Introduction to Agricultural and
Natural Resources
The Financial Markets
FREC 150
Dr. Steven E. Hastings
The Financial Markets
• Sources of Capital for Business Firms and
Entrepreneurs
– Suppose you want to start a business…
– Example – The Hastings Chair Company (HCC)!
– Where do you get
?
Stocks
• Stocks
– What is a stock?
• Shares of ownership in a publicly owned company.
• Issued buy companies to finance their business
activities.
– Stocks bought and sold in exchanges (markets).
– Many types that appeal to different investors –
“large cap”, “small cap”, growth, value, domestic,
international, etc.
Stock Certificate
Types of Stocks
• Blue chip stocks are stocks of well-established companies
that have stable earnings and no extensive liabilities.
• Penny stocks are low-priced, speculative and risky securities
which are traded over-the-counter (OTC); i.e. outside of one
of the major exchanges.
• Income stocks offer a higher dividend in relation to their
market price.
• Growth stocks are securities which appreciate in value and
yield a high return. Their profits are typically re-invested to
expand the business
• Value stocks are securities which investors consider to be
undervalued. They feel that the stock is being traded below
market value, and they believe in the long-term growth of
the issuing company.
• Source: www.finweb.com/investing/types-of-stocks.html
The Risk and Returns Vary
Blue is Growth
Red is Value
1975-80
1987-99
2000-07
Stocks
– Why buy stocks?
• Receive dividends (share of profits) and equity (stock
price can go up or down; no guarantee).
– Who buys them?
• Most (more that 50% by 2001) Americans, institutions,
retirement funds, college funds, other companies, etc.
own equities.
Stock Ownership
Source: Equity Ownership in America, 2005
Investment Company Institute and the Securities
Industries Association, 2005
Fixed Income Securities (2 types)
– Bonds
• What is a bond?
– Debt obligations (loans or IOU) issued by corporations,
universities, and state and local governments.
• Where do bonds originate?
– Issued as another source of revenue beyond stocks, taxes,
tuition, etc.
• Bonds issued and then resold in secondary markets;
investors can but a variety of different bonds at any
time.
• Price that you pay for a bond affects the yield (actual
return).
Delaware Bond Offering (2010)
Corporate Bonds
FREC 150 – Economics of Agricultural and
Natural Resources
Fixed Income Securities
• Why buy bonds?
– Receive interest annually (fixed mount) and debt
(guaranteed).
– Bond issuers are “rated” (A, AA, etc.) to guide investors.
• Who buys them?
– Most Americans, institutions, retirement funds, college funds,
other companies, etc. own bonds.
Headlines
Fixed Income Securities
– Money Market Securities
• Include Treasury bills, bank certificate of deposit (CD’s),
banker’s acceptances, and commercial papers issued by
corporations.
• Pay fixed rates of return (low) – secure investments
• See Reading List
Why Buy Stocks vs. Bonds?
• Difference in stocks and bonds
– Stocks
• (Dividend – Equity) – neither is guaranteed!
• Greater risk; greater return.
– Bonds
• (Interest - Debt) - both are guarenteed!
• Less risk; less return.
– Historical Comparisons of Returns
The DJIA Since 1896
Red is Stocks
Blue is Bonds
1 YR
FREC 150 – Economics of Agricultural and
Natural Resources
30 YRS
Money Magazine, Jan/Feb - 2012
The Lost Decade!
Recovery Under Way!
Risk and Return
Mutual Funds
• Mutual Funds
– What is a mutual fund?
• A mutual fund is a collection of stocks, bonds and other
securities purchased as a “set” by investors. The fund is
managed by a professional investment company.
• A company (Fidelity Investments, T. Rowe Price) may have
many funds.
– Why buy a mutual fund?
• Investors get returns in dividends, appreciation in asset value
(net asset value) and interest.
• Mutual finds provide diversification and
professional
management.
– Convenient, popular way to invest.
Early Mutual Funds
Legg Mason Value Trust
Many companies
Many Industries
Ownership of Mutual Funds
Source:
www.icmarc.org/xp/rc/marketview/chart/2008/20080905OwnershipofMutualFunds.html
Trillions ($) in Mutual Funds
Source: www.ici.org/research/stats/trends/trends_07_09
Mutual Funds
– A fund may be:
• “managed” or “indexed”,
• “open” or “closed”,
• “load” or “no-load”, etc.
– Investment objectives differ – the “Prospectus” is
important.
– Investors pay various fees to management
company.
– Many thousands of funds exist – trillions of dollars
invested!
Where do you buy S and B?
• Stock and Bond Markets (Exchanges)
– Traditional – seats or memberships required.
• First was in Philadelphia – 1790.
• New York Stock Exchange formed in 1817 on Wall Street.
• American Stock Exchange (a rival) founded in 1842.
– Electronic Stock Market
• National Association of Securities Dealers (NASDAQ)
operates an electronic market where brokers trade from
their offices.
– Requirements to trade differ for markets.
New York Stock Exchange
Measures of Activity
• Stock Market Indexes - indicators of market
(business) activity.
– Dow Jones Industrial Average – DJIA
• Oldest, most famous index (started in 1896 with 12
stocks); now, 30 large cap companies.
– Standard and Poore's 500 (S and P 500)
• Started 1957; 500 large cap companies.
– NASDAQ –
• All stocks in the NASDAQ market (5000), started 1971.
Measures of Activity
– Russell 2000
• Represents 2000 smaller companies.
– Wilshire 5000 –
• The “whole enchilada” – all stock market activity; has
more that 5000 stocks.
– Many other indexes exist.
Summary
• Why Monitor the Stock Market?
– All of you will invest in the future – maybe, now!
– Great way to monitor the (macro) economy!
• The financial markets are an important part of
our economic system.
• Virtually all Americans are affected by the
financial markets.
• Lecture Sources: Miscellaneous Materials
Assignment #2
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Review Assignment in Class
Pick a “publicly traded” company
Pick a mutual fund
Identify a source for data
Start recording data – 6 weeks or so
This assignment is 10% for your class grade!