Download Chapter 9, Section 3 Stocks, Bonds, and Futures Pgs 204 – 213 Why

Chapter 9, Section 3
Stocks, Bonds, and Futures
Pgs 204 – 213
Why Buy Stocks?
 gain a profit
 limit risk on investment
become part owner of a corporation
Profit Potential
1) Dividends – income stocks. Increase value – growth stocks.
2) Sell at a higher price than purchase price
Vocabulary: capital gain – sell for more than purchase price
capital loss – sell for less than purchase price
Limited Risk – limited liability
Ownership – become owner in a corporation and vote on company matters.
Vocabulary: stock split (share prices tend to rise afterward)
How Stocks Are Traded
Brokers and Analysts
Vocabulary: brokers – link buyers and sellers of stock
Brokers earn a profit by collecting a commission or fee per transaction.
Investment Banks
Buy and sell large blocks of stock from companies to public
Vocabulary: investment bank
Stock Exchanges. NYSE, 1792, largest in US. 2,000 transactions/second due to
Technology. Over 3,000 companies. Must purchase a seat on exchange.
Over-the-Counter Market. Such as NASDAQ. Smaller corporations that don’t meet
NYSE standards.
Determinants of Stock Prices
Corporate Finances – measure in profits/losses. Blue chip – high quality products with
Good long term prospects. In demand during both up and down swings in
market.
Investor Expectations – increase demand (buy) when expect market to increase.
Decrease demand (sell) when value of market decreases.
Vocabulary: bull market – Dow rises
bear market – Dow falls
DOW records stock prices of 30 major industrial companies.
External Forces – government statistics, international events, elections
For ex. Poison in Tylenol bottles, 9/11
Why Buy Bonds? – lower yield than stocks – offer less risks
Vocabulary: yields – interest or money owed to a bondholder
Corporate Bonds – raise large sums of money that might be hard to get from a bank.
Purchase at face value. Receive an annual interest payment. On maturity date
investor collects final interest and principal.
Government Bonds – bonds, bills, notes. 90 days  30 years. Interest is exempt
From state/local taxes. Safest of all investments.
Why Buy Futures? – High risk. Require knowledge of commodity. Traders accept investor’s
money today in exchange for promise to deliver goods at a future date. Buyers and
sellers make/lose money between price on contract date and price at delivery.
Vocabulary: futures – agricultural products such a corn, wheat. Industrial products such
as copper, crude oil. Precious metals such as gold, silver.
Regulation of the Security Industry
Clayton Antitrust Act 1914
Federal Securities Act 1933
Securities and Exchange Commission 1934
Vocabulary: prospectus – fact sheet containing data on a company’s finances.