Economics

October 24, 1929

Black Thursday

Stock

Investment that shows ownership

NYSE

Wall Street

Dividend

Is Profit

DJIA

Market indicator that averages 65 stocks in 3 different categories

Bond

Bull Market

Prices are rising

IPO

A look to your future!

• Income – Expenses =

• List your expenses

$$$ left over …

For what?????

What are you going to do with the $ left over?

• Fun• Savings account• Money market• CD’s

• Government Bonds• Treasury Bills• Corporate Bonds• Stocks• Mutual Funds

Securities

SecuritiesSecurities refers to bonds, stocks and other documents that are sold by

corporations and governments to raise large sums of $$$$.

These investments are commonly divided into 2 major categories:

1 2

Debt Securities: when companies borrow $

Equity Securities: shows ownership

What is a bond?

• A bond is a certificate representing a promise to pay a definite amount of $ at a state interest rate on a specified maturity date.

• By buying a bond, you become a creditor of the organization and in return your $ is used to help build the company.

More about Bonds

• Corporate bonds – bonds issued by a corp.• Government bonds - bonds issued by the

government.• Face value – AKA maturity value – the amount is

says on the face of the bond.• Bonds are sold in Bond Markets• Some risk (more in corporate bonds)• Bond prices are determined by buyers and sellers

in the bond market.

Government BondsMunicipal Bonds US Savings Bonds

Exempt from Federal and most state income taxes.

Low/no risk

Interest usually not as high as corp. bonds.

Can invest small amounts

Usually sold in amounts of $1,000 or more.

Series EE savings bonds

Very low risk $50 – 10,000

Payroll deductions

Tax deferred

Bonds cont.• Interest earned = purchase price –

redemption (payoff value)

• The time it takes for a bond to mature will be determined by the economy and current interest rates.

• Purchase limit $30,000 (face value)•Pays interest when bond is cashed•Can be purchased at any financial institution.•HH pays interest semi-annually directly to the bondholder.•No purchase limit of HH bonds.

What does a stockbroker do?

• Searching for potential clients using advertising, mailings lists, and personal contacts.

• Interviewing clients to determine financial goals and resources.

• Selling financial products and services to clients for investment purposes.

• Completing computerized forms to process transactions requested by clients.

Investing in Stocks

• You become part owner of a business• Stock certificate shows representations of stocks

purchase.• Dividends = profit• High risk … High return.• Bond holders are paid first in goods times or bad

times.• Stockholders may not get paid at all in bad

times/bankruptcy.

Investing in Stocks cont.

• Market value – price that is bought and sold on the market at one particular time – this is determined by how well the business is doing.

Preferred stock vs. Common stock

• PS owners get paid dividends first.

• Less risk than common stock

• No voting rights in a corporation.

• CS owners are invited to shareholder meetings.

• Are paid dividends after preferred stock holders.

• CS holders have more potential to make money – higher risk … higher earnings.

What do you look for in choosing a stock?

• Company’s net worth

• Amount of debt

• Sales revenue (how much $ they bring in)

• Profits

• Dividend history

• Current outlook for the company’s product and service.

SEC requires companies to file detailed reports electronically.

If you are considering investing in a company, you should ask the following

questions …1. Has the company been profitable over a period

of years?2. Have the company’s managers made good

business decisions?3. Does the company have growth potential in

coming years?4. Does the company have an unusually large

amount of debt?5. How does the company compare with others in

its industry.

You should also consider …

• The yield of a stock– Dividend = Dividend per share

Market Price p/ share

The higher the better

And …

• Price Earnings Ratio – The ratio of a stock’s selling price to its

earnings per share.– It gives you an indication of whether the stock

is priced too high or low in relation to its earnings per/share.

The lower ratio the better

• Stockbroker – licensed specialist in the buying and selling of stocks and bonds for a free called a commission.– Full service broker – provides you with

information about securities you may want to buy.

– Discount broker – places orders only. Charges lower commission.

•Brokers work through stock exchanges – business organizations that accommodate the buying an selling of securities.

–NYSE – New York Stock Exchange•Mainly large companies ?

–AMEX – American Stock Exchange•Medium size companies ?

–NASDAQ – smaller companies?

Mutual Funds

• Consist of buying and selling a variety of stocks and bonds in one family.

• Less risk because where one stock goes down another may go up and it offsets the loss.

Online Investing

• Becoming a standard practice for many individual investors

• Get quotes for companies• Buy and sell stocks• Maintain a portfolio of your investments• Learning tips for new investors• Research company news, income statements,

annual reports, and stock performance histories.

Investment Tradeoffs

Investment Safety Liquidity Rate of return

Savings acct

$ market

CD

Gvt bonds

Corp bonds

Pf stock

Cm stock

Mutual funds

Do this at the end of the unit.

• Set up a portfolio for the following people.

• Starting out

• Saving for college fund

• Retirement age

• Middle aged.