Savings, InvestmentsSavings, Investments& the Stock Market& the Stock Market

What To Do With Income?What To Do With Income? Pay taxesPay taxes Spend it (consume today)Spend it (consume today) Save it (delay consumption to future)Save it (delay consumption to future) Invest itInvest it

Using money you have saved to Using money you have saved to purchase a product that will create purchase a product that will create benefits in the futurebenefits in the future

Saving and investing involves trade-offsSaving and investing involves trade-offs

Saving and InvestmentSaving and Investment SavingSaving

Not consuming all current income Not consuming all current income Examples: Savings Account, Certificate of DepositExamples: Savings Account, Certificate of Deposit

Business InvestmentBusiness Investment Production and purchase of capital goodsProduction and purchase of capital goods Examples: machines, buildings and equipment that Examples: machines, buildings and equipment that

can be used to produce more goods and services in can be used to produce more goods and services in the futurethe future

Personal investmentPersonal investment Purchasing financial securities Purchasing financial securities Examples: stocks, bonds, real estate, mutual fundsExamples: stocks, bonds, real estate, mutual funds Pay a higher rate of return in the long run than the Pay a higher rate of return in the long run than the

interest paid on savings accounts.interest paid on savings accounts.

Return, Risk and LiquidityReturn, Risk and Liquidity Rate of Return -Type of profit or loss you Rate of Return -Type of profit or loss you

are getting on your investment (Interest on are getting on your investment (Interest on savings)savings)

Liquidity – ease of turning assets into Liquidity – ease of turning assets into moneymoney

Return and Risk (direct relationship)Return and Risk (direct relationship) Greater risk, higher returns (NASDAQ stocks)Greater risk, higher returns (NASDAQ stocks) Less risk, lower returns (CD)Less risk, lower returns (CD)

Return and Liquidity (inverse relationship)Return and Liquidity (inverse relationship) Greater liquidity, lower return (CD)Greater liquidity, lower return (CD) Less liquidity, greater return (Bonds)Less liquidity, greater return (Bonds)

How Liquid are the Following?How Liquid are the Following?1.1. $20 Traveler’s Check$20 Traveler’s Check

2.2. 30 Day Treasury Bill30 Day Treasury Bill

3.3. Share of Microsoft StockShare of Microsoft Stock

4.4. $5,000 Savings Account$5,000 Savings Account

5.5. Apartment ComplexApartment Complex

6.6. $1 (Dollar) Bill$1 (Dollar) Bill

7.7. Gold bullionGold bullion

8.8. IBM 20-year BondIBM 20-year Bond

9.9. Share in money-Share in money-market mutual fundmarket mutual fund

10.10. Credit card with Credit card with $5,000 line of credit$5,000 line of credit

11.11. Eurodollar savings Eurodollar savings account in a Swiss account in a Swiss BankBank

12.12. Your HouseYour House

13.13. Oil painting by MonetOil painting by Monet

Categorize as “very liquid,” “somewhat liquid” or “illiquid”

1.1. $20 Traveler’s Check$20 Traveler’s Check

2.2. 30 Day Treasury Bill30 Day Treasury Bill

3.3. Share of Microsoft StockShare of Microsoft Stock

4.4. $5,000 Savings Account$5,000 Savings Account

5.5. Apartment ComplexApartment Complex

6.6. $1 (Dollar) Bill$1 (Dollar) Bill

7.7. Gold bullionGold bullion

8.8. IBM 20-year BondIBM 20-year Bond

9.9. Share in money-Share in money-market mutual fundmarket mutual fund

10.10. Credit card with Credit card with $5,000 line of credit$5,000 line of credit

11.11. Eurodollar savings Eurodollar savings account in a Swiss account in a Swiss BankBank

12.12. Your HouseYour House

13.13. Oil painting by MonetOil painting by Monet

Categorize as “very liquid,” “somewhat liquid” or “illiquid”

Major ExchangesMajor Exchanges NYSE - New York Stock Exchange – “NYSE - New York Stock Exchange – “The Big The Big

Board”Board” Founded in 1792, the oldest and most prestigious Founded in 1792, the oldest and most prestigious

stock exchange in the U.S. – 3,000 mostly large-cap stock exchange in the U.S. – 3,000 mostly large-cap companiescompanies

NASDAQNASDAQ - - National Association of Securities National Association of Securities Dealers Automated Quotation SystemDealers Automated Quotation System - - computerized national trading system that lists computerized national trading system that lists more than 5300 small-cap & technology more than 5300 small-cap & technology companies companies

AMEXAMEX - - The American Stock ExchangeThe American Stock Exchange founded founded in 1842 as the New York Curb Exchange – 700 in 1842 as the New York Curb Exchange – 700 companiescompanies

Blue ChipsBlue Chips

Largest most consistently profitable Largest most consistently profitable companies that usually pay dividendscompanies that usually pay dividends Coca-ColaCoca-Cola General ElectricGeneral Electric McDonald’sMcDonald’s Exxon-MobileExxon-Mobile Wal-MartWal-Mart GilletteGillette

Types of StocksTypes of Stocks Common StockCommon Stock

The most basic form of ownership that a The most basic form of ownership that a corporation issues. corporation issues.

It designates that you own a fraction of the It designates that you own a fraction of the company. company.

The value of a common stock is directly The value of a common stock is directly influenced by the successes and failures of influenced by the successes and failures of the issuing company. the issuing company.

It may or may not pay a dividend, which is the It may or may not pay a dividend, which is the portion of the company's profits paid out to its portion of the company's profits paid out to its shareholders.shareholders.

Preferred StockPreferred Stock They receive their dividends before common They receive their dividends before common

stock ownersstock owners If the company goes out of business, If the company goes out of business,

preferred stockholders are paid back the preferred stockholders are paid back the money they invested before the common money they invested before the common stockholdersstockholders

For these reasons, preferred stock is For these reasons, preferred stock is generally less risky than common stockgenerally less risky than common stock

The main drawback of preferred stock is that The main drawback of preferred stock is that it cannot benefit as much from company it cannot benefit as much from company profits because it only pays a fixed dividendprofits because it only pays a fixed dividend

Capital Gains and DividendsCapital Gains and Dividends

Capital GainsCapital Gains A profit made when selling stock at a A profit made when selling stock at a

higher price than they paid for ithigher price than they paid for it. Most . Most people buy stock to make money from capital people buy stock to make money from capital gains. gains.

For example, if you buy 100 shares of For example, if you buy 100 shares of Company XYZ at $100.00 a share (a total Company XYZ at $100.00 a share (a total $10,000 investment) and sold it for $125.00 a $10,000 investment) and sold it for $125.00 a share ($12,500), you’ve realized a capital gain share ($12,500), you’ve realized a capital gain of $25.00 a share, or $2,500.00.of $25.00 a share, or $2,500.00.

DividendsDividends Dividends are the distribution of profits from a Dividends are the distribution of profits from a

company to the stockholderscompany to the stockholders Investors buy stock for the dividend Investors buy stock for the dividend

payments. payments. For example, if Company XYZ declares an For example, if Company XYZ declares an

annual dividend of $10.00 a share and you annual dividend of $10.00 a share and you own 100 shares, you’ll earn $1000.00 a year, own 100 shares, you’ll earn $1000.00 a year, or, $250.00 paid each quarter.or, $250.00 paid each quarter.

Who Decides Dividends?Who Decides Dividends? A companies board of directors decides how A companies board of directors decides how

large a dividend the company will pay, or large a dividend the company will pay, or whether it will pay one at all. whether it will pay one at all.

Quarterly dividend payments are the most Quarterly dividend payments are the most common; annual and semiannual payments common; annual and semiannual payments are less common. are less common.

Usually only large, established companies Usually only large, established companies pay dividends. pay dividends.

This is because smaller companies need to This is because smaller companies need to reinvest their profits to continue growing.reinvest their profits to continue growing.

IPO – Initial Public OfferingsIPO – Initial Public Offerings Taking a company through a public Taking a company through a public

offering on the U.S. securities offering on the U.S. securities markets is a major undertaking markets is a major undertaking

It is a source of pride, an It is a source of pride, an opportunity for business growth, and opportunity for business growth, and a serious legal responsibility. a serious legal responsibility.

Great way to get growth money for Great way to get growth money for expansion.expansion.

Downside – give up controlDownside – give up control

Why Invest in Stock?Why Invest in Stock?

Earn regular income – dividend Earn regular income – dividend paymentspayments

Buy low, sell high…hopefully Buy low, sell high…hopefully ☺☺ Sell at higher price than you bought?Sell at higher price than you bought?

• Capital gainCapital gain Sell at lower price than you bought?Sell at lower price than you bought?

• Capital lossCapital loss When do you reap the benefits?When do you reap the benefits?

Market CyclesMarket Cycles Ups and Downs Ups and Downs

Throughout its history, the stock market has Throughout its history, the stock market has tended to move in cycles of activity. tended to move in cycles of activity.

The stock market is greatly affected by The stock market is greatly affected by economics, social, and political factors. economics, social, and political factors.

While it's impossible to predict the While it's impossible to predict the market's future activity, one thing is market's future activity, one thing is certain: The stock market will continue to certain: The stock market will continue to experience ups and downs. experience ups and downs.

Bull and Bear MarketsBull and Bear Markets Bull: attacks by thrusting horns up Bull: attacks by thrusting horns up

(positive)(positive) Optimistic outlook, investor confidenceOptimistic outlook, investor confidence Prices rising or expected to risePrices rising or expected to rise Can apply to anything that is tradedCan apply to anything that is traded

Bear: attacks by swiping paw down Bear: attacks by swiping paw down (negative)(negative) Prices falling or expected to fallPrices falling or expected to fall Enter a downturn of 15-20% in multiple indexesEnter a downturn of 15-20% in multiple indexes

Psychological effects & speculationPsychological effects & speculation

IndexesIndexes

Each exchange calculates an index, or Each exchange calculates an index, or benchmarkbenchmark, based on the activity of its , based on the activity of its member companies' stock prices. member companies' stock prices.

"The market's up" or “the market's down," "The market's up" or “the market's down," refers to the Dow Jones Industrial refers to the Dow Jones Industrial Average. It is considered a reliable Average. It is considered a reliable indicator of the strength - or weakness - of indicator of the strength - or weakness - of stocks in general. stocks in general. Composite of 30 Composite of 30 companies.companies.

Market Indices & AveragesMarket Indices & Averages A short list of the major U.S. indices:A short list of the major U.S. indices:

Dow Jones Industrial Average (DJIA)Dow Jones Industrial Average (DJIA) Dow Transports (DJTA)Dow Transports (DJTA) Dow Utilities (DJUA)Dow Utilities (DJUA) DJ Wilshire 5000DJ Wilshire 5000 NASDAQ Composite / NASDAQ 100NASDAQ Composite / NASDAQ 100 S&P 500 Index (S&P 500) / S&P 100S&P 500 Index (S&P 500) / S&P 100 Russell 2000Russell 2000 NYSE and AMEX CompositesNYSE and AMEX Composites

Circuit BreakersCircuit Breakers

After the 1987 stock market crash, the After the 1987 stock market crash, the NYSE instituted automatic thresholds NYSE instituted automatic thresholds to reduce market volatility caused by to reduce market volatility caused by program trading.program trading.

These thresholds, know as "circuit These thresholds, know as "circuit breakers," are updated quarterly and breakers," are updated quarterly and use the Dow Jones Industrial Average use the Dow Jones Industrial Average as their benchmark. The current as their benchmark. The current thresholds are:thresholds are:

Three ThresholdsThree Thresholds 800 Point Drop800 Point Drop

An 800-point drop will halt trading for one hour if An 800-point drop will halt trading for one hour if it occurs before 2:00 pm; 30 minutes if between it occurs before 2:00 pm; 30 minutes if between 2:00 pm and 2:30 pm; the drop will have no effect 2:00 pm and 2:30 pm; the drop will have no effect between 2:30 pm and 4:00 pmbetween 2:30 pm and 4:00 pm

1,600 Point Drop1,600 Point Drop A 1600-point drop will halt trading for two hours if A 1600-point drop will halt trading for two hours if

it occurs between 1:00pm; one hour if it occurs it occurs between 1:00pm; one hour if it occurs between 1:00 and 2:00 pm; and halt trading for the between 1:00 and 2:00 pm; and halt trading for the day after 2:00 pm.day after 2:00 pm.

2,350 Point Drop2,350 Point Drop A 2350-point drop will halt trading for the A 2350-point drop will halt trading for the

remainder ofremainder of the day, regardless of the time it the day, regardless of the time it occurs.occurs.

RankRank DateDate Closed Closed Net ChangeNet Change % Change% Change

11 10/19/198710/19/1987 1738.741738.74 -508.00-508.00 -22.61-22.61

22 10/28/192910/28/1929 260.64260.64 -38.33-38.33 -12.82-12.82

33 10/29/192910/29/1929 230.07230.07 -30.57-30.57 -11.73-11.73

44 11/06/192911/06/1929 232.13232.13 -25.55-25.55 -9.92-9.92

55 12/18/189912/18/1899 58.2758.27 -5.57-5.57 -8.72-8.72

66 08/12/193208/12/1932 63.1163.11 -5.79-5.79 -8.40-8.40

77 03/14/190703/14/1907 76.2376.23 -6.89-6.89 -8.29-8.29

88 10/26/198710/26/1987 1793.931793.93 -156.83-156.83 -8.04-8.04

99 07/21/193307/21/1933 88.7188.71 -7.55-7.55 -7.84-7.84

1010 10/15/200810/15/2008 8577.918577.91 -733.05-733.05 -8.54-8.54

Days with Greatest Percentage Lost

Mutual FundsMutual Funds What is a mutual fund?What is a mutual fund?

Diversification of portfolio in one fundDiversification of portfolio in one fund Several businesses to spread riskSeveral businesses to spread risk Not a traditional bank depositNot a traditional bank deposit NOT insured by FDICNOT insured by FDIC NOT guaranteed by banksNOT guaranteed by banks Mutual funds carry risk, including the Mutual funds carry risk, including the

possible loss of principal.possible loss of principal.