Download Financial system

1. Explain the difference between saving & savings and why
saving is important for capital formation.
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: 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?)
• 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
• 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
• 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
1. Relationship between risk & return
• Higher risk yields higher return; safer risk yields
lower return
• Depends on your comfort level
2. Personal goals/reasons for investing
3. Simplicity of investing/avoid some
investments
• Too complicated
• Too good to be true
4. 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 (IRA’s)
•401(k) plan – a tax-deferred
investment & savings plan that
acts as a personal pension fund
for employees (mainly
employer-sponsored plans)
– Don’t pay income taxes on $ you
contribute until you withdraw it
– Many employers will match your
contribution by 25% to 100%
•
Bonds – long-term obligations that
pay a stated rate of interest for a
specified # of years (low-risk)
– 3 main components:
1) Coupon – stated interest on the debt
2) Maturity – life of the bond
3) 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)
• Individual Retirement Account (IRA)
– a long-term time deposit, with
annual contributions of up to $3000
per year not taxed until withdrawal
during retirement
• Roth IRA – an IRA whose
contributions are made after taxes so
no taxes are taken out at maturity
(fewer withdrawal restrictions &
requirements)
• In addition to financial assets, investors may
buy equities – stocks representing ownership
shares in corporations
• Markets are competitive because there are a
large # of buyers & sellers
• Investor confidence is important for market
stability – stocks tend to be much higher risk
investments
• Stock prices can vary considerably from one
company to the next ($.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 the
2 ways to
purchase
equities
(p. 329)
• A number of organized
securities exchanges exist –
places where buyers & sellers
meet to trade securities
• 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:
1) 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?
2) What is AMEX? (p. 330)
 Where is it located?
 It has how many listed stocks?
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 aren’t 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?
• Investors consult 2 indicators to
check their stocks’
performances:
1) What does DJIA stand for? (p. 332)
 Why is it significant?
 Its sample consists of how many
stocks?
2) What does S & P stand for?
 It uses the price changes of how
many stocks?
 Unlike the DJIA, it reports on stocks
listed where?
• 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)