investments & the stock market chapter 11 investments nations must have a financial system for...
TRANSCRIPT
Investments Investments & &
The Stock MarketThe Stock Market
Chapter 11Chapter 11
InvestmentsInvestments
Nations must have a Nations must have a
Financial System Financial System for investments to work.for investments to work.
2 ways investments help:2 ways investments help: Allow people to make a profitAllow people to make a profit Promote economic growth & contributes to Promote economic growth & contributes to
the nation’s wealththe nation’s wealth Always remember: Your return on an investment, usually depends on the type & risk, of the investment.
InvestmentsInvestments Types of investments through saving:Types of investments through saving:
Savings account
Bonds
CD Certificate of Deposits
Financial Assets (securities)
Financial Intermediaries Financial Intermediaries Can help with Can help with investmentsinvestments
Share the risk to avoid loss of all savings Share the risk to avoid loss of all savings through through diversificationdiversification
Provide Information through Provide Information through
prospectusprospectus to avoid research, to avoid research,
time & money spenttime & money spent Provide Provide liquidityliquidity, to avoid, to avoid
having to find buyers to turn having to find buyers to turn
items into cash.items into cash.
Types of Types of Financial Financial IntermediariesIntermediaries
Credit Unions
Mutual Funds Pension
Funds
Finance Companies
Banks
Life Insurance Companies
Savings & Loan Association
Types of Types of investmentsinvestments
BondsBonds Cds (Certificates of Deposits)Cds (Certificates of Deposits) Mutual FundsMutual Funds StocksStocks
BondBond A certificate a company or A certificate a company or
government issues in government issues in exchange for borrowed moneyexchange for borrowed money
Promises to repay a stated Promises to repay a stated borrowed amount plus interest borrowed amount plus interest over a period of time (when over a period of time (when maturitymaturity is met) is met)
Think of it as a loan, that you are giving, to the government or a company.
BondsBonds
A person can sell their bond for less or A person can sell their bond for less or par value to another person.par value to another person.
Issuers pros & consIssuers pros & cons
Pros Cons
Holders do not own a part of company
Fixed payment plans & interest rates, no matter how company is doing
Fixed payment plans
Researching bondsResearching bonds Research Companies: Research Companies:
Standard & Poore’sStandard & Poore’s Moody’sMoody’s
What to look for?What to look for? Rated by: issuers ability to payRated by: issuers ability to pay
AAA/ Aaa (highest) to D (lowest)AAA/ Aaa (highest) to D (lowest) Higher the rate of the bond, the lower the interest Higher the rate of the bond, the lower the interest
rate is. (Less risky)rate is. (Less risky) Higher rate bonds sell at higher prices or par Higher rate bonds sell at higher prices or par
value of the bond, at all times.value of the bond, at all times.
3 Components 3 Components to a bondto a bond Coupon
Rate (Interest Rate)
Maturity
Par Value
Types of Bonds Types of Bonds Government BondsGovernment Bonds
Issued by the government Issued by the government
to borrow money from theto borrow money from the
public and businessespublic and businesses Types of government Types of government
bonds include: bonds include:
*savings bonds*savings bonds
*treasury bills*treasury bills
* T-notes* T-notes
*T-bonds*T-bonds
Types of BondsTypes of Bonds Savings BondsSavings Bonds Range from $50-10,000Range from $50-10,000 Investor pays half of the bond’s face value and it’s Investor pays half of the bond’s face value and it’s
value increases every 6 months until it reaches full value increases every 6 months until it reaches full face valueface value
Usually matures in 10 to 15 years Usually matures in 10 to 15 years Not taxed until turned in for the face value (exempt Not taxed until turned in for the face value (exempt
from state and local)from state and local) If cashed in before maturity a penalty is applied If cashed in before maturity a penalty is applied
and will only get par value.and will only get par value. Government uses for projectsGovernment uses for projects No default risk and no annual paymentsNo default risk and no annual payments
Types of BondsTypes of BondsMunicipal BondsMunicipal Bonds
Issued by a state, local, or city Issued by a state, local, or city government to raise money for government to raise money for highways, government buildings, highways, government buildings, libraries, parks, and schoolslibraries, parks, and schools
Not subject to federal income tax or Not subject to federal income tax or the state income taxes (where it was the state income taxes (where it was issued)issued)
Risk is low, depending on government Risk is low, depending on government standing.standing.
Types of BondsTypes of BondsTreasury BillsTreasury Bills
Mature in 3 months to 1yearMature in 3 months to 1year $10,000 minimum amount of $10,000 minimum amount of
investmentinvestment Federal taxes due when the Federal taxes due when the
t-bill maturest-bill matures Exempt from state and Exempt from state and
locallocal
Safe from default
Only given in $1,000.0 denominations
Types of Bonds Types of Bonds
Treasury NotesTreasury Notes
Matures in 2 to 10 yearsMatures in 2 to 10 years $1,000 to 5,000 minimum amount $1,000 to 5,000 minimum amount
of investmentof investment Federal taxes due when the Federal taxes due when the
T-Notes maturesT-Notes matures Exempt from state and localExempt from state and local
Safe from default
Only given in $1,000.0 denominations
Types of Bonds Types of Bonds Treasury BondsTreasury Bonds
Matures in 10 or more yearsMatures in 10 or more years $1,000 to 5,000 minimum amount $1,000 to 5,000 minimum amount
of investmentof investment Federal taxes due when the T-Federal taxes due when the T-
Notes maturesNotes matures Exempt from state Exempt from state
and localand local
Safe from default
Only given in $1,000.0 denominations
Types of Bonds Types of Bonds Corporate BondsCorporate Bonds
Used to expand & improve businessesUsed to expand & improve businesses Value $1,000.00 to $10,000.00Value $1,000.00 to $10,000.00 Taxed as additional income (income tax)Taxed as additional income (income tax) Moderate riskModerate risk
Depends on sells/ service of businessDepends on sells/ service of business
Watched closely and researched by companies Watched closely and researched by companies & the & the Securities & Exchange Commission Securities & Exchange Commission (SEC)(SEC) Prohibits fraud & dishonest investment practices & Prohibits fraud & dishonest investment practices &
enforces lawsenforces laws
Types of Bonds Types of Bonds Junk Bonds Junk Bonds (High-Yield Securities)(High-Yield Securities) Low rate bonds Low rate bonds
B or lower rating and “speculative”B or lower rating and “speculative”
Higher interest ratesHigher interest rates RiskyRisky
CD/ CD/ Certificate of Certificate of Deposit Deposit
Similar to a savings account and bondSimilar to a savings account and bond Purchaser places money into account, but Purchaser places money into account, but
you are not allowed to withdraw until you are not allowed to withdraw until maturity date is met.maturity date is met.
If withdraw before maturity date, penalties If withdraw before maturity date, penalties will accrue. will accrue.
Must hold within 6 month increments, Must hold within 6 month increments, with a minimum of $100.00with a minimum of $100.00
Mutual Mutual FundsFunds
(easiest way to invest with a little (easiest way to invest with a little money)money)
Investment company that pools the Investment company that pools the money of many individuals to buy money of many individuals to buy stock, bonds, or investmentsstock, bonds, or investments
Risk is higher than a savings account, Risk is higher than a savings account, but decreases through diversification but decreases through diversification
Financial Asset MarketsFinancial Asset Markets Capital Markets Capital Markets offer CDs, and offer CDs, and
Corporate/ Government Bonds; that must Corporate/ Government Bonds; that must be held for at least 1 year.be held for at least 1 year.
Money Markets Money Markets offer short-term CDs, T-offer short-term CDs, T-bills & mutual fundsbills & mutual funds
Primary Markets Primary Markets offer savings bonds & offer savings bonds & CDsCDs
Secondary Markets Secondary Markets provide liquidity to provide liquidity to investors)investors)
StockStock Sold in shares which are Sold in shares which are
pieces of a corporation sold pieces of a corporation sold
to raise money for resourcesto raise money for resources
A Stockbroker that works for brokerage A Stockbroker that works for brokerage firm must be used to buy stocks they are firm must be used to buy stocks they are licensed to sell and trade between sellers licensed to sell and trade between sellers and buyers and buyers Remember!!!!!!
Every time a stockbroker has to buy or sell stock for their clients; they will take a commission, no matter if you make or loose money.
Helps with research of companies stocks
Benefits of Buying Benefits of Buying stockstock
Dividends – money paid to stockholders for Dividends – money paid to stockholders for their share of the corporations profits.their share of the corporations profits. Paid every quarterPaid every quarter
Capital gain –profit made when Capital gain –profit made when selling a stock at a higher price thanselling a stock at a higher price than you purchased it for. you purchased it for.
Capital loss – the money loss whenCapital loss – the money loss when you sell your stock for less than you sell your stock for less than you purchased it for.you purchased it for. Happens OFTEN
Types of Types of StocksStocksGet DividendsGet Dividends
Income StockIncome Stock Growth StockGrowth Stock
Reinvest earnings in its Reinvest earnings in its business, which increases business, which increases its value.its value.
Get Votes in the CompanyGet Votes in the Company Preferred StockPreferred Stock
Get dividends before Get dividends before common stock ownerscommon stock owners
Get paid 1Get paid 1stst after bond after bond owners, if company goes owners, if company goes bankrupt.bankrupt.
Common StockCommon Stock 1 vote per share & voting 1 vote per share & voting
on stock spliton stock split Due because price is to Due because price is to
high, to where people not high, to where people not buying stockbuying stock
Price later rise again.Price later rise again.
Most Popular Stocks
Blue chip Stocks (safe bet)
Penny Stocks ( very risky, but can make huge profits)
How do you choose a stock ? Research – newspapers,internet or brokerage firms
Places where stocks are Places where stocks are bought & soldbought & sold
New York Stock Exchange (NYSE) New York Stock Exchange (NYSE) Largest stock and bond market where only Largest stock and bond market where only the largest companies in the country are the largest companies in the country are tradedtraded
American Exchange (AMEX)American Exchange (AMEX)
second largest stock and bond marketsecond largest stock and bond market
Places where stocks Places where stocks are bought & soldare bought & sold
NASDAQNASDAQ The over the counter market The over the counter market
(electronic trading) of stocks and (electronic trading) of stocks and bonds of smaller companiesbonds of smaller companies
Shares of stock are sold Shares of stock are sold
in shares of a 100in shares of a 100
Securities Exchange Securities Exchange Commission (SEC)Commission (SEC)
Federal Regulatory Agency that Federal Regulatory Agency that regulates the trading of stocks regulates the trading of stocks and bonds and bonds
Established after the Established after the
Great DepressionGreat Depression Investigate any Inside Investigate any Inside
Information, which is illegalInformation, which is illegal
Where Where daytradingdaytrading is shown is shown
DowDow An average of the top 30 An average of the top 30 largest companies stock price largest companies stock price values that are traded on the values that are traded on the NYSENYSE
S+P 500 S+P 500 Includes the average of Includes the average of the stock price changes of 500 the stock price changes of 500 companies sold on the NYSE and companies sold on the NYSE and the NASDAQthe NASDAQ
Most risky: because people are buying & selling dozens of stocks in a day, to try and make a profit
Bull MarketBull Market When investors and When investors and
brokers believe that stocksbrokers believe that stocks
will continue to rise, due towill continue to rise, due to
a steady rise in the a steady rise in the
stock market over stock market over
a period time a period time
Bear MarketBear Market
When investors and When investors and
brokers believe that stocks brokers believe that stocks
will continue to drop, due towill continue to drop, due to
a steady drop in the a steady drop in the
stock market over stock market over
a period time. a period time.