Business in Business in Action 7e Action 7e Bovée/ThillBovée/Thill

Business in Business in Action 7e Action 7e Bovée/ThillBovée/Thill

Financial MarketsFinancial Marketsand Investment and Investment

StrategiesStrategies

Chapter 19Chapter 19

Learning Objectives

1. Distinguish between common stock and preferred stock and explain the difference between market value and intrinsic value

2. Explain the three key variables that distinguish bonds, compare the advantages and disadvantages of owning bonds, and list the major types of bonds

3. Define mutual fund and explain the advantages and disadvantages of this popular investment vehicle

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Learning Objectives

4. Define derivative and identify the major types of derivatives

5. Describe the four major types of financial markets

6. Describe four major steps required to become an investor

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Stocks

• Stock Ownership of or

equity in a company

a share of stock represents a specific portion of ownership

• Securities Investments such

as stocks, bonds, options, futures, and commodities

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19-6

Investment Categories of Common StockExhibit 19.1

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Types of Stock

• Common Stock Shares of ownership that include voting rights

• Preferred Stock Shares of ownership without voting rights but

with defined dividends

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Stock Valuation

• Par Value the value assigned when the stock is first

issued

• Book Value The difference between the assets and

liabilities as listed on the balance sheet

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Stock Valuation (cont.)

• Market Value The price at which

the stock is actually selling in the stock market

• Intrinsic Value An estimate of what

a company is actually worth, independent of book and market values

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Stock Valuation

• Price/ Earnings Ratio The market value per share divided by the

earnings per share

• Stock Split The act of dividing a share into two or more

new shares and reducing the market value by the same ratio

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19-11

How to Read a Stock QuotationExhibit 19.2

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Bonds

• Face Value The amount of money, or principal , a bond

buyer lends to a bond issuer; also known as par value or denomination

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Bonds (cont.)

• Maturity Date The date on which the principal of a bond will

be repaid in full

• Yield Interest income a purchaser receives from the

bond

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19-14

How to Read a Bond QuotationExhibit 19.3

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Advantages of Bonds

1. Most bonds are less risky than stocks and many other investments

2. Bonds offer lower volatility than stocks

3. Corporate bonds with twice-yearly interest payments can provide a regular source of income

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Bond Issuers

• Treasury Bills Short-term debt securities issued by the

federal government also referred to as T-bills

• Treasury Notes Debt securities issued by the federal

government that are repaid within 1 to 10 years after issuance

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Bond Issuers (cont.)

• Treasury Bonds Debt securities issued by the federal

government that are repaid more than 10 years after issuance

• Municipal Bonds Bonds issued by states, cities, and various

government agencies to fund public projects

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Bond Issuers (cont.)

• Treasury Inflation-Protected Securities (TIPS) Treasury issues in which the principal amount

is tied to the Consumer Price Index to protect the buyer against the effects of inflation

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19-19

How to Read a Bond QuotationExhibit 19.3

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Mutual Funds

• Portfolio Diversification Spreading investments across enough

different vehicles to protect against significant declines in any one vehicle

• Mutual Funds Financial instruments that pool money from

many investors to buy a diversified mix of stocks, bonds, or other securities

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Advantages of Mutual Funds

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Mutual Funds

• Expense Ratio The annual cost of owning a mutual fund,

expressed as a percentage

• No-load Funds

Mutual funds that do not charge loads

• Load The sales commission charged when buying or

selling a mutual fund19-22Copyright © 2015 Pearson Education, Inc.

Mutual Funds (cont.)

• Index Funds Mutual funds that mirror the composition of a

particular market or index

• Index A statistical indicator of the rise and fall of a

representative group of securities

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Mutual Funds (cont.)

• Exchange Traded Funds (ETFs) Mutual funds whose shares are traded on

public exchanges in the same way as stocks

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Options

• Option The purchased right—but not the obligation—

to buy or sell a specified number of shares of a stock at a predetermined price during a specified period

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19-26

Types of OptionsExhibit 19.7

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Financial Futures

• Financial Futures Contracts to buy or sell a financial instrument

(such as stocks, treasury bonds, and foreign currencies) for a set price at a future date

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Financial Futures (cont.)

• Commodities Futures Contracts to buy or sell specific amounts of

commodities for a set price at a future date

• Currency Futures Contracts to buy or sell amounts of specified

currency at some future date

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Financial Futures (cont.)

• Credit Derivatives Derivatives used to reduce a lender’s

exposure to credit risk

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Financial Markets

• Stock Exchanges Organizations that

facilitate the buying and selling of stock

• Bond Market The collective

buying and selling of bonds

most bond trading is done over the counter, rather than in organized exchanges

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Financial Markets (cont.)

• Money Market An over-the-counter marketplace for short-

term debt instruments such as Treasury bills and commercial paper

• Derivatives Market A market that includes exchange trading (for

futures and some options) and over-the-counter trading

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Establishing Investment Objectives

• Why do you want to get more money?

• How much will you need - and when?

• How much can you invest?

• How much risk are you willing to accept?

• How much liquidity do you need?

• What are the tax consequences?

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Learning to Analyze Financial News

• Bull Market A market situation

in which most stocks are increasing in value

• Bear Market A market situation

in which most stocks are decreasing in value

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Creating an Investment Portfolio

• Investment Portfolios Collections of

various types of investments

• Asset Allocation Management of a

portfolio to balance potential returns with an acceptable level of risk

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Buying and Selling Securities

• Broker A certified expert who is legally registered to

buy and sell securities on behalf of individual and institutional investors

• Market Order A type of securities order that instructs the

broker to buy or sell at the best price that can be negotiated at the moment

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Buying and Selling Securities

• Limit Order An order that stipulates the highest or lowest

price at which the customer is willing to trade securities

• Stop Order An order to sell a stock when its price falls to

a particular point, to limit an investor’s losses

THE END

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