Financial Markets and RiskR

ISK

RETURN

Treasury Bills

Savings Bonds

Municipal Bonds

Corporate Bonds

Income Stocks

Junk BondsGrowth Stocks

The higher the risk the greater the potential return.

Types of Risk• Credit Risk – you may not get paid back all

of your money

• Inflation Risk – the longer you have your money in savings the more inflation erodes its value

• 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

• Time Risk – a better investment opportunity may present itself

Bonds as Financial Assets

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 bond

• Federal government is the lowest risk

–Length of time before bond matures• Longer the time frame the greater the

risk

Making Money with Bonds

• Bondholders earn interest for the life of the bond.

• Bondholders can sell their bond for a higher price then for what they bought them.– Bond ratings and current interest rates can

change demand for bonds and thus their selling prices

• 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 more expensive - $1000, but they mature in 26 weeks, making them one of the safest of all investments

Government Bonds

Government Bonds

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

• Municipal bonds are tax free so they have less inflation risk.

• These take 5-15 years to mature.

Corporate Bonds• Corporation 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 bonds cost $1,000 and up.

Corporate Bonds

• Junk bonds are the lowest-rated type of corporate bond, but they are potentially higher-paying bonds.

• These bonds usually are being sold by companies on the verge of bankruptcy

Why do companies issue stock?Why do companies issue stock?

• By selling By selling SHARES, SHARES, corporations can corporations can raise money to:raise money to:

– StartStart– RunRun– Expand their businessExpand their business

There are TWO ways for There are TWO ways for shareholders to make a profit!shareholders to make a profit!

• DIVIDENDSDIVIDENDS– A portion of the corporation’s profits are A portion of the corporation’s profits are

paid to shareholderspaid to shareholders– Higher Profits = Higher Dividends per shareHigher Profits = Higher Dividends per share

• CAPITAL GAINSCAPITAL GAINS– The The differencedifference in the in the purchasing price & purchasing price &

selling priceselling price– Selling @ a HIGHER price = gainSelling @ a HIGHER price = gain– Selling @ a LOWER price = lossSelling @ a LOWER price = loss

HOW DO I PURCHASE STOCK?• Contact a STOCKBROKERSTOCKBROKER

• This is a person that links potential sellers & This is a person that links potential sellers & buyers.buyers.

• Stockbrokers charge fees for conducting the sale. Stockbrokers charge fees for conducting the sale.

TYPES OF STOCKTYPES OF STOCK

• Income stockIncome stock– Pays dividends. Pays dividends. – These are usually large well-established These are usually large well-established

firms.firms.

• Growth stock Growth stock – Pays few dividends, profits are reinvested in Pays few dividends, profits are reinvested in

the company. the company. – These are new start-up companiesThese are new start-up companies

STOCK EXCHANGESSTOCK EXCHANGES

MARKETS FOR BUYING AND SELLING STOCK

New York Stock ExchangeNew York Stock Exchange (NYSE) (NYSE)•The oldest, largest and most prestigious The oldest, largest and most prestigious exchange in the USexchange in the US•The largest companies are known asThe largest companies are known as BLUE CHIPBLUE CHIP stockstock

STOCK EXCHANGESSTOCK EXCHANGES

Over-the-Counter (OTC) Over-the-Counter (OTC) MarketsMarkets

•Stocks are bought and sold over Stocks are bought and sold over computer terminals, not on the computer terminals, not on the floor of an exchangefloor of an exchange

•Stocks are listed on NASDAQ (the Stocks are listed on NASDAQ (the 22ndnd largest exchange in the US) largest exchange in the US)

MEASURING STOCK PERFORMANCE

• BULL MARKETBULL MARKET– Stock market is rising steadily over a period of Stock market is rising steadily over a period of

time.time.

• BEAR MARKETBEAR MARKET– Stock market is steadily falling over a period of Stock market is steadily falling over a period of

time.time.

MEASURING STOCK MEASURING STOCK PERFORMANCEPERFORMANCE

•Dow-Jones Industrial Average (DIJA)Dow-Jones Industrial Average (DIJA)•Publishes a daily average of the closing prices of 30 stocks listed on the NYSE

Standard and Poor’s 500Standard and Poor’s 500Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

DOW Jones Industrial AverageDOW Jones Industrial Average

Risk IS Involved!!!

• Corporations cannot guarantee Corporations cannot guarantee profitsprofits– The Stockholder may experience a The Stockholder may experience a

CAPITAL LOSSCAPITAL LOSS

– Bond holders are paid FIRST!!!Bond holders are paid FIRST!!!• ***Remember*** ***Remember***

» A BOND represents DEBT that is owed by A BOND represents DEBT that is owed by the corporationthe corporation