Business in Action 7 e Bovée Thill Financial

Business in Action 7 e Bovée/Thill

Financial Markets and Investment Strategies Chapter 19 Business in Action 7 e Bovée/Thill

Learning Objectives 1. Distinguish between common stock and 2. 3. preferred stock and explain the difference between market value and intrinsic value Explain the three key variables that distinguish bonds, compare the advantages and disadvantages of owning bonds, and list the major types of bonds Define mutual fund and explain the advantages and disadvantages of this popular investment vehicle Copyright © 2015 Pearson Education, Inc. 19 -3

Learning Objectives 4. Define derivative and identify the major types of 5. 6. derivatives Describe the four major types of financial markets Describe four major steps required to become an investor Copyright © 2015 Pearson Education, Inc. 19 -4

Stocks • Stock • Securities 9 Ownership of or equity in a company 9 a share of stock represents a specific portion of ownership 9 Investments such as stocks, bonds, options, futures, and commodities Copyright © 2015 Pearson Education, Inc. 19 -5

Investment Categories of Exhibit 19. 1 Common Stock Copyright © 2015 Pearson Education, Inc.

Types of Stock • Common Stock 9 Shares of ownership that include voting rights • Preferred Stock 9 Shares of ownership without voting rights but with defined dividends Copyright © 2015 Pearson Education, Inc. 19 -7

Stock Valuation • Par Value 9 the value assigned when the stock is first issued • Book Value 9 The difference between the assets and liabilities as listed on the balance sheet Copyright © 2015 Pearson Education, Inc. 19 -8

Stock Valuation (cont. ) • Market Value 9 The price at which the stock is actually selling in the stock market • Intrinsic Value 9 An estimate of what a company is actually worth, independent of book and market values Copyright © 2015 Pearson Education, Inc. 19 -9

Stock Valuation • Price/ Earnings Ratio 9 The market value per share divided by the earnings per share • Stock Split 9 The act of dividing a share into two or more new shares and reducing the market value by the same ratio Copyright © 2015 Pearson Education, Inc. 19 -10

How to Read a Stock Exhibit 19. 2 Quotation Copyright © 2015 Pearson Education,

Bonds • Face Value 9 The amount of money, or principal , a bond

Bonds (cont. ) • Maturity Date 9 The date on which the principal of a bond will be repaid in full • Yield 9 Interest income a purchaser receives from the bond Copyright © 2015 Pearson Education, Inc. 19 -13

How to Read a Bond Exhibit 19. 3 Quotation Copyright © 2015 Pearson Education,

Advantages of Bonds 1. Most bonds are less risky than stocks and many other investments 2. Bonds offer lower volatility than stocks 3. Corporate bonds with twice-yearly interest payments can provide a regular source of income Copyright © 2015 Pearson Education, Inc. 19 -15

Bond Issuers • Treasury Bills 9 Short-term debt securities issued by the federal government 9 also referred to as T-bills • Treasury Notes 9 Debt securities issued by the federal government that are repaid within 1 to 10 years after issuance Copyright © 2015 Pearson Education, Inc. 19 -16

Bond Issuers (cont. ) • Treasury Bonds 9 Debt securities issued by the federal government that are repaid more than 10 years after issuance • Municipal Bonds 9 Bonds issued by states, cities, and various government agencies to fund public projects Copyright © 2015 Pearson Education, Inc. 19 -17

Bond Issuers (cont. ) • Treasury Inflation-Protected Securities (TIPS) 9 Treasury issues in which the principal amount is tied to the Consumer Price Index to protect the buyer against the effects of inflation Copyright © 2015 Pearson Education, Inc. 19 -18

Mutual Funds • Portfolio Diversification 9 Spreading investments across enough different vehicles to protect against significant declines in any one vehicle • Mutual Funds 9 Financial instruments that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities Copyright © 2015 Pearson Education, Inc. 19 -20

Advantages of Mutual Funds Copyright © 2015 Pearson Education, Inc. 19 -21

Mutual Funds • Expense Ratio 9 The annual cost of owning a mutual fund, expressed as a percentage • No-load Funds 9 Mutual funds that do not charge loads • Load 9 The sales commission charged when buying or selling a mutual fund Copyright © 2015 Pearson Education, Inc. 19 -22

Mutual Funds (cont. ) • Index Funds 9 Mutual funds that mirror the composition of a particular market or index • Index 9 A statistical indicator of the rise and fall of a representative group of securities Copyright © 2015 Pearson Education, Inc. 19 -23

Mutual Funds (cont. ) • Exchange Traded Funds (ETFs) 9 Mutual funds whose shares

Options • Option 9 The purchased right—but not the obligation— to buy or sell a specified number of shares of a stock at a predetermined price during a specified period Copyright © 2015 Pearson Education, Inc. 19 -25

Exhibit 19. 7 Types of Options Copyright © 2015 Pearson Education, Inc. 19 -26

Financial Futures • Financial Futures 9 Contracts to buy or sell a financial instrument (such as stocks, treasury bonds, and foreign currencies) for a set price at a future date Copyright © 2015 Pearson Education, Inc. 19 -27

Financial Futures (cont. ) • Commodities Futures 9 Contracts to buy or sell specific amounts of commodities for a set price at a future date • Currency Futures 9 Contracts to buy or sell amounts of specified currency at some future date Copyright © 2015 Pearson Education, Inc. 19 -28

Financial Futures (cont. ) • Credit Derivatives 9 Derivatives used to reduce a lender’s

Financial Markets • Stock Exchanges 9 Organizations that facilitate the buying and selling of stock • Bond Market 9 The collective buying and selling of bonds 9 most bond trading is done over the counter, rather than in organized exchanges Copyright © 2015 Pearson Education, Inc. 19 -30

Financial Markets (cont. ) • Money Market 9 An over-the-counter marketplace for shortterm debt instruments such as Treasury bills and commercial paper • Derivatives Market 9 A market that includes exchange trading (for futures and some options) and over-thecounter trading Copyright © 2015 Pearson Education, Inc. 19 -31

Establishing Investment Objectives • • • Why do you want to get more money? How much will you need - and when? How much can you invest? How much risk are you willing to accept? How much liquidity do you need? What are the tax consequences? Copyright © 2015 Pearson Education, Inc. 19 -32

Learning to Analyze Financial News • Bull Market • Bear Market 9 A market situation in which most stocks are increasing in value 9 A market situation in which most stocks are decreasing in value Copyright © 2015 Pearson Education, Inc. 19 -33

Creating an Investment Portfolio • Investment • Asset Allocation Portfolios 9 Collections of various types of investments 9 Management of a portfolio to balance potential returns with an acceptable level of risk Copyright © 2015 Pearson Education, Inc. 19 -34

Buying and Selling Securities • Broker 9 A certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors • Market Order 9 A type of securities order that instructs the broker to buy or sell at the best price that can be negotiated at the moment Copyright © 2015 Pearson Education, Inc. 19 -35

Buying and Selling Securities • Limit Order 9 An order that stipulates the highest or lowest price at which the customer is willing to trade securities • Stop Order 9 An order to sell a stock when its price falls to a particular point, to limit an investor’s losses THE END Copyright © 2015 Pearson Education, Inc. 19 -36