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Financial

Markets
Chapter 11

Starting Out
The TWO main ways for people to get
rich in this country is starting a
business and investing. So using
information, why is investing
important to learn about?
It allows you to make money

Who can be investors?


Anyone, Everyone, YOU!

Comparing the Aspects


What are the three aspects that one has
to consider when investing? Explain each.
1. Risk
We want LOW risk

2. Reward
We want HIGH Reward

3. Liquidity
We want HIGH Liquidity

How does this apply to investing when


comparing the different forms?
You ALWAYS have to give up one

Buying Stock
What are 3 major stock market in the U.S.?
1. New York Stock Exchange (NYSE)
Largest market in the world

2. American Stock Exchange (AMEX)


3. National Association of Securities Dealers
Automated Quotations AKA: NASDAQ
An electronic stock market with
no physical location

Measuring the Stock Market


Dow Jones Industrial Average AKA: The Dow
Most popular
Good gauge of day-to-day stock market activity
What is it?
The average of the 30 most traded stocks on the
NYSE

Standard & Poors 500 AKA: S&P 500


Made up of the 500 largest companies in the
U.S.
Represents about 75% of U.S. stock market
value

Why?
Why do corporations sell stock?
To raise money for expansion or
business expenses

Why do people buy stock?


1. Dividends- A share of the profits that a
company makes
2. Capital Gains- Buying a stock for a
lower price, then selling it in the
future for a higher price
Capital Loss- Selling your stock for less than
you paid for it

Increasing and Decreasing


So what makes the prices of stocks go up
and down?
Supply and Demand

So think back to what you have learned


If a stocks price goes up, then
Demand and Supply

A stocks price falls, then


Demand and Supply

Buying and Selling


What are the two ways that
someone can buy and sell stock?
1. Full Service Broker Gives both advice and makes trades
for you

2. Discount/Online Broker YOU tell them what you want and


they simply make the trade for you

Over the Long Run


Why might the stock market, in general, be a
better risk over the long-run, rather than over
the short-run?
The stock market goes up and down on a shortterm; but it usually goes up in the long run.
BUT?
The stock market is very risky and there are NO
guarantees

How do stock relate to risk, reward, and


liquidity?
Risk

Reward Liquidity

Whats the Stock Market


Like???

The Pit- Stock Market Trailer


2:47

Inside the NYSE- Tour


3:10

A Basket???
Mutual funds are like a basket of stocks.
This means
You own a small amount of many stocks

Why would you want this?


Spreads the risk out between different
stocks
Professionally managed
High liquidity

Raise Money
Corporations can raise money in three
ways
1. Borrow money from the bank
2. Sell stock
3. Issue bonds

What is a bond?
An IOU from a company
Private investors loaning money to
companies that will be paid back plus
interest

I Owe You
What 3 things make up a bond?
1. Maturity Date:
Length of time when the investor is paid
back

2. Coupon Rate:
The interest received

3. Par Value
The bonds value; to be paid at the
maturity date
4. Yield
Yearly return on a bond until maturity

What are the Different


Types?
Types of Bonds1. Corporate Bonds Issued by a business
Higher interest rate than other forms

2. Municipal Bonds Issued by a state or local government


Does NOT have to pay federal taxes

3. Treasury Bills, Notes, and Bonds Issued by the US government


Safest type of bond
Does NOT have to pay state taxes

Stocks or Bonds???
Why would companies rather issue
bonds OVER stocks?
Stocks make a company give up
ownership while bonds do not

How do bonds compare with liquidity,


risk, and reward?
Risk

Reward

Liquidity

Three Basic Rules


Three rules for building wealth
1. Start early
Give money time to grow

2. Buy and hold


Keep your money invested

3. Diversity
Dont put all of your eggs into one
basket

The Rule of 72
The Rule of 72 tells you how long it
will take your investment to DOUBLE
Heres how it works
Regardless of the dollar amount, take
72 and divide it by the interest rate
(with no decimal)
Ex. How long will it take your $5,000 savings
account to double with an interest rate of
72
3%?

= 24
3 years

Rocking Out with CDs


Certificate of Deposit AKA CDs
Must leave the money in for a FIXED period of
time

What is special about this form of interest?


Compound interest

What is the key to compound interest?


TIME, TIME, AND MORE TIME!!!
You build interest on your past interest

How do CDs compare with liquidity, risk, and


reward?
Risk

Reward

Liquidity

Quick Quiz
Would you rather have $1,000
or a penny doubled every day
for a month (31 days)?
A penny doubled every day
is about $11 million
Shows the power of
compounding

Its the Safest!


Savings Accounts
Provide small but steady returns
Insured by the Federal Government

How do savings accounts differ from CDs?


You have access to your money at any
time

How do savings accounts compare with


liquidity, risk, and reward?
Risk

Reward

Liquidity

The Risk Pyramid


1Stocks
2
3
4
5

Most
Risk

Bonds

Mutual Funds
CDs

Savings Account

Least
amou
nt of
Risk

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