton Capital markets average a much higher rate of return, 10%, over a savings account which averages 4.5%. Provides liquidity- Allows you to turn assets into cash very quickly. Diversification Capital markets allow investors to diversify their investments It is very important when investing to be diversified. As an investor you don’t want all your money in one company,. Don’t want all your eggs in one basket. If that company fails you are left with nothing. Diversify- means to have a variety A movie store has a diversification of movies to select from. The Nike factory outlet is not diversified. They only have one brand. Stocks A stock represents an ownership of a company. Each individual stock is a single share of a company. Companies issue stock to raise money for a business. Stockholders are entitled to share profits and get to vote in how the company runs If the company makes profits the stock price goes up. If the company starts to decline the stock price goes down Money is easily accessible- Liquidity An individual can sell a stock and receive cash with minutes. Stocks have an average return of 10% each year. Stock Example of if you would bought a stock -You buy 100 shares of Wal-Mart stock at $55.17. -If the price goes up to $89.25 that is a increase of $34.08. -So multiply $34.08 by the 100 shares you own, and you just made $3,408.00 What stock to buy? Don’t just pick a stock, invest in a company Choose from a market or company you have an interest in. Research the company One method is to pick a young company which you think will be profitable The company must have a good business model Want to look for excellent leadership Find companies with not only good CEO, but great managers Look for companies who you believe will increase profits. Bonds What is a bond? U.S. Treasury Bond A bond is an “IOU” a loan from a person to a corporation or of a government agency. Bonds are issued with a set interest rate for a set time. Much lower risk than stocks, but no chance for high return. Bonds pay an average of 5% return each year. Bond holders are first to get paid if company goes bankrupt. Bonds Example of how a bond works Wal-Mart issues a $10,000 bond that matures in 12 months at 4.5%. At the end of 12 months they would give you the $10,000 dollar and the interest. Multiple 10,000 and .045 and you get 450. So in 12 months you made 450 dollars. Investment Portfolio An investment portfolio is a collection of investments held by an institution or a private individual. Stocks, Bonds, Real Estate, Savings Account, or any asset can combine to make up someone’s portfolio Very important to diversify your portfolio. If you only have stocks what happens if stock market crashes and you are ready to retire? Mutual Funds Professionally managed investment portfolios Mutual funds sell on the open market just like stocks Individuals buy shares in portfolios and the managers make decisions on the best investments. One benefit to mutual funds is small investors have access to professional management. A downside to mutual funds can be high management fees. Most people agree that mutual funds are the best way to invest. Saving for Retirement The current U.S savings rate is negative. Lowest since great depression, this means it is time to start saving and stop spending No social security means you are on your own for retirement Most individuals depend on social security to survive on after they retire. $5,000 a year at 5% interest for 40 years provides you with $604,000 $5,000 a year at 10%for 40 years provides you with $2,213,000 You must have some knowledge in capital market to get the 10% instead of the 5% Conclusion Capital markets provide liquidity and diversification for investors. $5,000 a year over 40 years can provide you with over $2 million dollars for retirement. Mutual funds are easy way to diversify your portfolio. You should start saving for retirement as young as you can. Risk vs. Return- Stocks can provide greater return but carry more of a risk than a bond. Saving early, taking calculated risk, and diversifying is how you prepare for a wealthy retirement.