money, banking and the markets
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Money, Banking and the Markets. Lesson 4 Financial Markets. About Financial Markets. Aim: How do financial markets help savers reach their financial goals ? Do Now: Estimate how many years you’ll have a full-time career and how much you’ll save each year for retirement. - PowerPoint PPT PresentationTRANSCRIPT
Money, Banking and the Markets
Lesson 4 Financial Markets
About Financial Markets
Aim: How do financial markets help
savers reach their financial goals?
Do Now: Estimate how many years you’ll
have a full-time career and how much you’ll save each year for retirement.
About Financial MarketsDo Now answer:
Simple math says: Begin your career at age 25
(after getting an advanced degree) Retire at age 65 40 years of work in the middle! Save, say, a solid $500 per month?
($6,000 per year)
About Financial Markets
40 years * $6,000 saved yearly = ? A not-so-large $240,000 You could spend that in a few years! You may have noticed something
missing from our analysis. Any ideas? Saved money earns interest, which
can help us!
About Financial Markets
With interest, our money makes money. The earlier we save it, the more time it has to earn interest.
Let’s say that the bank will pay us 2% interest per year.
About Financial Markets
Instead of growing like this:
About Financial Markets
It can grow like this:
About Financial Markets
$369,000 at retirement is better than $240,000, but it’s still not enough. What’s the problem? We need to earn more each year than a
bank will pay! Any ideas on how we can achieve this?
Put our money into financial investments such as stocks and bonds
About Financial Markets
A person buying a bond is lending money.
What big-time borrowers issue bonds? Corporations Governments
Why do bonds pay more interest than a bank will pay on money you give it?There’s a greater risk that something
could go wrong.
About Financial Markets
A person buying stock wants to be an owner.
Who issues stock? Corporations, only
Corporations can thrive or fail, making stock investing more rewarding but also riskier than bond investing.
About Financial Markets
Over several decades, by investing in a combination of stocks and bonds, a person can reasonably earn 8% per year.
What’s your guess as to how much we’d have after 40 years if we could earn 8% per year?
About Financial Markets
More than $1.5 million!
About Financial Markets Ok now, so where can we find
stocks and bonds? On financial markets
About Financial Markets Financial markets, like banks, are
intermediaries
Savers(aka Investors)wanting to invest in stock
Corporations wanting to raise money by issuing stock
About Financial Markets Initial investors buy shares directly from
a corporation. Later, when they want to cash out, they become...
Buyers, who believe the stock will go higher, purchase it
…Sellers who make the shares available on a market.
About Financial Markets
A Public Offering occurs when a corporation sells shares to the public to raise money
The first time it does this is the Initial Public Offering, or IPO
After the shares are in the hands of investors, they trade between buyers and sellers
Includes:
Primary Market Secondary Market
About Financial Markets Millions of investors participating in the
secondary financial market means: Investors wanting to sell will find many buyers Selling:
1. can done quickly …
2. without having to lower the selling price These positive characteristics are known as:
Liquidity
There are physical exchanges:
The New YorkStock Exchange
About Financial Markets
The world’s largest exchange
Has an exchange floor where stock transactions are completed
There are electronic exchangesNational Association of
Securities Dealers Automated Quotations
System
Where are Financial Assets Traded?
Computerized exchange where approximately 3,300 companies trade
Most technology stocks are traded
Lesson Summary 1 of 31. Banks allow us to safely save and
accumulate money. What’s the catch?
2. What type of investment is basically a loan to a corporation or government?
3. What type of investment is partial ownership of a corporation?
Lesson Summary 2 of 34. Where do buyers and sellers of
these investments go trade with each other?
5. With the financial markets, is this trading said to occur in the primary or secondary market?
6. What, then, happens in the primary market?
Lesson Summary 3 of 37. What is the leading physical stock
exchange?
8. What is the leading electronic stock exchange?
9. What do we call the ability to quickly sell an investment we no longer want to own quickly and at fair value?
10.How do financial markets help savers reach their financial goals?
Web Challenge #1Q: The trading floor of the NYSE has been shrinking for many years. Why?
• A: Computerized trading it taking over and there are less and less people helping match buyers and sellers
• Challenge: Computers work very fast at matching buyers and sellers. Research the arguments for why human experts should still be involved in trading.
Web Challenge #2Q: At Google’s IPO, the stock price was $80. It’s gone up over 10 times (the 2 for 1 split makes it not appear this way). How much of the increase was Google itself able to collect?
• A: Not a dime! Once public, the stock trades among buyers and sellers who achieved.
• Challenge: Research companies that did a “secondary offering” to take advantage of a soaring stock price.
Challenge #3 (cont.)Q: In what way the does a high stock price benefit a corporation such as Google?
• A: #1: If the corporation wants to buy a competitor, it can pay in high-priced stock instead of cash. #2: Options it may have granted to employees will have made them wealthier and hopefully loyal to the corporation.
Explorations #4Q: What is high frequency trading (HFT), and how does it help or hurt markets?
• A: It’s complicated, but they profit from greater speed and small price differences. While they claim that they add liquidity to markets, critics say they mostly manipulate and “front run” markets.
• Challenge: Research the pros and cons of HFT, as well as what the SEC’s stance is on it.