Savings, InvestmentsSavings, Investments& the Stock Market& the Stock Market

Copy Comparison Chart b4Copy Comparison Chart b4

Financial intermediaries are institutions that help channel funds from savers to borrowers.

Banks, Savings and Loan Associations, and Credit UnionsTake in deposits from savers and then lend some of these funds to various businesses

Finance CompaniesMake loans to consumers and small businesses, but charge borrowers higher fees and interest rates to cover possible losses

Mutual FundsPool the savings of many individuals and invest this money in a variety of stocks and bonds

Life Insurance CompaniesProvide financial protection to the family, or other beneficiaries, of the insured

Pension FundsAre set up by employers to collect deposits and distribute payments to retirees

Financial IntermediariesFinancial Intermediaries

Financial intermediaries accept funds from savers and make loans to investors.

Financial Intermediaries

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

InvestorsSavers make deposits to…

The Flow of Savings and The Flow of Savings and InvestmentsInvestments

Commercial banks,Savings and Loans Associations,Mutual Savings Banks, and Credit Unions

Investors

Risks Associated with InvestmentRisks Associated with Investment

V3: “Risk and ReturnV3: “Risk and Return Rate of Return Formula: Amount of Income Made from the Rate of Return Formula: Amount of Income Made from the

investment/ the amount of the original investmentinvestment/ the amount of the original investment Annual Rate of Return: Amount of the Income made in a year/the Annual Rate of Return: Amount of the Income made in a year/the

original amount of the investment. original amount of the investment. Time Horizon: The amount of time you plan on investing.Time Horizon: The amount of time you plan on investing. Title, draw and color the risk investment pyramid: 10 minutesTitle, draw and color the risk investment pyramid: 10 minutes High Risk Investments: options, futures, and collectibles. High Risk Investments: options, futures, and collectibles. Middle (Medium Risk Investments: real estate, mutual funds, Middle (Medium Risk Investments: real estate, mutual funds,

stocks, bonds.stocks, bonds.Bottom (Low Risk Investments): government bonds, treasury notes, Bottom (Low Risk Investments): government bonds, treasury notes,

money Market investments, bank accounts, CD’s, money Market investments, bank accounts, CD’s, cash/checking/savings accounts.cash/checking/savings accounts.

Middle: Middle:

Return, Risk and Liquidity Return, Risk and Liquidity (Graphic (Graphic

Organizer B2)Organizer B2)

Rate of Return -Type of profit or loss you Rate of Return -Type of profit or loss you are getting on your investment (Interest on are getting on your investment (Interest on savings)savings)

Liquidity – ease of turning assets into Liquidity – ease of turning assets into moneymoney

Return and Risk (direct relationship)Return and Risk (direct relationship) Greater risk, higher returns (NASDAQ stocks)Greater risk, higher returns (NASDAQ stocks) Less risk, lower returns (CD)Less risk, lower returns (CD)

Return and Liquidity (inverse relationship)Return and Liquidity (inverse relationship) Greater liquidity, lower return (CD)Greater liquidity, lower return (CD) Less liquidity, greater return (Bonds)Less liquidity, greater return (Bonds)

Capital Gains and DividendsCapital Gains and Dividends

Capital GainsCapital Gains A profit made when selling stock at a A profit made when selling stock at a

higher price than they paid for ithigher price than they paid for it. Most . Most people buy stock to make money from capital people buy stock to make money from capital gains. gains.

For example, if you buy 100 shares of For example, if you buy 100 shares of Company XYZ at $100.00 a share (a total Company XYZ at $100.00 a share (a total $10,000 investment) and sold it for $125.00 a $10,000 investment) and sold it for $125.00 a share ($12,500), you’ve realized a capital gain share ($12,500), you’ve realized a capital gain of $25.00 a share, or $2,500.00.of $25.00 a share, or $2,500.00.

Suppose you purchase/invest only 10 shares of CVS’s Suppose you purchase/invest only 10 shares of CVS’s stock at $2.00 a share. If the stock increases in price to stock at $2.00 a share. If the stock increases in price to

$2.50 a share, what are your capital gains or rate of return?$2.50 a share, what are your capital gains or rate of return?

Now, suppose you take a greater risk and purchase/invest Now, suppose you take a greater risk and purchase/invest 40 shares of CVS stock at 2.00 a share. When the share 40 shares of CVS stock at 2.00 a share. When the share

increases to $2.50, what are your capital gains?increases to $2.50, what are your capital gains?

Why were your returns higher when Why were your returns higher when you invested more? you invested more?

A) You took a greater risk and the risk A) You took a greater risk and the risk ended up having a positive outcome.ended up having a positive outcome.

B) The company decided to pay you more B) The company decided to pay you more because they want to keep your because they want to keep your investment.investment.

C) You were their 10,000C) You were their 10,000thth customer. customer. D) None of the above.D) None of the above.

Investments fall in to the following Investments fall in to the following categoriescategories

Very liquidVery liquid Somewhat liquidSomewhat liquid Illiquid (not liquid)Illiquid (not liquid)

* Liquidity: The ease * Liquidity: The ease

Work with a PartnerWork with a Partner1.1. $20 Traveler’s Check$20 Traveler’s Check

2.2. 30 Day Treasury Bill30 Day Treasury Bill

3.3. Share of Microsoft StockShare of Microsoft Stock

4.4. $5,000 Savings Account$5,000 Savings Account

5.5. Apartment ComplexApartment Complex

6.6. $1 (Dollar) Bill$1 (Dollar) Bill

7.7. Gold bullionGold bullion

8.8. IBM 20-year BondIBM 20-year Bond

9.9. Share in money-Share in money-market mutual fundmarket mutual fund

10.10. Credit card with Credit card with $5,000 line of credit$5,000 line of credit

11.11. Eurodollar savings Eurodollar savings account in a Swiss account in a Swiss BankBank

12.12. Your HouseYour House

13.13. Oil painting by MonetOil painting by Monet

Categorize as “very liquid,” “somewhat liquid” or “illiquid”

Work with a PartnerWork with a Partner1.1. $20 Traveler’s Check$20 Traveler’s Check

2.2. Share of Microsoft Share of Microsoft StockStock

3.3. $5,000 Savings $5,000 Savings AccountAccount

4.4. Apartment ComplexApartment Complex

5.5. $1 (Dollar) Bill$1 (Dollar) Bill

6.6. Gold bullionGold bullion

7.7. IBM 20-year BondIBM 20-year Bond

9.9. Share in money-Share in money-market mutual fundmarket mutual fund

10.10. Credit card with Credit card with $5,000 line of credit$5,000 line of credit

11.11. Eurodollar savings Eurodollar savings account in a Swiss account in a Swiss BankBank

12.12. Your HouseYour House

13.13. Oil painting by MonetOil painting by Monet

Categorize as “very liquid,” “somewhat liquid” or “not liquid”

Stock Market VideoStock Market Video

Major ExchangesMajor Exchanges NYSE - New York Stock Exchange – “NYSE - New York Stock Exchange – “The Big The Big

Board”Board” Founded in 1792, the oldest and most prestigious Founded in 1792, the oldest and most prestigious

stock exchange in the U.S. – 3,000 mostly large-cap stock exchange in the U.S. – 3,000 mostly large-cap companiescompanies

NASDAQNASDAQ - - National Association of Securities National Association of Securities Dealers Automated Quotation SystemDealers Automated Quotation System - - computerized national trading system that lists computerized national trading system that lists more than 5300 small-cap & technology more than 5300 small-cap & technology companies companies

AMEXAMEX - - The American Stock ExchangeThe American Stock Exchange founded founded in 1842 as the New York Curb Exchange – 700 in 1842 as the New York Curb Exchange – 700 companiescompanies

Blue ChipsBlue Chips

Largest most consistently profitable Largest most consistently profitable companies that usually pay dividendscompanies that usually pay dividends Coca-ColaCoca-Cola General ElectricGeneral Electric McDonald’sMcDonald’s Exxon-MobileExxon-Mobile Wal-MartWal-Mart GilletteGillette

Types of StocksTypes of Stocks Common StockCommon Stock

The most basic form of ownership that a The most basic form of ownership that a corporation issues. corporation issues.

It designates that you own a fraction of the It designates that you own a fraction of the company. company.

The value of a common stock is directly The value of a common stock is directly influenced by the successes and failures of influenced by the successes and failures of the issuing company. the issuing company.

It may or may not pay a dividend, which is the It may or may not pay a dividend, which is the portion of the company's profits paid out to its portion of the company's profits paid out to its shareholders.shareholders.

Preferred StockPreferred Stock They receive their dividends before common They receive their dividends before common

stock ownersstock owners If the company goes out of business, If the company goes out of business,

preferred stockholders are paid back the preferred stockholders are paid back the money they invested before the common money they invested before the common stockholdersstockholders

For these reasons, preferred stock is For these reasons, preferred stock is generally less risky than common stockgenerally less risky than common stock

The main drawback of preferred stock is that it The main drawback of preferred stock is that it cannot benefit as much from company profits cannot benefit as much from company profits because it only pays a fixed dividendbecause it only pays a fixed dividend

DividendsDividends Dividends are the distribution of profits from a Dividends are the distribution of profits from a

company to the stockholderscompany to the stockholders Investors buy stock for the dividend Investors buy stock for the dividend

payments. payments. For example, if Company XYZ declares an For example, if Company XYZ declares an

annual dividend of $10.00 a share and you annual dividend of $10.00 a share and you own 100 shares, you’ll earn $1000.00 a year, own 100 shares, you’ll earn $1000.00 a year, or, $250.00 paid each quarter.or, $250.00 paid each quarter.

Who Decides Dividends?Who Decides Dividends? A companies board of directors decides how A companies board of directors decides how

large a dividend the company will pay, or large a dividend the company will pay, or whether it will pay one at all. whether it will pay one at all.

Quarterly dividend payments are the most Quarterly dividend payments are the most common; annual and semiannual payments common; annual and semiannual payments are less common. are less common.

Usually only large, established companies Usually only large, established companies pay dividends. pay dividends.

This is because smaller companies need to This is because smaller companies need to reinvest their profits to continue growing.reinvest their profits to continue growing.

IPO – Initial Public OfferingsIPO – Initial Public Offerings Taking a company through a public Taking a company through a public

offering on the U.S. securities markets is offering on the U.S. securities markets is a major undertaking a major undertaking

It is a source of pride, an opportunity for It is a source of pride, an opportunity for business growth, and a serious legal business growth, and a serious legal responsibility. responsibility.

Great way to get growth money for Great way to get growth money for expansion.expansion.

Downside – give up controlDownside – give up control Only time company gets moneyOnly time company gets money

Why Invest in Stock?Why Invest in Stock?

Earn regular income – dividend Earn regular income – dividend paymentspayments

Buy low, sell high…hopefully Buy low, sell high…hopefully ☺☺ Sell at higher price than you bought?Sell at higher price than you bought?

• Capital gainCapital gain Sell at lower price than you bought?Sell at lower price than you bought?

• Capital lossCapital loss When do you reap the benefits?When do you reap the benefits?

Market CyclesMarket Cycles Ups and Downs Ups and Downs

Throughout its history, the stock market has Throughout its history, the stock market has tended to move in cycles of activity. tended to move in cycles of activity.

The stock market is greatly affected by The stock market is greatly affected by economics, social, and political factors. economics, social, and political factors.

While it's impossible to predict the While it's impossible to predict the market's future activity, one thing is market's future activity, one thing is certain: The stock market will continue to certain: The stock market will continue to experience ups and downs. experience ups and downs.

Bull and Bear MarketsBull and Bear Markets Bull: attacks by thrusting horns up Bull: attacks by thrusting horns up

(positive)(positive) Optimistic outlook, investor confidenceOptimistic outlook, investor confidence Prices rising or expected to risePrices rising or expected to rise Can apply to anything that is tradedCan apply to anything that is traded

Bear: attacks by swiping paw down Bear: attacks by swiping paw down (negative)(negative) Prices falling or expected to fallPrices falling or expected to fall Enter a downturn of 15-20% in multiple indexesEnter a downturn of 15-20% in multiple indexes

Psychological effects & speculationPsychological effects & speculation

IndexesIndexes

Each exchange calculates an index, or Each exchange calculates an index, or benchmarkbenchmark, based on the activity of its , based on the activity of its member companies' stock prices. member companies' stock prices.

"The market's up" or “the market's down," "The market's up" or “the market's down," refers to the Dow Jones Industrial refers to the Dow Jones Industrial Average. It is considered a reliable Average. It is considered a reliable indicator of the strength - or weakness - of indicator of the strength - or weakness - of stocks in general. stocks in general. Composite of 30 Composite of 30 companies.companies.

Market Indices & AveragesMarket Indices & Averages A short list of the major U.S. indices:A short list of the major U.S. indices:

Dow Jones Industrial Average (DJIA)Dow Jones Industrial Average (DJIA) Dow Transports (DJTA)Dow Transports (DJTA) Dow Utilities (DJUA)Dow Utilities (DJUA) DJ Wilshire 5000DJ Wilshire 5000 NASDAQ Composite / NASDAQ 100NASDAQ Composite / NASDAQ 100 S&P 500 Index (S&P 500) / S&P 100S&P 500 Index (S&P 500) / S&P 100 Russell 2000Russell 2000 NYSE and AMEX CompositesNYSE and AMEX Composites

Circuit BreakersCircuit Breakers

After the 1987 stock market crash, the After the 1987 stock market crash, the NYSE instituted automatic thresholds NYSE instituted automatic thresholds to reduce market volatility caused by to reduce market volatility caused by program trading.program trading.

These thresholds, know as "circuit These thresholds, know as "circuit breakers," are updated quarterly and breakers," are updated quarterly and use the Dow Jones Industrial Average use the Dow Jones Industrial Average as their benchmark. The current as their benchmark. The current thresholds are:thresholds are:

Three ThresholdsThree Thresholds 800 Point Drop800 Point Drop

An 800-point drop will halt trading for one hour if An 800-point drop will halt trading for one hour if it occurs before 2:00 pm; 30 minutes if between it occurs before 2:00 pm; 30 minutes if between 2:00 pm and 2:30 pm; the drop will have no effect 2:00 pm and 2:30 pm; the drop will have no effect between 2:30 pm and 4:00 pmbetween 2:30 pm and 4:00 pm

1,600 Point Drop1,600 Point Drop A 1600-point drop will halt trading for two hours if A 1600-point drop will halt trading for two hours if

it occurs between 1:00pm; one hour if it occurs it occurs between 1:00pm; one hour if it occurs between 1:00 and 2:00 pm; and halt trading for the between 1:00 and 2:00 pm; and halt trading for the day after 2:00 pm.day after 2:00 pm.

2,350 Point Drop2,350 Point Drop A 2350-point drop will halt trading for the A 2350-point drop will halt trading for the

remainder ofremainder of the day, regardless of the time it the day, regardless of the time it occurs.occurs.

RankRank DateDate Closed Closed Net ChangeNet Change % Change% Change

11 10/19/198710/19/1987 1738.741738.74 -508.00-508.00 -22.61-22.61

22 10/28/192910/28/1929 260.64260.64 -38.33-38.33 -12.82-12.82

33 10/29/192910/29/1929 230.07230.07 -30.57-30.57 -11.73-11.73

44 11/06/192911/06/1929 232.13232.13 -25.55-25.55 -9.92-9.92

55 12/18/189912/18/1899 58.2758.27 -5.57-5.57 -8.72-8.72

66 08/12/193208/12/1932 63.1163.11 -5.79-5.79 -8.40-8.40

77 03/14/190703/14/1907 76.2376.23 -6.89-6.89 -8.29-8.29

88 10/26/198710/26/1987 1793.931793.93 -156.83-156.83 -8.04-8.04

99 07/21/193307/21/1933 88.7188.71 -7.55-7.55 -7.84-7.84

1010 10/15/200810/15/2008 8577.918577.91 -733.05-733.05 -8.54-8.54

Days with Greatest Percentage Lost

Mutual Funds VideoMutual Funds Video What is a mutual fund?What is a mutual fund?

Diversification of portfolio in one fundDiversification of portfolio in one fund Several businesses to spread riskSeveral businesses to spread risk Not a traditional bank depositNot a traditional bank deposit NOT insured by FDICNOT insured by FDIC NOT guaranteed by banksNOT guaranteed by banks Mutual funds carry risk, including the Mutual funds carry risk, including the

possible loss of principal.possible loss of principal.

How To Read The Stock TablesHow To Read The Stock Tables

Stock prices from the previous day's Stock prices from the previous day's trading are printed in tables in most trading are printed in tables in most newspapers Tuesday through Saturday, newspapers Tuesday through Saturday, and the week's activity is commonly and the week's activity is commonly summarized on Sunday. The listings can summarized on Sunday. The listings can seem confusing, since they look like a seem confusing, since they look like a mixture of numbers, but they can be a very mixture of numbers, but they can be a very useful tool when trading stocks. The useful tool when trading stocks. The listings are organized into different listings are organized into different columns and include this information:columns and include this information:

Reading Financial PapersReading Financial Papers

Refer to Investopedia Tutorial handoutRefer to Investopedia Tutorial handout How to Read A Stock Table/Quote, pp. 10, How to Read A Stock Table/Quote, pp. 10,

1111 QUIZ – Savings, Investment, Personal QUIZ – Savings, Investment, Personal

InvestmentInvestment

Let’s Get StartedLet’s Get Started

You will pick one stock and invest $5000.You will pick one stock and invest $5000. You will pick one mutual fund and invest 5000.You will pick one mutual fund and invest 5000. It is your responsibility to check the price of each It is your responsibility to check the price of each

of your investments, as well as the Dow Jones of your investments, as well as the Dow Jones Industrial Average, weekly and record it on your Industrial Average, weekly and record it on your investment sheet. investment sheet.

At the end of the semester you will do an At the end of the semester you will do an analysis of your purchases and the market in analysis of your purchases and the market in general.general.

Finance.yahoo.comFinance.yahoo.com

Stock (code) Stock (code) LAST (Last traded amount)LAST (Last traded amount) Mutual (code) Mutual (code) NAV (Net Asset Value - Last traded NAV (Net Asset Value - Last traded

amount)amount)

Mutual Fund ChoicesMutual Fund Choices

MCHFXMCHFX CGMFXCGMFX HABDXHABDX PRFDXPRFDX DODFXDODFX FAIRXFAIRX PRMSXPRMSX OAKIXOAKIX MUHLXMUHLX