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Financial Markets


... to borrowers Depository Financial Institutions Savings banks Credit unions Commercial banks Savings associations Nonbank Financial Institutions Finance ... – PowerPoint PPT presentation

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Title: Financial Markets

Chapter 12 Financial Markets
  1. Explain the difference between saving savings
    and why saving is important for capital
  2. Explain how the financial system works to
    transfer funds from savers to borrowers.
  3. Understand the role of the major nondepository
    financial institutions.
  4. Identify 4 important investment considerations
  5. Define the 3 characteristics of bonds
  6. Describe the types of major financial assets.
  7. Describe the major stock exchanges
  8. Explain how stock market performance is measured.

Saving vs. Savings
  • Saving absence of spending
  • Savings that becomes available for investors
    when others save
  • Businesses borrow the savings to produce new
    goods services, build new plants equipment,
    and create more jobs
  • Savings makes economic growth possible (does
    spending too?)

Copy Savings Diagram on Focus Transp. 42 Copy
and answer Questions 1 and 2
The Financial System
  • Financial system network of savers, investors
    financial institutions that work together to
    transfer savings to investors
  • Made up of funds, financial assets, savers,
    borrowers, and institutions
  • Financial intermediaries financial institutions
    that lend funds that savers provide to borrowers

Copy Figure 12.1 Overview of the Financial
System/ Circular Flow of Funds (p. 315)
Financial Intermediaries
  • Depository Financial Institutions
  • Savings banks
  • Credit unions
  • Commercial banks
  • Savings associations
  • Nonbank Financial Institutions
  • Finance companies
  • Life insurance companies
  • Mutual funds
  • Pension funds
  • Real estate investment trusts

Investment Strategies
  • Investing the active redirection of resources,
    from being consumed today, to creating benefits
    in the future
  • To invest wisely, investors should have a basic
    understanding of investment considerations
  • 4 factors to consider when you invest (list them
    p. 318) Leave a couple of spaces after each one

  • Relationship between risk return
  • Higher risk yields higher return safer risk
    yields lower return
  • Depends on your comfort level
  • Personal goals/reasons for investing
  • Simplicity of investing/avoid some investments
  • Too complicated
  • Too good to be true
  • Consistency of investing
  • Amount not as important as investing on a regular
    basis (SAVE SOMETHING!)

  • There is a wide range of financial assets (assets
    are any item of economic value owned by an
    individual or corporation, especially that which
    could be converted to cash) one may invest in.
    They include
  • Savings accounts certificates of deposit
    (specific term interest rate)
  • 401(k) plans
  • Bonds
  • Treasury notes bonds
  • Treasury bills
  • Individual retirement accounts (IRAs)

Types of Investments
  • 401(k) plan a tax-deferred investment savings
    plan that acts as a personal pension fund for
    employees (mainly employer-sponsored plans)
  • Dont pay income taxes on you contribute until
    you withdraw it
  • Many employers will match your contribution by
    25 to 100

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  • Bonds long-term obligations that pay a stated
    rate of interest for a specified of years
  • 3 main components
  • Coupon stated interest on the debt
  • Maturity life of the bond
  • Par value principal/amount borrowed that must
    be repaid at maturity
  • Types of bonds
  • Corporate bonds (raise to expand)
  • Municipal bonds (issued by city/local)
  • Govt savings bonds
  • Treasury bonds (30-yr maturity)

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  • Individual Retirement Account (IRA) a long-term
    time deposit, with annual contributions of up to
    3000 per year not taxed until withdrawal during
  • Roth IRA an IRA whose contributions are made
    after taxes so no taxes are taken out at maturity
    (fewer withdrawal restrictions requirements)

The Stock Market
  • In addition to financial assets, investors may
    buy equities stocks representing ownership
    shares in corporations
  • Markets are competitive because there are a large
    of buyers sellers
  • Investor confidence is important for market
    stability stocks tend to be much higher risk
  • Stock prices can vary considerably from one
    company to the next (.01 to hundreds of !)

  • Investors must decide which equities to buy
    which to avoid
  • The Efficient Market Hypothesis states that
    stocks are always priced about right that
    bargains are hard to find because they are
    closely watched by so many investors
  • Many use portfolio diversification holding a
    large of different stocks so that increases in
    some can offset unexpected declines in others

Explain the2 ways to purchase equities(p. 329)
  • A number of organized securities exchanges exist
    places where buyers sellers meet to trade
  • These have members who must pay a fee to join
    trades may only take place on the floor
  • They can be classified into 4 main exchanges

  • What does NYSE stand for? (p. 329)
  • Where is it located?
  • Why is it significant?
  • How many seats/memberships does it have?
  • It lists stocks from how many companies?
  • What is AMEX? (p. 330)
  • Where is it located?
  • It has how many listed stocks?

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  • 3) Where are the major regional stock exchanges
    located? (p. 330)
  • 4) Where are the major global stock exchanges
    located? (P. 330)

  • Most stocks are traded on the over-the-counter
    market an electronic marketplace for securities
    that arent traded on an organized exchange
  • What does NMS stand for? What is it? (p. 331)
  • Members of the OTC market belong to the __.
  • What does NASDAQ stand for? What is it?

History of NASDAQ
  • Investors consult 2 indicators to check their
    stocks performances
  • What does DJIA stand for? (p. 332)
  • Why is it significant?
  • Its sample consists of how many stocks?
  • What does S P stand for?
  • It uses the price changes of how many stocks?
  • Unlike the DJIA, it reports on stocks listed

Dow Jones Industrial Average
  • Terms describing the movement of the market
  • Bull market a strong market where stock
    prices move up for several months or years in a
    row (1995, 2000)
  • Bear market a mean market where stock
    prices move down for several months of years in a
    row (1998)