Brief Response
• Should ordinary people invest? (4)
• Yes:
• Young people, especially, should begin saving/investing as soon as
they have a part of a steady income to do it with. As they will be
working some 30 years, they can make a great deal of money,
perhaps retire early to a comfortable life. Having the basic skills will
help them seek the right professionals to begin with the best plan.
• No:
• Saving takes money away from enjoying life now. Investment is
dangerous. One can lose all their savings to investment schemes
that go bad. People who do not understand the investment system
and do not constantly watch what is happening will be more
vulnerable when failures happen.
CH 12, Section 2, p. 318, Terms:
• Risk
• 318 a situation in which the outcome is not certain.
– Probabilities for each possible outcome can be estimated
• Financial assets are “risky”
– Prices may go up OR down.
– Agency issuing bond, note, or bill, may not redeem and
investor loses all investment
• Higher risk means higher interest rates demanded by
investors.
401(k) Plan
• 320 an investment and savings plan that acts
as a personal pension fund for employees
• tax-deferred (reduces annual income =
reduces annual income tax)
Coupon
• 321 the stated interest on a bond debt
Maturity
• 321 the life of a bond
Par value
• 321 the principal or the total amount initially
borrowed that must be repaid to the lender at
maturity
Current yield
• 321 the annual interest divided by the
purchase price of the bond.
Municipal bonds
• 323 aka “munis”
• Bonds issued by state and local governments
– Finance for….
•
•
•
•
•
•
Highways
State buildings
Schools
Parks
libraries
Public works
• Considered safe because governments have
– low chance of going out of business
– power to tax
– And they are …..
Tax-exempt
• 323 the federal government does not tax the
interest paid to investors owning municipal
bonds.
Savings bonds
•
•
•
•
•
323 low-denomination, non-transferable bonds
Issued by the US government
Through payroll savings plan
Low risk
Easy to obtain
– Bought at a lower price than the face value,
– Owner must wait for term to expire to collect that amount
• Ex: $50 bond is bought for $25, but recipient must wait a number
of years before the bond is actually worth $50.
– Savings bonds are no longer sold in paper since 2012
Treasury Notes
• 325 US obligations with maturity of two to ten
years.
Treasury Bonds
• 324 US obligations with maturity of ten to
thirty years.
• Smallest denomination is $1000
Treasury Bills
• 324 aka “T-bill”
• Short-term obligation with a majority of 13,
26, or 52 weeks
• Minimum denomination of $1000
• Sold on a “discount” basis, at auction.
Individual Retirement Account
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•
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•
•
•
324 aka “IRA”
Long-term time deposit
Set up for retirement
Tax-sheltered
Convenient for married couples
Taxable when used at maturity.
Roth IRA
• 325 an IRA whose contributions are made
after taxes so that no taxes are taken out at
maturity
– Tax already paid each month.
Capital market
• 325 a market where money is loaned for more
than one year.
• Long-term CDs
• Corporate and government bonds
Money market
• 325 A market where money is loaned for
periods of less than one year.
• CD with maturity of one year or less
• Mutual funds
Primary market
• 326 a market where only the original issuer
can repurchase or redeem a financial asset
(first sale)
– Government savings bonds
– IRAs
– Small CDs
Secondary market
• 326 market in which existing financial assets
can be resold to new owners
• Liquidity to investors
– Can be bought and sold faster
– More competitive
Section 3, p. 328 Terms:
• Equities
• 328 stocks that represent ownership shares in
corporations
• Large number of buyers and sellers
– Well informed
Efficient Market Hypothesis
• 329 aka “EMH”
• Argument that stocks are always priced about
right
• that bargains are hard to find
– because they are followed closely by so many
investors
Portfolio diversification
• 329 the practice of holding a large number of
different stocks
• Increases in some will offset unexpected
declines in others.
• Popular strategy
stockbroker
• 329 a person who buys or sells equities for
clients.
– Arranges stocks or bonds to be bought on the
exchange floor by a trader
– Also supplies the securities from an inventory
– Buys them from some other broker
Securities exchange
• 329 place where buyers and sellers meet to
trade securities
• Members pay fee to join
• Trades can only take place on the floor of the
exchange.
– NYSE
– AMEX
seats
• 330 membership on an exchange
– Ex: NYSE has 1400 seats
– Only seat holders may trade on the exchange floor
– Larger brokerage companies have more seats
because they can afford them.
– Each seat may cost several million dollars…..
• Fees vary with market
• Bidding process
• Dec. 2014: $3,505,000
Trading floor of NYSE
Over-the-counter market
• 331 aka: OTC
• Electronic marketplace for securities that are
not traded on an organized exchange.
– NASDAQ
Dow-Jones Industrial Average
• 332 the most popular and widely publicized measure of stock
market performance on the NYSE.
• Covers 30 major stocks
• Various industrial/business sectors
– Value of “point” varies due to
– value of money traded and volume of stock
• Better way to evaluate performance is to look at percentage
gained or lost
• Some criticize that 30 companies are not enough to judge the
performance of thousands of companies being traded
• Listing
Standard and Poor’s 500
• 332 uses the price changes of 500
representative stocks as an indicator of overall
market performance.
• Total of all sales reduced to an easy to
understand “index” number.
• Covers stocks on more than NYSE
– AMEX
– OTC
• Listing
Bull market
• 332 A “strong” market with the prices moving
up for several months or years in a row.
• At time of text publishing, the DJIA peaked at
12,000 points, in 2000.
• 2009, 6,507
• Current DJIA is 18,500 5/2015
• A brief history of the DJIA
Charging Bull, which is sometimes
referred to as the Wall Street Bull or
the Bowling Green Bull, is a
3,200 kilograms (7,100 lb) bronze
sculpture by Arturo Di Modica that
stands in Bowling Green Park near
Wall Street in Manhattan, New York
City.
Bear market
• 332 A “weak” or “mean” market with the
prices falling sharply for several months or
years in a row.
• 2001-2003 market lost 30+% of it value
How things rose and fell:
Spot market
• 332 transactions are made immediately at the
prevailing price.
• “spot” denotes
– the current price in the city where the trade takes
place, not a world average.
– The current price at the moment of purchase, not
in the future.
Futures contract
• 333 agreement to buy or sell at a specific price at a
specific date in the future.
• Regardless of market price at the specific date.
• Ex: airline buys aviation fuel at $3 a gallon, to be
collected 1 year from now.
– Market price of aviation fuel climbs to $5 a gallon in the
course of that year.
– Airline saves $2/gallon
– Aviation fuel seller makes good money now and had got
rid of stock of aviation fuel.
Futures market
• 333 marketplace where futures contracts are
bought and sold.
• Ex.:
– Chicago Board of Trade/Chicago Mercantile
Exchange/New York Mercantile Exchange (CME)
– Intercontinental Exchange (ICE)
option
• 333 contract that provides the right to
purchase or sell commodities or financial
assets at some point in the future.
• At an agreed upon price today.
• Either party may choose to back out.
Call-option
• 333 the right to buy a share of stock at a
specified price some time in the future.
– Later price lower than purchase price, you can buy
BELOW the call-option price.
– If later price higher than purchase price, you can
buy AT the call-option price.
– Ex.: p. 333
Put option
• 333 the right to sell a share of stock at a specified
price some time in the future.
– If you pay a price for the right to sell at a specified higher
price and the actual future price is lower than that target
price, you can require the buyer to pay the target price.
• You get back your initial fee
• And you get the difference
– If the market price exceeded the target price, you could
ignore the agreement with the other buyer and sell it
yourself.
• You would get profit from the higher market price minus your
initial fee.
– Ex.: p. 333
Options market
• 333 the markets where options are bought
and sold.
Investment Analyst
• This is a small investment company
• My older brother’s one of them.
• It is in New Jersey
Hwk Assessments, Class Work,
to Know
Assessments: Checking for Understanding
CH 12, S2
• 1
• Invest wisely
• Analyze the risk and return
CH 12, S2 Assessment
•
•
•
•
•
3
Risk and return
Personal investment goals
Consistency
simplicity
CH 12, S2 Assessment
•
•
•
•
4
Coupon
Maturity
Par value
CH 12, S2 Assessment
• 5
• Ex: CDs cost as little as $100 and are a safe
investment
• Investors select the length of maturity
CH 12, S2 Assessment
• 6
• A capital market grants longer-term loans than
does a money market.
• A primary market, the issuer only can redeem
a financial asset
• A secondary market, previously owned
securities are sold.
Assessments: Checking for Understanding
CH 12, S3
• 1
• Quantity demanded greater than quantity
supplied
Image, p. 319
• Question
• To compensate for greater risk
Image, p. 320
• Question
• $439
Image, p. 321
• Question
• Approximately $42,000
Image, p. 322
• Question
• Bonds prices are determined by supply and
demand.
• Because low-rated bonds probably would be
in less demand, prices would be lower.
Image, p. 325
• Question
• Because they may have various long-term and
short-term maturities
Image, p. 326
• Question
• A capital market is a market where money is
loaned for periods of more than one year.
• A money market is a market where money is
loaned for periods of less than one year.
Image, p. 329
•
•
•
•
Question
Number of outstanding shares to be traded
Company profitability
expectations
image, p. 330
• Question
• Ford Motor
Image, p. 332
• Question
• The Dow-Jones Industrial Average (DJIA) and
the Standard & Poor’s 500 (S&P 500)
Brief Response
• When you invest, it is best to diversify your
portfolio. Why? (3)