ch 11 finacial Mkts

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Chapter 11 Financial Markets : 

Chapter 11 Financial Markets State Standard 12.2.9 Describe the functions of the financial market. Objective: Explain how investing contributes to the free enterprise system. Explain the difference between stocks and bonds.

The Financial System : 

A financial system is a system that allows the transfer of money between savers and borrowers. The Financial System Financial Assets When savers invest, they receive documents confirming their deposit or bond purchase, such as passbooks or bond certificates. These documents are known as financial assets. They represent claims on property or income of the borrower.

Private Enterprise and Investing : 

Private Enterprise and Investing Investment is the act of redirecting resources from being consumed today so that they may create benefits in the future. In short, investment is the use of assets to earn income or profit. When people save or invest their money, their funds become available for businesses to use to expand and grow. In this way, investment promotes economic growth.

Financial Intermediaries : 

Financial intermediaries are institutions that help channel funds from savers to borrowers. Banks, Savings and Loan Associations, and Credit Unions Take in deposits from savers and then lend some of these funds to various businesses Finance Companies Make loans to consumers and small businesses, but charge borrowers higher fees and interest rates to cover possible losses Mutual Funds Pool the savings of many individuals and invest this money in a variety of stocks and bonds Life Insurance Companies Provide financial protection to the family, or other beneficiaries, of the insured Pension Funds Are set up by employers to collect deposits and distribute payments to retirees Financial Intermediaries

The Flow of Savings and Investments : 

Financial intermediaries accept funds from savers and make loans to investors. The Flow of Savings and Investments

Risk and Return : 

Return is the money an investor receives above and beyond the sum of money initially invested. Risk and Return Return and Liquidity Savings accounts have greater liquidity, but in general have a lower rate of return. Certificates of deposit usually have a greater return but liquidity is reduced. Return and Risk In general, the higher potential return of the investment, the greater the risk involved.

Bonds as Financial Assets : 

Bonds as Financial Assets Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor. Bonds have three basic components: 1. The coupon rate — the interest rate that the issuer will pay the bondholder. 2. The maturity — the time when payment to the bondholder is due. 3. The par value — the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity.

Buying Bonds at a Discount : 

Buying Bonds at a Discount Investors earn interest on the bonds they buy. They can also earn money by buying bonds at a discount from par.

Bonds and other financial assets : 

Bonds and other financial assets Business and governments issue bonds and other financial assets in order to finance expansion. Bonds are relative low risks investments for purchasers, who receive the purchase price plus interest when the bond matures. Other financial assets such as money market mutual funds and certificate of deposit offer additional investment opportunity

Types of Bonds : 

Types of Bonds Savings Bonds Savings bonds are low-denomination ($50 to $10,000) bonds issued by the United States government. Savings bonds are purchased below par value (a $100 savings bond costs $50 to buy) and interest is paid only when the bond matures. Treasury Bonds, Bills, and Notes These investments are issued by the United States Treasury Department. Municipal Bonds Municipal bonds are issued by state or local governments to finance such improvements as highways, state buildings, libraries, and schools. Corporate Bonds A corporate bond is a bond that a corporation issues to raise money to expand its business. Junk Bonds Junk bonds are lower-rated, potentially higher-paying bonds.

Other Types of Financial Assets : 

Other Types of Financial Assets Certificates of Deposit Certificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time. CDs have various terms of maturity, allowing investors to plan for future financial needs. Money Market Mutual Funds Money market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.

The stock market : 

The stock market The stock market is another way people invest their earnings. Stocks offer possibilities for high return but also high risks. Major stock exchange in the U.S. include the New York Stock Exchange and Nasdaq.

Buying Stock : 

Buying Stock Corporations can raise money by issuing stock, which represents ownership in the corporation. A portion of stock is called a share. Stocks are also called equities. Stockowners can earn a profit in two ways: 1. Dividends, which are portions of a corporation’s profits, are paid out to stockholders of many corporations. The higher the corporate profit, the higher the dividend. 2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

Types of Stock : 

Stocks may be classified either by whether or not they pay dividends or whether or not the stockholder has a say in the corporation’s affairs. Types of Stock Dividend Differences Income stock pays dividends at regular times during the year. Growth stock pays few or no dividends. Instead, the issuing company reinvests earnings into its business. Decision-Making Differences Investors who buy common stock are voting owners of the company. Preferred stock owners are nonvoting owners of the company, but receive dividends before the owners of common stock.

How Stocks Are Traded : 

How Stocks Are Traded A stockbroker is a person who links buyers and sellers of stock. Stockbrokers work for brokerage firms, or businesses that specialize in trading stock. Some stock is bought and sold on stock exchanges, or markets for buying and selling stock.

Stock Exchanges : 

Stock Exchanges The New York Stock Exchange (NYSE) The NYSE is the country’s largest stock exchange. Only stocks for the largest and most established companies are traded on the NYSE. NASDAQ-AMEX NASDAQ-AMEX is an exchange that specializes in high-tech and energy stock. The OTC Market The OTC market (over-the-counter) is an electronic marketplace for stock that is not listed or traded on an organized exchange. Daytrading Daytraders use computer programs to try and predict minute-by-minute price changes in hopes of earning a profit.

……. : 

……. Stock performance is measured by the Dow and S & P 500. The Great Crash of 1929 dealt the stock market one of it’s worst economic blows in U. S. history. Following a period of distrust after the crash investors returned to the stock market in great numbers.

Terms to know : 

Terms to know Brokerage firms Equities financial intermediary Bear Market Bonds Stocks bull market speculation Liquidity Maturity Investment Diversification Portfolio Dividends Capital gain

Key Terms (2) : 

Key Terms (2) OTC New York Stock Exchange Stock broker Capital loss Municipal bonds

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