Investments By: Bowowow-Stickalele Types of Savings Basic savings accounts - do not require a minimum amount, usually have less than 1% interest rates, have few restrictions on accessing money Money market accounts - non-financial account that pays interest based on current interest rates in the money markets. Online savings accounts - similar to basic savings accounts but have higher interest rates because it is online Credit Unions - similar to banks but are owned by their customers and have high interest rates Financial Assets Financial assets are claims on the property and the income of the borrower Bonds Components coupon rate: the stated interest on the debt maturity: the life of the bond par value: the principal or the total amount initially borrowed that must be repaid to the lender at maturity Prices $30 twice a year for 20 years, plus a final par value payment of $1,000. However, investors can offer $950, $1,000, $1,100, or any amount for the future payment Yields The bonds current yield is the annual interest divided by the purchase price Bonds cont. Ratings: CDs A Certificate of Deposit (CD) is when you leave your money alone for a long period of time, anywhere from months to even years. You cannot withdraw money whenever you please unless you want to pay a penalty. Banks try to lure new customers in by using promotional CDs giving high interest rates. Other types of CDs are: ~ Stock-Indexed: based on the stock market ~ Callable: long term (10-15 years) with high interest rates (However, the bank may call the account if the interest rate drops ~ Global: tied to currency rates Corporate Bonds Corporate bonds are a main source of corporate funds. They can go as low as $1,000 or go even higher to $10,000. Junk bonds (exceptionally risky: Moodys Ba or lower) have a higher rate of return as compensation. Corporate bonds are used for long term investments but can also be quickly sold if money is needed. Also known as munis, are bonds issued by state and local governments. Benefits of Municipal Bonds: Generally regarded as safe investments Unlike companies, state and local governments dont go out of business so they rarely default Since the government has the power to tax, it can be presumed that in the future they will be able to pay interest and principal for any bonds they have issued Municipal Bonds State Issued Bonds:Local Govt issued bonds: Finance highwaysPay for baseball parks and football stadiums Finance state buildingsFund libraries and parks Finance some public worksFund other civic improvements Treasury Notes/Bonds When the federal government borrows funds for periods lasting longer than a year, it issues Treasury notes and bonds Treasury Notes are U.S. government obligations with maturities of 2 to 10 years and Treasury Bonds Have a maturity rate of 30 years: Pay interest every 6 months until they mature Only collateral that secures both is the faith and credit of the U.S government Each come in denominations of $100 so small investors can afford to buy them Notes and Bonds are issued electronically and are purchased directly from the U.S. Treasury by investors Popular because they are generally regarded as the safest of all financial assets but have the lowest returns of all financial assets due to trade-off between risk and return IRAs Individual Retirement Accounts are long-term, tax-sheltered time deposits that can be set up as part of an individual retirement plan Example: A worker deposits $4,000 annually to an IRA and their spouse opens a separate account, also depositing $4,000. The worker can deduct these deposits from the taxable income which shelters $8,000 from the individual income tax. Though taxes on the interest and principal will eventually have to be paid, the tax-deferment feature allows the worker to postpone the taxes until he or she is retired and in a lower tax bracket creating an incentive to start savings asap. Markets for Financial Assets Capital Market: A market in which money is loaned for more than one year. Money Market: A market in which money is loaned for periods of less than one year. Primary Markets: A market where only the original issuer can sell or repurchase a financial asset. Secondary Market: A market where existing financial assets can be resold to new owners. Stock Market Equities: Shares of common stocks that represent ownership of corporations Stockbroker: A person who buys or sells equities for clients Efficient Market Hypothesis (EMH): The argument that stocks are usually priced correctly and that bargains are hard to find because stocks are followed closely by so many investors Wall Street: A street in lower Manhattan that is the original home of the New York Stock Exchange. The street is the historic headquarters of the largest U.S. brokerages and investment banks. Many have since relocated to other areas of Manhattan and the United States Wall Street Schoolhouse Rock Shares The capital of a company is divided into shares. A share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company. There are two main types of shares: ~ Equity: gives the power to share the earnings/profits in the company and also any losses, gives the right to vote in people at annual general meetings ~ Preference: earn their holders only dividends (sum of money paid regularly to shareholders), which are fixed, giving no voting rights Mutual Funds A company that sells stock in itself to individual investors Allows people to invest in the market without risking all they have in one or a few companies Staff is hired for the mutual funds to monitor market conditions and analyze many different stocks and bonds before deciding which ones to buy or sell Net Asset Value (NAV): The market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued 401k A 401k plan is a retirement plan sponsored by the employer. This lets the worker save money before taxes are taken out of their paycheck. Measure Stock Performance Dow Jones S & P An indicator of stock market prices; based on the share values of 30 blue- chip stocks listed on the New York Stock Exchange; "the Dow Jones Industrial Average is the most widely cited indicator of how the stockmarket is doing" The world's leading Index Provider and the foremost source of independent credit ratings. Standard & Poor's has been providing financial market intelligence to decision-makers for more than 150 years. In addition to Standard & Poor's Ratings Services and S&P Indices, the company has a third division, S&P Capital IQs, which provides data, research and analytics to Institutional investors and Investment Advisers. Standard & Poor's was acquired by The McGraw-Hill Companies in 1966. Bull vs. Bear Market When the Stock market prices increase for several months at a time this is a bull market. A bear market is the opposite, when the Stock market prices decrease for several weeks at a time. The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market. Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. However it's difficult to predict consistently when the trends in the market will change. Capital Gains Simple version: Profit from the sale of property or of an investment An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price. Liquidity and Returns Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market, such as a country's stock market or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid. Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. There are several ratios that express accounting liquidity. returns are profits made from investments. The NYSE The New York Stock exchange was founded in 1729 by 24 stockbrokers and merchants. Today is is over 36,000 square feet and it where the daily high stake stocks are bought and and sold. Companies pay initial fees of 250,000 and listing fees can reach 500,000 just to be listed on the NYSE. The NYSE functions as auctioneer for 2,600 US and foreign companies. After 214 years of non-for-profit exchange, the NYSE went public on march selling shares in itself. It also merged with Archipelago Holdings Inc and Pacific Exchange to become the NYSE group, the largest stock exchange ever. (Skinny meat tube) Stock Market Crash The Wall Street Crash of 1929, also known as Black Tuesday, the Great Crash, or the Stock Market Crash of 1929, began on October 24, 1929, and was the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its fallout. The crash signaled the beginning of the 10-year Great Depression that affected all Western industrialized countries.