investing: chapter 11. investment – use of assets to earn an income or profit the financial...
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Financial MarketsInvesting: Chapter 11
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Investment – use of assets to earn an income or profit
The Financial System◦ Financial Assets (or securities)
Flow of Savings and Investments◦ Savers make deposits to Financial Institutions◦ Financial Institutions make loans to Investors
Saving and Investing
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Financial Intermediaries Banks, Saving and Loan Associations, Credit Unions,
Finance Companies Mutual Funds Hedge Funds Life Insurance Companies Pension Funds
Saving and Investing
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◦ Sharing Risk Credit risk, liquidity risk, inflation rate risk, and time
risk DIVERSIFY!!!! – spread out your investments
◦ Providing information Portfolio – collection of one’s financial assets Prospectus – investment report that provides info to
potential investors◦ Providing Liquidity
Saving and Investing
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Liquidity, Return, and Risk◦ Liquidity and Return
Return – the money an investor receives above and beyond the sum of money initially invested
More liquid, usually lower return◦ Return and risk
Typically, higher return, higher risk Must weigh potential return with risk
Saving and Investing
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Bonds as Financial Assets◦ Three components of Bonds
1. Coupon Rate – interest rate that bond issuer will pay to a bondholder
2. Maturity – time at which payment to a bondholder is due
3. Par value – the amount to be paid at maturity (face value or principal)
- Yield – the annual rate of return on a bond if held to maturity
Bonds and Other Financial Assets
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◦ Buying Bonds at a Discount Interest change, so price of a bond must change as
well◦ Bond Ratings
Standard & Poor’s; Moody’s AAA (highest)
◦ Advantage of Bonds to Issuer Fixed coupon rate once sold Not part of a company
◦ Disadvantage of Bonds to Issuer Must make fixed payments Bonds can be downgraded
Bonds and Other Financial Assets
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Types of Bonds◦ Savings bonds◦ Treasury Bonds, Bills, and Notes◦ Municipal Bonds◦ Corporate Bonds◦ Junk Bonds
Treasury Bond
Treasury Note
Treasury Bill
Term Long-term
Middle-term
Short-term
Maturity 30 years 2, 5, or 10 yrs
4, 13, 26, 52 weeks
Liquidity and Safety Safe Safe Liquid and
safe
Minimum Purchase $100 $100 $100
Denomination $100 $100 $100
Bonds and Other Financial Assets
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Other Types of Financial Assets◦ Certificates of Deposits (CDs)
Very common; through banks; very flexible◦ Money Market Mutual Funds
Higher interest than savings account but no FDIC
Bonds and Other Financial Assets
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Financial Assets Markets◦ Capital Markets and Money Markets
Capital Market – market in which money is lent for periods longer than a year Ex: Long-term CDs and bonds (over 1 yr)
Money markets – market in which money is lent for less than a year Ex: short-term CDs, T-Bills, and money market mutual funds
◦ Primary and Secondary Markets Primary Market- a market for selling financial assets that
can be redeemed only by the original holder Secondary Market – a market for reselling financial
assets
Bonds and Other Financial Assets
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Shares – a portion of a stock Benefits of Buying Stock
◦ Dividends – portion of company profit (quarterly)◦ Capital Gains – sell for more than purchased
Capital loss
Buying Stock
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Types of Stock◦ Income Stock◦ Growth Stock
or- Common Stock- Preferred Stock
Stock Splits- Split single shares to lower price of single stock
Buying Stock
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Risks of Buying Stock◦ Company may lose money
Dividend is smaller, stock price drops◦ If Company goes bankrupt, shareholders are paid
last
Buying Stock
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Stockbroker – person who links buyers and sellers of stock
Brokerage Firm – a business that specializes in trading stocks
Stock Exchange◦ The market for buying and selling stock◦ NYSE, Nasdaq
How Stocks Are Traded
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Futures and Options◦ Futures – contracts to buy or sell commodities at a
particular date in the future at a price specified today
◦ Options – contracts that give investors the right to buy or sell stock and other financial assets at a particular price until a specified future date
◦ Call/Put Option – contract to buy/sell stock at a particular price until a future date
Day Trade??????
How Stocks Are Traded
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Bull and Bear Markets◦ Bull Market – a steady rise in the stock market
over a period of time◦ Bear Market – a steady drop or stagnation in the
stock market over a period of time Dow Jones Industrial Average
◦ 30 large companies in various industries◦ Meant to represent the whole market
S&P 500◦ 500 stocks to measure performance
Measuring Stock Performance