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Introduction to Agricultural and Natural Resources The Financial Markets FREC 150 Dr. Steven E. Hastings
The Financial Markets • Sources of Capital for Business Firms and Entrepreneurs – Suppose you want to start a business… – Example – The Hastings Chair Company (HCC)! – Where do you get ?
Stocks • Stocks – What is a stock? • Shares of ownership in a publicly owned company. • Issued buy companies to finance their business activities. – Stocks bought and sold in exchanges (markets). – Many types that appeal to different investors – “large cap”, “small cap”, growth, value, domestic, international, etc.
Types of Stocks • Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. • Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i. e. outside of one of the major exchanges. • Income stocks offer a higher dividend in relation to their market price. • Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business • Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company. • Source: www. finweb. com/investing/types-of-stocks. html
The Risk and Returns Vary Blue is Growth Red is Value 1975 -80 1987 -99 2000 -07
Stocks – Why buy stocks? • Receive dividends (share of profits) and equity (stock price can go up or down; no guarantee). – Who buys them? • Most (more that 50% by 2001) Americans, institutions, retirement funds, college funds, other companies, etc. own equities.
Stock Ownership Source: Equity Ownership in America, 2005 Investment Company Institute and the Securities Industries Association, 2005
Fixed Income Securities (2 types) – Bonds • What is a bond? – Debt obligations (loans or IOU) issued by corporations, universities, and state and local governments. • Where do bonds originate? – Issued as another source of revenue beyond stocks, taxes, tuition, etc. • Bonds issued and then resold in secondary markets; investors can but a variety of different bonds at any time. • Price that you pay for a bond affects the yield (actual return).
Delaware Bond Offering (2010)
FREC 150 – Economics of Agricultural and Natural Resources
Fixed Income Securities • Why buy bonds? – Receive interest annually (fixed mount) and debt (guaranteed). – Bond issuers are “rated” (A, AA, etc. ) to guide investors. • Who buys them? – Most Americans, institutions, retirement funds, college funds, other companies, etc. own bonds.
Fixed Income Securities – Money Market Securities • Include Treasury bills, bank certificate of deposit (CD’s), banker’s acceptances, and commercial papers issued by corporations. • Pay fixed rates of return (low) – secure investments • See Reading List
Why Buy Stocks vs. Bonds? • Difference in stocks and bonds – Stocks • (Dividend – Equity) – neither is guaranteed! • Greater risk; greater return. – Bonds • (Interest - Debt) - both are guarenteed! • Less risk; less return. – Historical Comparisons of Returns
The DJIA Since 1896
Red is Stocks Blue is Bonds 1 YR FREC 150 – Economics of Agricultural and Natural Resources 30 YRS
Money Magazine, Jan/Feb - 2012
The Lost Decade!
Recovery Under Way!
Risk and Return
Mutual Funds • Mutual Funds – What is a mutual fund? • A mutual fund is a collection of stocks, bonds and other securities purchased as a “set” by investors. The fund is managed by a professional investment company. • A company (Fidelity Investments, T. Rowe Price) may have many funds. – Why buy a mutual fund? • Investors get returns in dividends, appreciation in asset value (net asset value) and interest. • Mutual finds provide diversification and professional management. – Convenient, popular way to invest.
Early Mutual Funds
Legg Mason Value Trust Many companies Many Industries
Ownership of Mutual Funds Source: www. icmarc. org/xp/rc/marketview/chart/20080905 Ownershipof. Mutual. Funds. html
Trillions ($) in Mutual Funds Source: www. ici. org/research/stats/trends_07_09
Mutual Funds – A fund may be: • “managed” or “indexed”, • “open” or “closed”, • “load” or “no-load”, etc. – Investment objectives differ – the “Prospectus” is important. – Investors pay various fees to management company. – Many thousands of funds exist – trillions of dollars invested!
Where do you buy S and B? • Stock and Bond Markets (Exchanges) – Traditional – seats or memberships required. • First was in Philadelphia – 1790. • New York Stock Exchange formed in 1817 on Wall Street. • American Stock Exchange (a rival) founded in 1842. – Electronic Stock Market • National Association of Securities Dealers (NASDAQ) operates an electronic market where brokers trade from their offices. – Requirements to trade differ for markets.
New York Stock Exchange
Measures of Activity • Stock Market Indexes - indicators of market (business) activity. – Dow Jones Industrial Average – DJIA • Oldest, most famous index (started in 1896 with 12 stocks); now, 30 large cap companies. – Standard and Poore's 500 (S and P 500) • Started 1957; 500 large cap companies. – NASDAQ – • All stocks in the NASDAQ market (5000), started 1971.
Measures of Activity – Russell 2000 • Represents 2000 smaller companies. – Wilshire 5000 – • The “whole enchilada” – all stock market activity; has more that 5000 stocks. – Many other indexes exist.
Summary • Why Monitor the Stock Market? – All of you will invest in the future – maybe, now! – Great way to monitor the (macro) economy! • The financial markets are an important part of our economic system. • Virtually all Americans are affected by the financial markets. • Lecture Sources: Miscellaneous Materials
Assignment #2 • • • Review Assignment in Class Pick a “publicly traded” company Pick a mutual fund Identify a source for data Start recording data – 6 weeks or so This assignment is 10% for your class grade!