Financial Markets - Duluth High School

Financial Markets
Saving and Capital Formation
• Saving money makes
economic growth possible
• One’s person savings can
represent another person’s loan
• Savings make investments
Financial Assets and the
Financial System
• Consist of a network, including
–Financial institutions
–Work together to Transfer
savings to investors
Financial Assets and the
Financial System
• Financial assets
– Claims on the property and the
income of the borrower
– Open a Savings accounts
– Certificates of deposits
– Government bonds
– Corporate bonds
Financial Assets and the
Financial System
• Financial Intermediaries
– Financial institutions that bring together savers and
Commercial banks
Savings and loan Asso.
Savings bank
Mutual savings banks
Credit unions
Life insurance companies
Mutual funds
Pension Funds
Real Estate Investment Trust
Finance Companies
Circular flow of funds: shows how funds are
transferred from savers to borrowers
• Any part of the economy can supply and borrow
• Largest Borrowers = Government and businesses
Nonbank Financial Intermediaries
• Non-depository institutions that
channel savings to borrowers
– Finance companies
– Life Insurance
– Mutual Funds
– Pension Funds
– Real Estate Investment Trust
Investment Strategies
and Financial Assets
Basic Investment Considerations
• Risk: a situation in which the
outcome is not certain but can
be estimated
–Higher risk = higher rate of
–Low risk = lower rate of return
Basic Investment Considerations
• Investments depends on goals of the investor
– Consistent investment can yield large
– Avoid complex investments
• 401K Plan: tax deferred investment
plan that acts as a personal pension
fund for employees
Basic Investment Considerations
Bonds as Financial Assets
• Three main components
– The Coupon: stated interest on debt
– The Maturity: life of the bond
– The par value: principal or the total amount initially
borrowed that must be repaid at maturity
• Prices are determined by supply
and demand
• Yield = annual interest rate
divided by the purchase price
Bond Ratings
• Rated on
the financial health of the investor
The ability to make future coupon
Principal payments
Issuer’s past credit history
• Range from D (lowest) to AAA (highest)
• Default = the issuer has not kept up
with the interest of the par value payments
Financial Assets and
Their Characteristics
• Most common form of investment =
Certificates of deposit
• Corporate Bonds
– Issued by corporations
– Usually used for long term investment
• Municipal bonds
– Issued by the state and local gov’t
– Safe, tax exempt investment
Financial Assets and
Their Characteristics
• Savings bonds
– Low-denomination, non-transferable
– Issued by federal gov’t
– Virtually no risk
• Treasury and Bonds
– Long-term obligations
– Issued by fed gov’t
– Safest of all financial assets
Financial Assets and
Their Characteristics
• Treasury Bills
– Short-term obligations
– Issued by federal gov’t
• Individual Retirement Accounts (IRA’s)
– Long-term
– Tax sheltered time deposits
– Intended for retirement
Markets for Financial Assets
• Capital markets: money is loaned for more
than one year
• Money Markets: money is loaned for more
less one year
• Primary Markets: only the original issuer
can repurchase or redeem a financial asset
• Secondary Markets: financial assets can be
resold to new owners
Markets for Financial Assets
Figure 12.6
Financial Assets and Their Markets
Investing in Equities, Futures,
and Options
Market Efficiency
• Efficient Market Hypothesis (EMH)
– Argument that stocks are always priced about
right and that bargains are hard to find
– It is not possible to “beat the market” regularly
– Investors should diversify their portfolios
– Or enlist the assistance of a stock broker
Organized Stock Exchanges
• New York Stock Exchange (NYSE)
– List share of 2,800 large companies
– 1,400 seats or memberships
• American Stock Exchange (AMEX)
– List shares of 750 companies
• Regional Stock Exchanges
– list shares too small or to new to be listed on NYSE or
• Global Stock Exchange
– Include stock exchanges around the world
Over the Counter Markets (OTC)
• Electronic Marketplace for securities not
traded on an organized exchange
– I.E. National Association of Securities Dealers
Automated Quotation (NASDAQ)
– List information on companies traded on (OTC)
Measure of Stock Performance
• Dow-Jones Industrial Average (DJIA)
– Index made up of 30 stocks
– Most popular and widely publicized
measure of stock market performance on the
• Standard & Poor’s 500
– Index made up of 500 representative stocks
• Bull Market: prices are rising
• Bear Market: prices are falling
Trading in the Future
• Spot Market
– “Spot” meaning immediate
– Transactions are made at the
prevailing price
– Futures contract
– Futures market
Trading in the Future
• Option Market
– Put and Call options are bought
and sold
– Call option
• Gives the owner the right to buy
at a specific price in the future
– Put option
• Gives the owner the right to sell
at a specific price in the future