Transcript FINANCIAL MARKETS

Money, Banking, & Finance
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Money & Banking
Federal Reserve
Managing Your Money
Planning & Budgeting
Saving & Investing
Bonds & Other Financial Assets
The Stock Market
How to Read Stocks
Money & Banking
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Money
Fiat/Legal Tender – money that has value because a government fiat,
or order, has established it as acceptable for payment of debts.
Medium of Exchange – use of money in exchange for goods or services.
Unit of Accounting – use of money as a yardstick for comparing the
values of goods and services in relation to one another.
Store of Value – use of money to store purchasing power for later
use.
Banking
Interest Rate – amount of money the borrower must pay for the use
of someone else’s money. Expressed in a percentage.
Prime Rate – rate of Interest banks charge on loans to their best
business customers.
Loans – money that is given with the idea that it will be paid in return.
Collateral – something of value that a borrower lets the lender claim if
a loan is not repaid.
Credit Unions – depository institution owned & operated by its
members to provide savings accounts & low interest loans to its
members.
Savings & Loans – depository institution that, like a commercial bank,
accepts deposits & lends money.
FEDERAL RESERVE
Federal Reserve (FED) – created by Congress in 1913 to “provide for a
safer and more flexible banking and monetary system.”
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FED – 12 Districts – each served by one bank, divided into
territories.
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FED decisions do not have to be ratified by President or Congress.
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Appointments to the Board of Governors – President appoints –
Congress approves.
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FED reports to Congress on its policies.
Purpose of the FED – control nation’s money supply.
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Tight Monetary Policy – makes credit expensive and in short supply
in an effort to slow the economy. (inflation)
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Loose Monetary Policy – makes credit inexpensive & abundant, to
increase money in circulation. (recession)
Goal of the FED – balance the need to create long-term growth in the
economy – more jobs, consumer goods, continuing higher standard of
living – with the need to avoid inflation (higher prices).
Tools of the Federal Reserve
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Discount Rate – the amount of interest that commercial banks pay
the FED for borrowed funds. Banks in turn set their lending rates
for companies, individuals, home mortgages, and auto loans.
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Reserve Requirement – the amount of money banks must hold as
security for loans. The higher the requirement, the less money
banks have to loan. (expressed in a %)
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Buying & Selling Government Securities – bonds and loans the
government has received from private individuals and banks.
Managing Your Money
Types of Income
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Disposable Income – Money left over after taxes.
Discretionary Income – Money left after paying for necessities.
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Consumerism – a movement to educate buyers about the
purchases they make & demand better & safer products.
Caveat Emptor – “let the buyer beware”
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Gather Information before you buy.
Report Faulty Products.
Make Fair Complaints.
Consumer Rights
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Consumer Bill of Rights
a Safe Product. Will not harm health or lives.
be Informed. Must not be misled by producer.
Choose. Have a variety of products available.
be Heard. Consumer interests heard in writing laws.
Redress. Payment for damages from producer.
Consumer Responsibilities
Planning & Budgeting
Understanding a Budget
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Budget – a record of what you earn & spend.
Income – the money you earn.
Expenses – money you spend on everything including saving.
Understanding Credit
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Credit – borrowing money to pay for something now, promise to pay
back later.
Lender – person who lends money.
Borrower – person receiving the loan.
Interest – the cost for the use of the money.
APR – (annual percentage rate) – expressed as a %.
Credit Rating – evaluation of your ability to pay back a loan.
Collateral – property or other items of value that are used as a
backup for a loan. Can be seized if you default.
Sources of Credit
1) Banks
2) Credit Unions
3) Financial Institutions
SAVING & INVESTING
• Investment – using money to earn money later.
• Financial System – made up of savers and borrowers
• Financial Intermediary – takes transactions between savers
and borrowers.
Financial Intermediaries
savings & loan associations
financial company
mutual fund
life insurance company
pension fund
Interest Rates
CD – certificate of deposit
Higher rate because bank
Holds $ longer
Interest rates based on
length of loan & risk
Saving & Investing Vocabulary
portfolio – collection of financial assets
prospectus – investment report
intermediaries give to clients
liquidity – the ease with which investment
can be turned to cash
return - $ above the original investment
diversification – investing in different
types of businesses, etc… (spreading out
to reduce risk)
BONDS & OTHER FINANCIAL ASSETS
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Bond – a loan to a company,
government, etc… (low risk
investment)
3 Components of a Bond
coupon/interest rate
maturity – time payment due
par value – amount to purchase
Types of Bonds
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Savings bond
Treasury bond
Treasury bill
Treasury note
Municipal bond
Corporate bond
Junk bond
THE STOCK MARKET
Stock Market Vocabulary
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Share/equity – portion of
company
Dividend – profit from stock
Capital gain/loss –
increase/decrease in amount of
investment
Stock split – cuts price of
stock in ½; doubles shares
Stockholder – owner of shares
of stock
Stock brokerage – firm that
buys/sells stock
Stock exchange – stock is
bought and sold
Stock Exchanges
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NYSE - largest – biggest
companies listed
AMEX – smaller companies
OTC – electronic trading
NASDAQ – market for OTC
Stock Market Analysis
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Bull Market – on the rise
Bear Market – on the decline
Dow Jones Industrial Average
30 companies from different
sectors; overall health of the
market
S&P 500 – 500 companies,
mainly NYSE
How to Read a Stock Table
1 - high price for past year
2 - low price for past year
3 - company name
4 - stock symbol
5 - last annual dividend/share
6 - dividend/closing price (per
share)
7 - latest CP/latest net earning
8 - shares traded that day (in 100s)
9 - that day’s high price
10 - that day’s low price
11 - closing price
12 - difference btwn current CP and
previous CP