Why Buy Bonds

Stocks, Bonds and Futures Why do people buy  To gain a profit = profit may come two ways: stocks? o buy low/sell high (capital gain)(capital loss) o or dividends(the yield)  To limit the risk on investment = can only lose the amount invested  To become a part owner of a corp = vote on company matters (number of votes = number of shares)  To elect board of directors  To initiate a stock split How are stocks Through a broker = links buyers and sellers of stock traded? (collect a fee or commission)  A broker works for Investment bank/firm = which buys and sells large blocks of stock  The buying and selling of stocks takes place at the Stock Exchange = place to buy and sell corporate stocks and government bonds  Stockbrokers and investment bank brokers work there

Examples: o NYSE = 1792, Wall Street, NY o Before Civil War - NY Curb Agency (Now AMEX) . Also in Tokyo, Hong Kong, London, Frankfurt, Paris . NYSE = 2,000 transactions/second

. Approx 3,000 companies . Must meet minimum standards = number of shareholders, shares, and earnings . Corporation must buy a seat on the exchange in order to buy and sell shares. . Prices vary.  All time high = August, 1999 = 2.65 million  Low = 1871 = $2,750 o Over-the-Counter Market (OTC) o NASDAQ = Smaller corporations which can’t meet the standards of the NYSE o If too small for NASDAQ = broker may be able to deal directly with Corporation What Determines Shares typically traded in lots, or amounts, of 100 Stock Prices? Example: Seller asks for $38.12 per share Buyer offers $37.37 per share They may agree on something between the two This happens very quickly and 1000s of times per second

When many buyers compete for a scarce stock = price goes up When few buyers compete for a large supply = price goes down

So…demand affects stock prices.

But what affects demand for a stock? o Corporate finances good = “blue chip” stock  Investor expectations = if investors think the price of a stock will go up = demand goes up = causing the price to go up o If investors think the price of a stock will go down = demand goes down = causing price to go down

Bull Market = Dow steadily rises for a period of time

Bear Market = Dow steadily falls for a period of time

External Forces = Sometimes things happen that are out of the control of buyers/sellers Example: Someone put poison in a few bottles of Tylenol capsules in 1982 Price for Johnson & Johnson stock fell Also…unemployment, inflation, interest rates, national election

Also…international events = revolutions, war terrorist attacks, etc Why should you Borrower: Earn yields (interest) consider buying bonds? Lender: Use money as capital What is good about Good safe way to save money and earn interest. corporate bonds? o Helps with the creation of capital. o Business expands. o Supply goes up. o Prices come down What is good about Even safer way to save money and earn interest. government bonds?  Helps government meet its obligations. o Theoretically could relieve tax burden Why buy futures? In finance, a futures contract is a standardized contract, What are they traded on a futures exchange, to buy or sell a certain anyway? underlying instrument at a certain date in the future, at a pre-set price.

The future date is called the delivery date or final settlement date.

The pre-set price is called the futures price.

The price of the underlying asset on the delivery date is called the settlement price.

Regulation of the Securities Industry = Clayton Antitrust Act, 1914 Federal Securities Act, 1933 Securities and Exchange Commission (SEC) for enforcement.

Prospectus = detailed fact sheet containing data on a company’s finances must be submitted Borrowing and Credit What is borrowing Borrowing is: It is the transfer of a specified amount on credit? of money from a lender to a borrower for a specified length of time.  When a bank loans money to someone or some business, it amounts to the creation of money. o Say businessperson goes to the bank and asks to borrow $10,000. o Bank approves the loan and deposits $10,000 into the businessperson’s account.  The money came out of the banks reserves (not counted in the money supply). o Now it is in a usable form. Businessperson can write checks, use cash, etc.  Money has been created.  Buying on credit Does not involve a direct exchange of money. Can pay for things without cash. Why do consumers •Paying a small amount every month makes large borrow money or purchases more affordable for many people. rely on credit? •Principal Interest Collateral – house in mortgage loan, car in car loan. •Installments – payments (longer the length of loan, the less per month – but the more interest will be paid) What is a Credit An estimation of the probability of you being able to rating? repay what you have borrowed  Ability to pay  Assets  credit history What is a Credit It is a credit reporting service that businesses use to bureau? decided whetehr or not to loan or approve credit for you.  Equifax What are Credit  They are billed every 28 or 30 days terms?  Includes Finance charge – total cost of credit  Annual percentage rate (APR) – total cost of credit per year  Usury – charging credit above the legal limit. What happens if May have to file Bankruptcy – legal declaration of you abuse credit? inability to pay debts.  Remains on credit history for 14 years. How does Credit  Use of credit helps satisfy many peoples’ wants impact the and needs. economy?  Also stimulates economic growth by promoting economic stability. o One of the goals of the U.S. . Occurs when the output of goods and services increases per person . during a specified period of time. o Shows overhead How does credit Another goal of the U.S. promote stability?  Occurs when employment is high and prices are stable  Credit, when used responsibly, promotes high employment and stable prices How?  As consumers use credit  demand increases  Production increases  Employment increases

Supply now meets demand This is market EQUILIBRIUM!!