FINANCIAL MARKETS Financial institutions through which savers can

  • Slides: 28
Download presentation
FINANCIAL MARKETS Financial institutions through which savers can directly provide funds to borrowers. Stock

FINANCIAL MARKETS Financial institutions through which savers can directly provide funds to borrowers. Stock and Bond Markets

 Investing in a friend’s Internet company could double your money, but there is

Investing in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved.

Types of Risk • Capital Loss Risk – when the price of the asset

Types of Risk • Capital Loss Risk – when the price of the asset falls below the purchase price (stocks) Buy for $50 sell for $40 ) : – • Credit or Default Risk – you may not get paid back all of your money –I buy a corporate bond and then the company goes bankrupt

Types of Risk Inflation Risk – the longer you have your money in savings

Types of Risk Inflation Risk – the longer you have your money in savings the more inflation erodes its value I earn 2% on my savings but prices rise by 4% Liquidity Risk – you may need cash and if your money is tied up in a long term investment you may not be able to get it without paying a penalty A five year certificate of deposit charges me a 3% penalty for early withdrawal

Financial Markets and Risk RISK Junk Bonds Growth Stocks Income Stocks Corporate Bonds Municipal

Financial Markets and Risk RISK Junk Bonds Growth Stocks Income Stocks Corporate Bonds Municipal Bonds Savings Bonds Treasury Bills RETURN

Bond Market Bonds are basically loans, or IOUs, that represent debt that the government

Bond Market Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor with interest.

Bonds and Risk Bonds have different levels of risk depending on: Who issued the

Bonds and Risk Bonds have different levels of risk depending on: Who issued the bond Federal government is the lowest risk Length of time before bond matures Longer the time frame the greater the risk (most bonds have a maturity of 10 -30 years)

Making Money with Bonds Bondholders earn interest for the life of the bond. Bondholders

Making Money with Bonds Bondholders earn interest for the life of the bond. Bondholders can sell their bond for MORE then for what they bought them. Bond ratings and current interest rates can change demand for bonds and thus their selling prices

Government Bonds Savings bonds are the least expensive bond; they cost only $25, but

Government Bonds Savings bonds are the least expensive bond; they cost only $25, but they take 18+ years to mature making them an inflation risk. U. S. Treasury Bills are a little more expensive - $100 minimum, but they mature in 26 weeks, making them one of the safest of all investments

Government Bonds Municipal bonds are issued by state or local governments to finance improvements.

Government Bonds Municipal bonds are issued by state or local governments to finance improvements. Issued in $5, 000 increments. Municipal bonds are tax free so they have less inflation risk. These take 5 -15 years to mature.

Corporate Bonds Corporations issue bonds to raise money to expand their business. They mature

Corporate Bonds Corporations issue bonds to raise money to expand their business. They mature in 10 -30 years. Corporate bonds are rated according to risk AAA is lowest risk CCC is highest risk Corporate and up. bonds cost $1, 000

Corporate Bonds Junk bonds are the most risky type of corporate bond, but they

Corporate Bonds Junk bonds are the most risky type of corporate bond, but they are potentially higher-paying bonds. These bonds usually are being sold by companies on the verge of bankruptcy

A Study of Risk & Reward

A Study of Risk & Reward

 • What is stock? Stock represents ownership of a corporation Why do companies

• What is stock? Stock represents ownership of a corporation Why do companies issue stock? By selling SHARES, corporations can raise money to: Start Run Expand their business

There are TWO ways for shareholders to make a profit! DIVIDENDS A portion of

There are TWO ways for shareholders to make a profit! DIVIDENDS A portion of the corporation’s profits are paid to shareholders Higher share CAPITAL Profits = Higher Dividends per GAINS The difference in the purchasing price & selling price Selling @ a HIGHER price = gain Selling @ a LOWER price = loss

STOCK SPLITTING Stock prices reflect the value of a corporation to buyers. But if

STOCK SPLITTING Stock prices reflect the value of a corporation to buyers. But if prices become too high, buyers won’t want to buy the company’s stock. If stock prices become too expensive a board of directors may vote for a STOCK SPLIT This would double the number of shares you hold, but cuts their price in half.

HOW DO I PURCHASE STOCK? Contact a STOCKBROKER This is a person that links

HOW DO I PURCHASE STOCK? Contact a STOCKBROKER This is a person that links potential sellers & buyers. Stockbrokers charge fees for conducting the sale.

TYPES OF STOCK Income These firms. Pays are usually large well-established dividends. Growth These

TYPES OF STOCK Income These firms. Pays are usually large well-established dividends. Growth These Pays stock are new start-up companies few dividends, profits are reinvested in the company.

STOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK

STOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK

MARKETS FOR BUYING AND SELLING STOCK New York Stock Exchange (NYSE) • The oldest,

MARKETS FOR BUYING AND SELLING STOCK New York Stock Exchange (NYSE) • The oldest, largest and most prestigious exchange in the US • A company must have 300, 000 shares of stock that are owned by at least 1, 500 people • The biggest companies are known as blue chip companies

STOCK EXCHANGES Over-the-Counter Markets

STOCK EXCHANGES Over-the-Counter Markets

Over-the-Counter (OTC) Markets • Stocks are bought and sold over computer terminals, not on

Over-the-Counter (OTC) Markets • Stocks are bought and sold over computer terminals, not on the floor of an exchange • Stocks are listed on NASDAQ (the 2 nd largest exchange in the US)

MEASURING STOCK PERFORMANCE

MEASURING STOCK PERFORMANCE

MEASURING STOCK PERFORMANCE BULL MARKET Stock market is rising steadily over a period of

MEASURING STOCK PERFORMANCE BULL MARKET Stock market is rising steadily over a period of time. BEAR MARKET Stock market is steadily falling over a period of time.

MEASURING STOCK PERFORMANCE • Dow-Jones Industrial Average (DJIA) • Publishes a daily average of

MEASURING STOCK PERFORMANCE • Dow-Jones Industrial Average (DJIA) • Publishes a daily average of the closing prices of 30 stocks listed on the NYSE • Standard and Poor’s 500 – Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

DOW Jones Industrial Average

DOW Jones Industrial Average

Risk IS Involved!!! Corporations profits cannot guarantee The Stockholder may experience a CAPITAL LOSS

Risk IS Involved!!! Corporations profits cannot guarantee The Stockholder may experience a CAPITAL LOSS Bond holders are paid FIRST!!! ***Remember*** A BOND represents DEBT that is owed by the corporation

Differences in Risk Bonds are less risky because the corporation or government must pay

Differences in Risk Bonds are less risky because the corporation or government must pay you back UNLESS they go bankrupt. Stocks are more risky because corporations only pay dividends if they make a profit and if they decide to not put the profits back into the business. Capital gains are made only if the demand for your stock goes up.