understanding your options in today’s financial markets
TRANSCRIPT
Topic Overview
InvestingFinancial System
Investment Choices
Savings AccountsCD’s
Mutual FundsBondsStocks
What is investment?
The act of redirecting resources from being consumed today so that they will create
benefits in the future.
Private Enterprise and Investing
When people save or invest their money, their funds become available for businesses to use to expand and grow. In this way, investment promotes economic growth for the entire economy.
For investment to take place an economy needs a healthy financial system. The financial system includes savers and borrowers and allows for the transfer of money between them.
What are financial intermediaries?
Financial intermediaries are institutions that help channel funds
from savers to borrowers.
What are some examples of financial intermediaries?
1. Banks and Credit Unions2. Finance Companies3. Life Insurance Companies4. Pension Funds
Federal Deposit Insurance Corporation (FDIC)
Enacted by the Banking Act of 1933
Purpose: Restore public confidence in the banking system, prevent bank runs
Deposit insurance shifts the risk of bank failures from individuals to the FDIC
$2,500 -- $250,000
No money has been lost in the banking system since it has been enacted
Depository Institutions: Banks, Credit Unions
Offer a variety of consumer services
85% of their loans are real estate loans
Credit unions vary from traditional banks because they are cooperative financial institutions that are owned by depositors/members.
Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC
Offer lower interest loans and higher interest savings accounts to their members
What are the Three Main Functions of Financial Intermediaries?
1.Sharing Risk
2.Providing Information
3.Providing Liquidity
The Federal Reserve System The Fed’s organization
Created in 1913Board of governors
○ 7 membersAppointed by the president & confirmed by the SenateHave 14-year terms
○ The chairmanDirects the Fed staffPresides over board meetingsTestifies regularly about Fed policy in front of congressional
committees.Appointed by the president (4-year term)
Federal Reserve Board in Washington, D.C. 12 regional Federal Reserve Banks
○ Major cities around the country○ The presidents - chosen by each bank’s board of directors
The Federal Reserve System The Fed’s jobs
Regulate banks & ensure the health of the banking system○ Monitors each bank’s financial condition ○ Facilitates bank transactions - clearing checks○ Acts as a bank’s bank○ The Fed – lender of last resort
Control the money supply○ Quantity of money available in the economy
Monetary policySetting of the money supply by policymakers in the central bank
○ Federal Open Market Committee (FOMC)7 members of the board of governors5 of the twelve regional bank presidentsMeets about every six weeks in Washington, D.C.Discuss the condition of the economyConsider changes in monetary policy
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The Federal Reserve System Fed’s primary tool - open-market operation
Purchase & sale of U.S. government bonds FOMC - increase the money supply
The Fed: open-market purchase○ Increase the money supply
FOMC - decrease the money supplyThe Fed: open-market sale
○ Decrease the money supply
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Other Tools of the Federal Reserve Bank
1. Reserve ratio (fractional reserve banking)
2. Discount rate3. Federal funds rate
Things to Consider….
Return and LiquiditySavings accounts have greater
liquidity, but in general have a lower rate of return.
Certificates of deposit usually have a greater return but liquidity is reduced.
Return and Risk• In general, the higher potential
return of the investment, the greater the risk involved.
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What are some things that you may
consider before choosing an
investment option?
Saving and Investing1. Savings Accounts
Savings○ A bank account used for depositing money that may be
needed in a short amount of time.○ Highly Liquid/Low Interest
Money Market ○ Bank account that allows you to save and write a limited
number of checks.○ Higher interest (VARIABLE) than a savings account, but
generally requires a minimum balance and has increased fees.
○ Liquid/Variable interest
Time Deposit (Certificate of Deposit) ○ Bank accounts that offer a guaranteed interest rate for a
fixed amount of time.○ Banks charge substantial penalty for withdrawing before
the CD has reached maturity○ Low Liquidity/Higher interest
2. Bonds Loans or IOU’s from the
government or corporation that must be repaid to the investor.
Characteristics: coupon rate (interest rate), maturity (time until payment is due), par value (face value/principal)
Types: Savings, Treasury, Municipal, Corporate, Junk
Lack liquidity, moderate return, generally low risk
3. STOCKS
Represent a piece of ownership in a corporation
Potential Benefits: Capital Gains and/or Dividends
Types of Stock: Preferred (dividends) and Common (dividends based on the market)
Highly liquid, moderate to high risk
4. MUTUAL FUNDS
Fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds and other financial assets.
Naturally diverse investment option, which reduced risk
Liquidity and risk vary by type
The Stock Market Corporations can raise money by
issuing stock which represents ownership in the corporation.
A portion of stock is called a SHARE.
By selling shares of stock, corporations raise money to start, expand and develop their businesses.
In this way, stocks encourage overall economic growth.
Corporation
Economy
Investor
Stock Market Basics
How Stocks Are Traded
A stockbroker is a person who links buyers and sellers of stock.
Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.
Stock exchanges are markets for buying and selling stock.
DIVIDENDS ~PORTIONS OF A CORPORATION’S PROFITS THAT
ARE PAID OUT TO STOCKHOLDERS.
~GENERALLY, THE HIGHER THE CORPORATE PROFIT, THE HIGHER THE DIVIDEND.
CAPITAL GAINS~MONEY EARNED WHEN A STOCKHOLDER SELLS
STOCK FOR MORE THAN THEY PAID FOR IT.
How do investors profit from stocks?
What are four main types of stock?
Dividend Difference
Growth Stock
Pays few or no dividends.
Income Stock
Pays regular dividends.
Decision Making
Difference
Common Stock
Voting member, last payout
Preferred Stock
Non-voting member, first
payout
Measuring Stock Performance Bull and Bear Markets
When the stock market rises steadily over time, a bull market exists.
When the stock market falls over a period of time, it’s called a bear market.
Stock Performance IndexesThe Dow Jones Industrial Average The Dow is an index that shows how stocks of 30 companies
in various industries have changed in value.The S & P 500 The S & P 500 is an index that tracks the performance of 500
different stocks.
$87 Billion
The Crash of 1929
Between the years of 1925 and 1929 the value of stocks being sold on the New York Stock Exchange had more than tripled.
$27 Billion
1925 1929
GM rose from $268 to $452 per share!!
Causes of the Crash Dangerous investment practices
SpeculationBuying on the Margin
False sense of prosperityThe “Roaring Twenties” brought unprecedented
amounts of prosperity to the United States. During this period consumers had access to many new products and believed that they could all have the glitz and glamour of the era.
Many spent well beyond their means and then utilized the largely unrestricted credit available to keep on purchasing.
Government policies “Laissez Faire”Lack of business regulation Lack of bank regulationLack of stock market regulation
The Beginning of the End: Black Thursday
Despite signs in September that a stock market crash may occur, many people continued to invest in the market.
By late October it became clear that the market was getting increasingly dangerous. Professional investors began to pull out of the market which resulted in a decline in prices.
On October 24, 1929 almost 13 MILLION shares of stock were frantically traded.
As stock values plummeted below the amount borrowed to purchase them, brokers demanded that investors repay their loans. When they couldn’t, brokers offered the stocks for sale.
The Bottom Falls Out:Black Tuesday
On October 29, 1929 the stock market collapsed. Over 16 MILLION shares of stock were sold on that
day and by the end of the day many stocks had no value at all!
Investors lost over $30 BILLION which was equivalent to:1/3 of the United States gross domestic productWages of ALL Americans for that entire year!
The failure of the banks was one of the most devastating results of the stock market crash because it resulted in non-investors losing their savings
October 29, 1929