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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
Risk and Reward
   • The bigger the risk the bigger the potential
     payoff.
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
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
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
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
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
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
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
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
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”
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
Moving Markets
  • Values of investment securities rise and fall



  • Five important factors
     –   Investor action
     –   Business conditions
     –   Government actions
     –   Economic indicators
     –   International events and conditions
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)

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Smart investing intro to financial markets

  • 1.
  • 2. 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
  • 3. Risk and Reward • The bigger the risk the bigger the potential payoff.
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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”
  • 13. 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
  • 14. Moving Markets • Values of investment securities rise and fall • Five important factors – Investor action – Business conditions – Government actions – Economic indicators – International events and conditions
  • 15. 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)