financial markets chapter 11 ms. eraqi. financial intermediaries types of investments includes...
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Financial MarketsFinancial MarketsChapter 11 Chapter 11
Ms. Eraqi
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Financial IntermediariesFinancial Intermediaries
TYPES OF INVESTMENTS◦Includes banks, S&Ls, credit unionsalso finance companies, pension funds, life insurance companies
◦ Mutual fund—pools individuals’ money to buy range of financial assets investors own shares of entire fund
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Financial IntermediariesFinancial Intermediaries
Example: Nonbank Financial Intermediaries◦Finance companies make small loans to
households, small businesses◦Mutual funds let individuals own many assets;
managers make decisions◦Pension funds invest employees’ money, so will
have more at retirement◦Life insurance companies invest income in
financial assets let people save by building cash values, protect them against loss
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Financial Asset MarketsFinancial Asset Markets
Financial Markets◦Financial markets categorized according to
time, resalability◦ Capital market—for buying and selling long-
term financial assets ◦ Money market—for buying and selling short-
term financial assets ◦ Primary market—for financial assets that
original buyer must redeem ◦ Secondary market—where financial assets are
resold
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Financial Asset MarketsFinancial Asset Markets
Time◦Capital markets—assets held for over a year include stocks, bonds, mortgages, long-term CDs
◦Money markets—loans made for less than a year include short-term CDs, Treasury bills
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Financial Asset MarketsFinancial Asset Markets
Resalability◦Primary markets—financial assets can be redeemed only by original buyer include savings bonds, small denomination CDs
also market where first issue of stock sold through investment bankers
◦Secondary markets—resale markets; offer liquidity to investors include stocks, bonds
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Risk and ReturnRisk and Return
What Kind of Risk Are You Willing to Take?◦Risk usually means loss of part of initial investment, or principal no-risk investments: insured savings and CDs, U.S. government bonds
◦Safe investments risk interest rate may not keep up with inflation
◦Return on riskier investments depends on how profitable company is bonds less risky than stocks; bondholders paid off first
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Risk and ReturnRisk and Return
What Kind of Return Do You Want?◦Safe investments have lowest return through fixed interest rates
◦Stocks, bonds—no guaranteed rates; stocks—higher return over time
◦If investing over long period, can risk losses in stock some years if less time and money, may want safer investment
◦Diversification gives better chance of offsetting a loss with a gain
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The Stock MarketThe Stock Market
Why Buy Stock?◦Buy to earn dividends, share of company profits investors who want income, want dividends
◦Buy to earn capital gains through resale of stock investors who want growth look for potential for capital gains
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The Stock MarketThe Stock Market
Types of Stock ◦ Common stock—gives shareholders voting rights, share of profits one vote per share owned to elect board of directors
◦ Preferred stock—gives shareholders share of profits, no voting rights investors get guaranteed dividends, paid off first if company closed
dividends do not increase if stock increases in value
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Trading StockTrading Stock
Organized Stock Exchanges◦New York Stock Exchange (NYSE) on Wall Street; oldest, largest in U.S. traditionally, each stock auctioned from trading post on exchange floor
today, hand-held computers used to execute many trades
2006 merger with Archipelago Exchange allowed electronic trades
◦American Stock Exchange (AMEX) companies smaller than on the NYSE
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Trading StockTrading Stock
Electronic Markets◦Over-the-counter (OTC) market for stocks not traded on NYSE or AMEX
◦NASDAQ is centralized computer system for OTC trading second largest exchange in world in number of companies, shares traded
companies from many sectors of U.S. economy, most in technology
◦OTC Bulletin Board is electronic market for smaller companies
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Trading StockTrading Stock
Recent Developments◦1990s regulations allow any firm to trade stocks in any exchange
◦Through electronic communications networks (ECNs), 24-hour trading
◦Investors access Internet; huge growth in online brokerage companies lower commissions than traditional brokers computer technology matches buyers, sellers automatically; rapid trades
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Measuring How Stocks PerformMeasuring How Stocks Perform
Stock Indexes◦U.S. indexes: DJIA, Standard & Poor’s 500, NASDAQ CompositeGlobal indexes: Hang Seng, DAX, Nikkei 225, TSE 300, FTSE 100
◦Since 1896, Dow Jones Industrial Average changed with U.S. economy includes most successful companies in most important economic sectors
uses points to measure changes in prices at which stocks traded
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Measuring How Stocks PerformMeasuring How Stocks Perform
Tracking the Dow◦ Bull market—prices rise steadily over a relatively long period
◦ Bear market—prices decline steadily over a relatively long period
◦1972 to 2000 longest bull market in history; most last two to three years
◦Dow affected by previous close, Fed, foreign indexes, trade balance
◦About 21 stock markets overseas with over 1,000 large companies each
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Other Financial InstrumentsOther Financial Instruments
Certificates of Deposit◦CDs offered primarily by banking institutions; have maturity date
◦Pay fixed or variable interest, reinvested for compound interest longer maturity dates pay higher interest rates
◦Federal government insures funds up to $100,000
◦Risks: can lose interest, some principal if funds withdrawn early
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Other Financial InstrumentsOther Financial Instruments
Money Market Mutual Funds◦MMMFs’ financial assets have maturities of one year or less
◦Give higher yield than savings accounts with similar liquidity can redeem shares by check, phone, electronic transfer
◦Funds not insured but tightly regulated, so principal considered safe
◦Yield varies based on yield of assets in fund