InvestingEconomics Chapter 11 Section 1

SPEND IT!

INVEST IT!

SAVE IT!

INVESTING:REDIRECTING YOUR RESOURCES FOR

PROFIT AND FUTURE BENEFIT

INVESTING CONTRIBUTES TO THE FREE ENTERPRISE SYSTEM

Profit Motive:PRIVATECITIZENSINVEST IN

ORDERTO MAKE A

PROFIT

HOW DOES INVESTING WORK?

THE COMPANY TAKES

YOUR MONEYAND BUILDS UPTHEIR PROFITS

THAT COMPANY

PAYSYOU BACK IN THE FORM

OF INTEREST AND/OR

DIVIDENDSOR CAPITAL

GAINS

YOU PUT YOUR MONEYINTO A

COMPANY’SSTOCK OR

BONDS

WHAT DOES INVESTMENT REQUIRE?

• Financial System

• Assets

• Financial Intermediary

• Knowledge of Risks

FINANCIAL SYSTEM

MUST BE:• STABLE

• REGULATED

• FREELY ACCESSIBLE BY INVESTORS AND INVESTEES

ASSETS

MONEY

(OR THINGS OF WORTH)

TO INVEST

FINANCIAL INTERMEDIARIESHELP YOU INVEST

PROVIDE:PROSPECTUS

PORTFOLIOS

DIVERSIFICATION

LIQUIDITY

Bonds and Other Financial AssetsEconomics Chapter 11 Section 2

BONDS: LOANS OR IOUs THAT REPRESENT WHAT A

CORPORATION OR GOVERNMENT OWES YOU AT MATURITY

THREE BASIC COMPONENTS OF BONDS:

• COUPON RATE: interest rate paid to you

• MATURITY: the date that you can cash it in

• PAR VALUE: the principal (starting) value

SAVINGS:

low denominations

issued by the

government

TREASURY BONDS,

BILLS, NOTES:

issued by the US Treasury

Department, low risk

MUNICIPAL:

sold by state and

local government

CORPORATE:

sold by corporations

JUNK:

low rated, risky bond

that could have higher

yields

See p. 279 for bond rating systems

CAPITAL MARKETS:investment for more

than one year

MONEY MARKETS:investment is less than

one year

PRIMARY MARKETS:only the original

holder can redeem it

SECONDARY MARKETS:investment can be resold

repeatedly

The Stock MarketEconomics Chapter 11 Section 3

STOCKS

EQUITIES OR SHARES:

a corporation allows you to

own a “piece” of their company in

exchange for either “dividends”

or “capital gains”

HOW DO YOU MAKE MONEY IN THE STOCK MARKET?

Step # 1: Research the corporation

Step # 2: Find a financial intermediary

Step # 3: Buy the stock (number of shares)

Step # 4: Monitor the progress

Step # 5: Sell it to earn “capital gains” or to

cut “capital losses”

Step # 6: Collect “dividends”

WHERE CAN YOU RESEARCH?

• FINANCIAL NEWS

• CORPORATE WEBSITES

• FINANCIAL INTERMEDIARIES

ALL STOCKS ARE NOT THE SAME

TYPES OF STOCK

income

pays dividends

regularly

growth

profits are

reinvested

preferred:

no vote for

holders

common

all holders

get a vote

WHERE DOES THIS HAPPEN?

NYSE - an actual place in NYC

- largest stock exchange

- blue chip stocksNASDAQ - mostly electronic

- OTC stocks

Brokers and Traders

DOW JONES INDUSTRIAL AVERAGE

SHOWS THE HEALTH OF THETOP 30 CORPORATIONS IN THESTOCK MARKET

S & P 500:TOP 500 CORPORATIONS

BULL VS. BEAR MARKET

Bull Market:

prices are rising

Bear Market:

prices are falling

Which is scarier?

OPTIONS & FUTURES

Investing based on prices in the future

and reserving the option to buy or sell in the

future.