Investments & The Stock Market Chapter 11 Investments Nations must have a Financial System for investments to work. 2 ways investments help: Allow.

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.