Bell Ringer It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win. -John Paul Jones What does the quote mean? Restate the quote in your own words. What is your reaction to the quote? Draw from personal experience. Objectives 1. Describe how investing contributes to the free enterprise system. 2. Explain the role of financial intermediaries in the financial system. 3. Identify the four basic types of risk. Introduction What are the benefits and risks of saving and investing? Savings you deposit in a bank will grow (a little) with almost no risk at all. Investing, while more risky, may yield a larger return for your initial investment. It may also prove to be financially devastating if it is ill-timed or mismanaged. Introduction The simple truth is you will all invest at some point in your lives. College House/car Children Retirement Investing and Free Enterprise INVESTING People deposit money into a bank The bank lends money to businesses/investors Businesses increase or expand production The economy grows Financial Intermediaries Financial intermediaries, including banks and other financial institutions, accept funds from savers to make loans to investors. Sharing Risk Sharing risk Diversification allows you to spread out your investments. (Dont put all your eggs in one basket!) Sharing risk helps prevent losing everything on a bad investment. Providing Information A prospectus is an investment report that provides information to potential investors. By providing vital data, financial intermediaries reduce the costs in time and money that lenders and borrowers would pay if they had to get the information on their own. Liquidity Liquidity is the ability of property, capital, or investments to be used as or converted into cash. Financial intermediaries help people get access to their money when they need it, depending on how liquid the investment is. Return and Risk In 2005, 24 year-old Sean Parker (founder of Napster) learned about a new website, thefacebook.com He met with the sites founder, Mark Zuckerberg, and decided to invest $12 million in the companys start-up. Parker, now 35 years old, is worth an estimated $3.1 billion Return and Risk Quarterback Mark Brunell (Jaguars, Redskins) played 18 years in the NFL and earned $52 million over his career Founded a company, Champion LLC, with other NFL players for real estate investments In 2010, Brunell filed for Chapter 11 bankruptcy after owing more than $25 million to investors. Return and Risk, cont. In general, the higher the potential risk, the higher the return. The lower the potential risk, the lower the return. Whenever people evaluate their potential investments, they must balance the risks involved with the rewards they expect to gain. Types of Risk 1.Credit risk Borrowers may not pay off the money they have borrowed, or they may be late in making payments 2.Inflation rate risk Inflation rates erode the value of your assets 3.Liquidity risk You may not be able to convert the investment back into cash quickly enough for your needs 4.Time risk You may have to pass up other, more profitable investment opportunities aka, opportunity cost Whats the Risk? Bell Ringer Think of a time when you invested in something. (You can invest your time, money, or energy in something.) What was it? Why did you do it? What was in it for you? Objectives 1. Describe the characteristics of bonds as financial assets. 2. Identify different types of bonds. Introduction What is a bond? Introduction What is a bond? Bonds are a form of debt. They are loans to institutions or to the government, but you serve as the bank. Introduction Why are bonds bought and sold? Bonds are sold by governments and/or corporations to finance projects. They offer a higher rate of return than a savings account, although they are generally a non-risky investment. Components of Bonds Bonds have three basic components: Coupon rate - the interest rate that a bond issuer will pay to a bondholder Maturity when payment to a bondholder is due Par value - the amount to be paid to the bondholder at maturity Coupon rate As of April 2015, 0.50% Maturity Initial maturity of 20 years; collects interest up to 30 years Par value Issued in denominations between $50 and $10,000 Beginners Guide to Bonds mtfASmITkpQmtfASmITkpQ Advantages and Disadvantages Advantages Once a bond is sold, the coupon rate remains the same. (Stability) The return for a bond investment is predictable. Disadvantages Once a bond is sold, the coupon rate remains the same. (Low returns) A company/government does not have to share profits with bondholders if it is doing well. Municipal Bonds State and local governments issue municipal bonds to finance such projects as highways, libraries, parks, and schools. These are attractive to long-term investments and are relatively safe. Why are they a safe investment? Corporate and Junk Bonds Corporate bonds are issued by corporation to help raise money to expand business. These bonds have a moderate risk level because investors must depend on the corporations success. Junk bonds are bonds with a high risk and a potentially high return. Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt. Why would someone want to buy a junk bond? Weighing the Risks Pg & Pg. 301 Closure What? So What? Now What? Key Terms coupon rate: the interest rate that a bond issuer will pay to the bondholder maturity: the time at which payment to a bondholder is due par value: a bonds stated value, to be paid to the bondholder at maturity Key Terms, cont. municipal bond: a bond issued by a state or local government or a municipality to finance a public project corporate bond: a bond issued by a corporation to help raise money for an expansion junk bond: a bond with high risk and potentially high yield Bell Ringer stock marketstocks List as many things that come to mind when you hear the words stock market or stocks. Objectives 1. Define what a stock is. 2. Describe how stocks are traded. 3. Explain how stock performance is measured. 4. Describe the Great Crash of 1929 and more recent stock market events. Introduction https://www.youtube.com/watch?v =Snsapamg8CU https://www.youtube.com/watch?v =Snsapamg8CU Investing Basics: Stocks Introduction How does the stock market work? In addition to selling bonds, corporations can raise money by selling stock shares in that corporation. Stock, or ownership shares in a company, are bought and sold on a stock market. Benefits of Buying Stock The two ways of making money from buying stock are: Dividends part of the firms profits Capital gains selling the stock for more than you paid for it Types of Stock Income stock: provides investors with income by paying dividends Growth stock: pays few or no dividends, but the earnings are reinvested in the company How Stocks are Traded If you want to buy stock, you would first contact a stockbroker to advise you on which stocks to buy for a fee. You buy stocks on a secondary market known as a stock exchange. The New York Stock Exchange (NYSE) is the worlds largest and most powerful exchange, handling stock and bond transactions for the top companies in the United States and the world. The Nasdaq is the second largest securities market and the largest electronic market. Summary Activity https://www.youtube.com/watch?v =F3QpgXBtDeo https://www.youtube.com/watch?v =F3QpgXBtDeo How the Stock Exchange Works (For Dummies) Summary Activity Find a partner. Write a summary of what the stock market is and how it works in exactly 20 words. Measuring Stock Performance When the stock market rises steadily over a period of time it is known as a bull market. When the stock market falls or stagnates for a significant period it is a bear market. Measuring Stock Performance The Dow Jones Industrial Average (DJIA) measures stock performance. It is an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. Companies include Apple, Coca-Cola, General Electric, McDonalds, Verizon, and Disney (aka, blue-chip stocks). Closure What are stocks? How are they traded? How are they measured? The Great Crash The Stock Market Crash of 1929 4t6Be4eQ4t6Be4eQ The Great Crash The U.S. enjoyed a decade-long bull market following World War I. The market value of all stocks rose from $27 billion in 1925 to $87 billion by late 1929. The Great Crash However, the income was spread unequally throughout society, making the economic growth unsound. Consumer debt rose exponentially throughout the 1920s. More investors were encouraged to make speculative investments (high-risk investments with borrowed money). The Great Crash The Dow began steadily dropping in September, People began to sell their shares and companies couldnt keep up. On October 29, 1929, a record 16.4 million shares were sold and the market crashed (aka, Black Tuesday). The Crash led to the Great Depression. The Aftermath For decades after the Great Depression, many people were scared to invest in the stock market. By the 1980s, with the development of mutual funds (a pool of funds placed in diversified investments and professionally managed), Americans became more comfortable with stock ownership once again. The Stock Market Today In 2008, the stock market began falling, causing a major economic crisis in the United States once again (aka, The Great Recession). Although unemployment has remained high and some business sectors are struggling, the stock market has rebounded and is currently in a bull market. On May 19, 2015, the DJIA hit a record high of 18, Stock Market Worth If you combined the value of all stocks traded on all of the stock exchanges worldwide, including the value of their derivatives, how much is the stock market worth? Stock Market Worth One quadrillion dollars =1,000 trillion dollars =$1,000,000,000,000,000 By contrast, there is approximately $75 trillion in the total global money supply! Homework Assignment Stock Market in the News Key Terms share: a portion of stock capital gain: the difference between the selling price and purchase price that results in a financial gain for the seller Key Terms, cont. stockbroker: a person who links buyers and sellers of stock 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 Bell Ringer What are the two ways someone earns money from owning stock? Why is owning stock important, and perhaps even necessary? Objectives 1. Define income, stock, and dividend. 2. Explain why people buy stock. 3. Identify some advantages and disadvantages of owning stocks. What are dividends? A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits. Dividends Game In groups of 3-4, you will represent an investment firm which can earn income (dividends) from their stocks. Each firm will earn shares of stock in Mr. Langes One Stop Nutrition Shop by correctly answering basic math and economics questions. Each correct answer = 10 shares Mr. Langes One Stop Nutrition Shop EXTREME Question 1 Shares of stock represent ownership in a company/corporation TRUE FALSE TRUE or FALSE Question 2 50% written as a fraction is 5/100 TRUE FALSE TRUE or FALSE Question 3 Marcus bought 100 shares of Nike stock, and each share sold for $ If no fees were involved, Marcus paid $35,500 for the shares. TRUE FALSE TRUE or FALSE Question 4 If Jenny has $100 in a savings account and earns 2 percent interest this month, her balance at the end of the month will be $102 TRUE FALSE TRUE or FALSE Question 5 The closing price for a share of Wal-Mart stock was This means that the price of the share was $37 and one-fifth of a dollar. TRUE FALSE TRUE or FALSE Question 6 When stockholders sell their stock for more than they paid, it is referred to as a capital gain. TRUE FALSE TRUE or FALSE Question 7 People who own stocks are guaranteed a return on the money they invested in stocks. TRUE FALSE TRUE or FALSE Question 8 The only way stockholders make money is through dividend payments while they own the stock. TRUE FALSE TRUE or FALSE Question 9 Stockholders can reduce the risk on their stock investments by diversifying their portfolios. TRUE FALSE TRUE or FALSE Question 10 The New York Stock Exchange is the only place in the United States where people can buy and sell stock. TRUE FALSE TRUE or FALSE Dividends Activity Tally your groups ownership shares. Each ten shares of stock in Mr. Langes One Stop Nutrition Shop will pay 1/2 piece of candy in dividends. Dividends Activity Review How was the game different from dividend earnings in real life? How was it the same? Mr. Langes One Stop Nutrition Shop EXTREME Stock Market Quiz 1. Spreading out your investments is referred to in economics as ______? 2. Complete the statement: The higher the risk, _______________. 3. True or False: Stockholders are guaranteed a return on their financial investment. Stock Market Quiz 4. What are stocks? 5. Why do corporations issue stock? 6. True or False: When stockholders sell their stock, the corporation receives the money. 7. What does NYSE stand for? Stock Market Quiz 8. What are dividends? a. A capital gain b. Part of a companys profit paid to its owners c. The price for which the stock is sold on an exchange d. The price for which the stock is sold to investment bankers Stock Market Quiz 9. People buy stocks because a. there is no chance of loss. b. they expect to earn a return. c. the government encourages them to buy stock. d. they are guaranteed interest payments each year. Stock Market Quiz 10. One way people earn money from stocks is by a. buying stock from an investment banker. b. selling the stock for the same price as they paid for it. c. selling the stock for a lower price than they paid for it. d. selling the stock for a higher price than they paid for it. Closure Visual Vocabulary Stock Market In one paragraph (~5 sentences), explain how the stock market works. What are stocks? How are stocks bought and sold? How are stock prices measured? How do investors make money off of stocks? Illustration/visual Test question