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Smart investing intro to financial markets


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Smart investing intro to financial markets

  1. 1. Objectives • Understand relationship between risk and return • Learn about U.S. financial markets and investment products • What affects market prices • Government regulation of financial markets
  2. 2. Risk and Reward • The bigger the risk the bigger the potential payoff.
  3. 3. Investment Risks • Interest Rate risk – Risk of change in asset value due to change in interest rates • Business Failure risk – Risk that the business will fail • Market Price risk – Risk that the market price of the investment drops • Inflation risk – Risk that return on an investment will lose purchasing power • Political risk – Risk of government actions negatively affecting the value of the investment • Fraud risk – Investment is designed to deceive or misrepresent facts
  4. 4. How Financial Markets Work • Financial markets is where people and money come together • Supply and demand ─ Demand is the quantity of goods that consumers want to purchase ─ Supply is the quantity of goods available for consumers to purchase ─ If supply outweighs demand the price of a good will go down and vice versa
  5. 5. Exchanges • Exchanges serve as central locations where buyers and sellers meet • Can be a physical location or a network of computers • Several exchanges make up the stock market − New York Stock Exchange (NYSE) − Nasdaq stock market • Private companies are not traded on exchanges
  6. 6. The Market Meets the Web • Investing can take place online • Need to be informed – Know the investment you purchase – Know the ground rules of the market – Know the level of risk • It’s easier to lose than to make money through a click of a button
  7. 7. Saving • Returns for saving at a bank are low, so is the risk • Most accounts are insured by the FDIC or NCUA • Certificates of deposit (CD) – Specific amount of money at a fixed interest rate over a specified period of time – The longer the time frame the higher the interest rate – CDs are insured up to a certain amount if the financial institution where they were purchased is a member of the FDIC or NCUA
  8. 8. Stocks • Stocks represent a partial ownership of a company • Common stocks versus preferred stocks – Common stock carries a voting right – Preferred stock does not carry a voting right, but normally receive a fixed dividend – Preferred shareholders need to be paid before common shareholders • Stock price – Amount paid for one share of stock • Dividends – Distribution of a company’s profit – Generally paid quarterly
  9. 9. Different Kinds of Stock • Different size classifications: Classification Market Capitalization Example Mega Cap Greater than $200 Billion Exxon Mobil Large Cap Greater than $10 Billion IBM Mid Cap Between $2 Billion and $10 Billion Vulcan Materials Small Cap Less than $2 Billion Panera Bread Company Micro Cap Between $50 Million and $300 Million Reddy Ice Nano Cap Less than $50 Million Autobytel • Growth stocks • Income stocks • Blue chips • Value stocks
  10. 10. Bonds • Loans given to a company or a governmental entity • Bond prices fluctuate with interest rates • Types of bonds – Municipal bonds – Treasury bonds – Federal agency bonds – Corporate bonds – Asset backed securities • Bonds are traded in the over the counter market • Quoted in percent of face value
  11. 11. Mutual Funds • Invests pooled money in various types of investments – Fund manager buys and sells on behalf of the fund’s shareholders – The price of a share of a(n) (open end) mutual fund is called its net asset value (NAV) • Benefits of mutual funds – Diversification – Professional management – Liquidity • Commissions and fees – “12(b)-1 fee”
  12. 12. Derivatives • Financial instrument whose value depends on the value of a another asset • Speculative investment • Need to be a knowledgeable investor who is willing to take high risk • Have to be prepared to lose all of their investment
  13. 13. Moving Markets • Values of investment securities rise and fall • Five important factors – Investor action – Business conditions – Government actions – Economic indicators – International events and conditions
  14. 14. Regulation of Financial Markets • State regulation • Federal regulation – Securities and Exchange Commission (SEC) – Security Investors Protection Corporation (SIPC) – Commodity Futures Trading Commission (CFTC) • Self Regulatory Organizations (SRO) – Financial Industry Regulatory Authority (FINRA) – National Futures Association (NFA)