Saving and Investing Investing and Free Enterprise Investing

Saving and Investing

Investing and Free Enterprise • Investing money is a way to increase your money by either not using it today (savings), or by using it to create more money (stocks, bonds, business ownership, property, etc…) • This invested money is used to build new business, and encourage economic growth.

Financial Intermediaries • There are many kinds of businesses that link savers and borrowers • Risk can be reduced by diversifying (having more than one type) investments • Banks, Savings and Loans, Credit Unions • Finance Companies • Mutual Funds • Life Insurance Companies • Pension Funds

Risk in Investing • Typically, the higher the payout, the riskier the investment. These risks can be described in different ways – Credit risk (The borrower can fail or bankrupt) – Liquidity risk (Cash tied up in non-cash investments) – Inflation rate risk (Interest rates change, lowering return) – Time risk (Your money might be unavailable for a while)

Financial Assets • Bonds: (I. O. U. ) Many kinds of bonds, including Federal, corporate, municipal, and others. • Certificates of Deposit (CDs) • Money Market Mutual Funds (Trading financial assets like bonds, with a group of investors) • 401 Ks, IRAs, T-Bills, Stocks

Stocks • Stocks are investments that show partial ownership in a company

• Stocks come in two main varieties: – Common Stock can vote, lower priority – Preferred Stock cannot vote, higher priority • Profit can be made by collecting dividends or by selling the stock (capital gains) • As stocks increase in value, they may split • Stock prices are determined by supply and demand, and therefore are not necessarily representative of the value of the company – this can cause “bubbles” like the technology bubble at the end of the 1990 s

• Stocks are traded at stock exchanges around the world, or online – American – New York – Tokyo - Nasdaq - Hong Kong - London • Many stocks are included in Indexes. These Indexes are used to determine the health of the market – – Dow Jones Industrial Average (DJIA) Standards and Poor’s 500 (S&P 500) Russell’s 3000 Nikkei Index

DJIA 1928 to present

Bull and Bear Markets • Bull and Bear markets describe general conditions in the market • A Bull Market is going up • A Bear Market is going down