These are notes from a finance class, the teacher was not that clear as apparently my word for word notes are not either, but may help you know more about business too: Banks
We lend banks money, when we save. They pay us money they want to loan us and charge high interest rates. On car loans, lenders want to see you put down at least 50%, they don’t like to bear risk.
Cc and checking acct pools money and lends to borrowers. Credit union rates usually better than banks.
Stock brokerage firms annual rate of return 10% RofR. 1000 stocks, dividends 10%, to $1100.
CD fixed interest rate, 5.5%. Stock Market very different. Bond Market, bigger than stocks, duller than stocks. Return on bond 11%, nasdaq over the counter not traded in one place. A Bond is lending someone your money, and they have to pay you back.
Mutual funds: stocks and bonds
Like a bank that collects money, they take money and buy stocks of certain types, you have ownership minimum [imath]500, starting investment,[/imath]1000, diversify to help reduce risk, do some bonds, some stocks.
Federal Reserve System is the central bank, most important financial institution.
Firms help corporations that help decide whether to finance or sell stock are called. You sometimes want the co to hold its resources so in future your profits are better.
Venture Capitalists… two guys in a garage, 1976, 50,000 loaned to them, percentage or share of profit or stock. Or sell stock, give money and I’ll give you share of profit.
Common stock:
Set of four ownership rights:
Own a right to a share of company profits
Right to vote for board - board choses tope officer, CEO, President, CFO. As a shareholder you get one vote for each share you own. (Millions of people own Coca Cola Stock, you can’t).
The right to sell.
Limited Liability
If you own stock and someone sues company, you won’t be liable with your personal assets with common stock. Sole proprietor and Partnerships are liable. You apply to state for corporate charter for a small fee $50, with or without a lawyer. Day care nursing or Toy store, set up as corporation, taxes are lower as corporation.
Go to Stock listings and see PE ratio’s. You own those four rights of common stock. The right to a share of profit in stock market. 2 types organized market and OTC.
NYSE = New York Stock Exchange, is the actual place stocks are bought and sold.
ASE, NASDAQ National Association of Securities Dealers Automated _____ (?Chicago, San Francisco?).
Smaller stocks traded here.
Preferred Stock:
Hybrid between a stock and a bond (IOU). Almost guaranteed a payment. But no voting rights. Payment doesn’t change. If corporation goes under, it sells its assets first. First claims: Bonds are paid off, 2nd Preferred stocks, 3rd: Common stocks are paid (if any money is left).
A bond is an IOU, borrowing money with interest.
1). Principle or face value or par value. Corporation pays owner of bond when due. Maturity date, you get paid par or face value 90 days, 6 months, 10, 20, or 30 year bonds can be purchased. If you get interest on bond, the interest is called a coupon rate. Percentage of the value of bond, the owner of bond will received in interest each year.
Corp sells 30 year 1000 dollar bond at 8% interest per year.
Face Value $1000 = (in 30 years you receive this back).
Maturity Date = 30 years
Coupon Rate = 8%. (Each year you always get $80.00 in interest).
Only variable is price of bond. Company asks how much you’ll buy a bond for and the price goes to the corporation. Not likely you’ll pay face value, amt of rate of return and years to maturity, 8% is good. If coupon rate is 20%, you may pay more than $1000 for the bond.
Yield is the interest you get divided by the price you pay = 100%.
So buyers bid up the price and RofR / Yield goes down. Is interest compounded? You get the interest each year and you can put in bank yourself>
Preferred Stock: Hybrid between common stock and bond.
You have right to profit, you can buy it out right, right to share of profits, guarantee a dividend of some size, you get a check payment.
Share of common stock is called an Equity, not a Debt.
When a firm sells stock for the first time, they are raising money. Primary market when first issued.
When you or I trade stock, that’s the secondary market.
Call broker to buy or sell..if OTC stock broker, goes thru a network to find on NYSE. Your order is sent to NYSE on computerized system. DOT = Designated Order Turnaround. 100 shares Xerox, if broker can’t find it, its sent to NYSE physical area where Xerox is traded. If more sell orders than buy orders, they lower the price, like an auctioneer. Retail clothing, extra low price.
Commodities Market, Chicago board of Trade, Cotton exchange Memphis / exchange… physical – brutal out there, buyers and sellers visitors booth, Larry, 6 computer screens scrolling numbers. Grubb/Gruff?
millions of $ worth of trading, reconsider this as a career. Next day, he may get it all back or you can end up worse off than when you started, brutal commodities, you can lose investments. Zero sum gain. For every winning, and equal amount is lost in commodities.. stock price changes throughout the day, specialist, changes price during day in order to make trade. Not usually a large fluctuation, but it goes up and down so trade can be made. Wall street journal will tell you want each column means, has explanatory notes.
Ticker Tape spread out with latest prices. Abbreviation of company is the ticker symbol.
HI: 81 3/8 LO: 51 15/16 Stock/Coca Cola SYM: KO DIV: .60 (For every dollar of stock you bought, you get $60 if bought 100). Yield %/ .8 (Rate of Return from dividend) PE/47 (price earnings)
15/16 CLOSE .79 LOOK at price of stock at end of day under close. NET CHANGE: -1/4, = net change from day before from closing price on previous day.
.60 divided by closing price .79 x 100% = .8%.
PE RATIO Stock Price to Earning per share.
PRICE/EPS
The most recent profit divided by total number of shares of stock outstanding = EPS.
If all earning distributed you get this ratio paid out to each share owned.
Buy low and sell high, makes money and dividends.
79/EPS = PE = 47
The higher the PE ratio, the higher people are willing to pay, (Optimism is high).
If you have mutual funds or retirement plan, you’re in the market indirectly. State of Georgia has retirement fund, you can diversify # of mutual funds, stock funds, high risk, high return, day to day movements don’t move that much.
The higher the stock market goes, the more people worry about it crashing.
1). Medium of exchange
2). Unit of Account
3. Store of Value
Money, Wealth, Income.
Wealth > money constitutes a small portion of wealth, stock of assets.
Income is amount of money you have coming in. Is a flow over time. Exchange good for good = barter.
To get groceries, hard to put value on it. Find something to trade, not always willing and able to exchange. Without money costs of exchange are much higher.
Unit of account: Exchange ratio between backpack and every other good. Price depdnds on what other good you want to trade. $ is created by banks when they make loans. Money makes exchange a whole lot easier. It facilitates exchange. Coins: gold and silver. They held value and you could use them for other things, this kind of money is called full bodied or commodity. Value goes down. Inflation. What causes inflation? If a shortage occurs, just supply and demand. Price goes down because gold and silvefr are a limited supply, 14-16th century they were successful because total supply of gold wasn’t changing much from year to year. We still find gold but its so small in comparison to what is already there.
Representative full bodies papger that represents the gold. Its lighter and easier to carry. Someon else decided they could build a building to keep money safe. You get a receipt to show proof its there, or certificate for every gold piece, you exchange,. Our money is backed by faith, you’ll want to try to get rid of it, but then no one else will either, only at the end of confederacy, they over printed toward the end, and in Russia at end of soviet union. Fiat money is backed by faith, its called fiat, government fiat, legal tender. By law, seller has to accept it. Money doesn’t represent wealth. Wealth is when you command goods over services.
Checks and checking accounts: Substitutes for fiat money, we don’t want to carry around the money too much either, very practical way to avoid this. Electronic money: direct deposit, transaction acct balance, changed over wire. Pay check is directly deposited, electronically wired to credit union. Volume of money is very large now. ATM cards, debit cards, receipts, are needed for exchange. That’s the evolution of money.
Currency, checking accounts> demand deposits, travelers checks. When added up, it comes to M1. (all money out there). The size of $ supply has by effect on inflation.
Savings accounts? Money market funds, like mutual funds, a place you can park money cross between checking and savings. They take yours and others money and buy mm instruments M short term low risk bonds. Treasury notes, etc. Higher interest rates. Always pay higher rates, these accts very liquid with little loss of value. [imath]1000 has to be deposited and you can write 3 checks, money upwards of[/imath]500 each. These can be added to M1’s but they become M2.
Just know there are different measures of the money supply.
Trillion: (M1= clearly money).
4 Trillion: (M2=All those in M1 plus other items not as liquid, but very liquid).
5 Trillion: (M3= all in M2 and other assets as well).
Overnight repurchase agreement GM $1Million.
Rep agreement bank keeps for GM and agrees to give it back tomorrow. Collateral are T-Bills and T-Bonds. Two of the most important things which cause peoples money to go up are saving and investing.
Saving is when you get income, and don’t spend it all and put it into stock or other. Investing is spending by business or households on goods which can generate other goods. For example, expanding facilities for business, capital goods. Or buying a house or property. Job market skills allow more money. productive partly because they have more capital. Secty PCS thousands of dollars and allows them to be more productive. Why relevant to saving? Capital goods and skills of labor force come from spending.
Bank attracts funds and loans them out. That’s what financial markets are about, they channel savings into investments. Terms: Financial instrument = bond, stock, CD, any financial asset.
Yield: Default risk and market risk, possibility you lose some of investment.
Liquidity, ease in which an asset can be converted into money in a short period of time. If quick at a high cost, its not liquid, if yes, but not quick, its not liquid. M1, M2, M3, stocks not too liquid.
If you purchase a bond there is risk that company could go under, if insolvent. Or won’t be able to pay you when bond expires. Market risk: fluctuation of price, (stock purchase) Up or down capital loss. Savings account 3% interest, could drop to 2%, inflation, will eat way most quickly. So purchasing power of money goes down. Yield = rate of return – stocks, bonds, or checking and savings, yield will be 3.1%.
Compounding: Interest earned 3% interest rate, calculate interest earned every 3 months.
3% of 1000 divided by 4
30 divided by 4 = $7.50
1007.50 1st quarter
3% divided by 4 of 1007.50, and on and on, you end up with more than $1,030.
Yield is how much you earned overall in interest divided by 1000 x 100%.
Yield 3.21%.
Yild is annual rate of return on investment.
Current yield on bond is interest earned in year divided by price of bond multiplied by 100%.
Current yield = [imath]40 interest earned divided by price of bond[/imath]500 multiplied by 100%.
Yield to maturity long formula:
Liquidity/Yield/Risk
Yield is rate of return
Compare risk to yield
Stocks to savings
Higher yield Auto insurance, 22 year old corvette at high cost. A whole bunch of 22 year olds tend to be more risk, odds are certain ages are less risk. Iiquidity to yield. If liquid, there is a lower yield. Not so much risk. Liquidity to risk: The less liquid, the higher the yield. The only w y you get people to take risk is to offer higher yield. CD is low risk investment, when it comes due 1 or 5 years later. They offer a higher interest rate because its not as liquid. Debt instruments contract between borrower and lender when borrower agrees to pay lender certain $ at certain date, it’s a contract, IOU, enforceable by law.
Debt: Bond, Loan or Bond.
Equity: Stock, bearer of equity has legal claim of income that’s received by income of equity. You own right to share of profits earned by company.
Primary and Secondary Markets:
When you buy new car from dealer this is primary market (bought first time), brand new.
Same in financial market, new stock or old stock. The vast majority of transactions are secondary market unless it is an IPO, or Initial Public Offering. Corporation receives money in new stocks, once sold, investment bank firm in secondary market, and corporation doesn’t get money. Organized markets (NYSE) is a specific place where stocks are traded, vs over the counter OTC.
Here is more about the money supply: https://www.investopedia.com/terms/m/moneysupply.asp
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