Chapter 11

Chapter 11Financial MarketsChapter 11Section 1Private Enterprise and InvestingInvestment- the act of redirecting resources from being used today so they can be used to create future benefitsWhen people save or invest, that money is used by business to expand=economic growth

The Financial SystemFinancial assets are documents that show a person made an investmentA financial system allows the transfer of money between savers and borrowersFinancial IntermediariesFinancial Intermediaries are institutions that help channel funds from savers to borrowersBanks, credit unionsFinance CompaniesMutual FundsLife Insurance CompaniesPension Funds Services Provided by Financial IntermediariesDiversification is the spreading out of investments to reduce risk Financial Intermediaries save time/money because they do the research for investments

Risk and ReturnReturn is the money an investor receives above and beyond the sum of money initially invested

Risk and ReturnRemember, investing in a friends company could double your money, but the company could failThe higher the potential return of the investment, the great the risk involvedChapter 11Section 2Bonds as Financial AssetsBonds are loans that the government or a corporation must repay to the investor. Bonds pay a fixed amount of interest for a set amount of time

Advantages and Disadvantages of BondsAdvantages:Unlike stocks, bonds are not shares of ownership in a company, meaning the price does not go up or downAdvantages and Disadvantages of BondsDisadvantages:Whoever issues the bond must make fixed payments, even if times are toughIf issuer cannot maintain financial health, difficult to sell bondsTypes of BondsSavings- issues by the US governmentTreasury- US Treasury DepartmentMunicipal- state and local governmentsCorporate- corporation issued (to expand business

Chapter 11Section 3Buying StockCorporations raise money by issuing stock, which represents ownership in the company. A portion of stock is called a share.

Buying StockStockowners earn a profit in two ways:1) Dividends- payments made to the stockholder by the company (earned profit)2) Capital gain- sell stock for more than they paid for it

Types of StockThose who buy common stock are voting membersThose who buy preferred are nonvoting members

Stock RisksBuying stock is RISKY! If the company experiences economic downturn, that means less dividends (profit) and reduces the value of the stock

How Stocks Are TradedA stockbroker is a person who links buyers and sellers of stockStockbrokers work for brokerage firms, or business that specialize in trading stockStocks are sold on the stock exchange, which are markets for buying and selling stockStock ExchangesThe New York Stock Exchange (NYSE) is the worlds largest stock exchange.

Measuring Stock PerformanceBull Market- when the stock market rises steadily over a period of timeBear Market- when the stock market falls steadily over a period of time

Measuring Stock PerformanceThe Dow Jones Industrial Average ,The Dow measures how stocks are doing

The Great CrashIn 1929, the stock market crashed due to speculation, the practice of making high-risk investments with borrowed money in hopes of getting a big returnAs of the 1980s, only 25% of American households own stock