Financial Markets. Economics Spring 2017

Transcription

1 Financial Markets Economics Spring 2017

2 What Can You Do With Your Money? Spend it or save it Savings: income not used for consumption Marginal propensity to consume: the change in personal spending that results from an increase in income Savers and borrowers come together in the financial markets

3 Let s Invest: Stocks Stock: a share of ownership in a corporation Common stock: holders have voting rights, share of profits Preferred stock: pays dividends, generally no voting rights also, higher on capital ladder

4 Trading Stock Most stocks are sold to investors through a stock exchange these are secondary markets Organized stock exchanges Securities must be listed NYSE: >8,000 issues; exchanges have listing requirements Auction market: buyers and sellers are matched through bidding to determine prices; prices vary continuously Stocks trade under ticker symbols Ticker symbol: arrangement of letters that represents a particular stock, used to place orders for the stock Examples: Ford (F), Boeing (BA), Apple (AAPL) Examples: NYSE, NASDAQ, Tokyo Stock Exchange, BM&F Bovespa Over-the-counter (OTC) exchanges: trading of securities not listed on exchanges

5 Investment Basics: Risk and Return How much is an investment supposed to return? Are risk and return related? Can you measure risk? How do you measure risk? Standard deviation: a measure of the dispersion from the mean used to measure risk, in terms of price fluctuations of an asset Correlation: a measure of how two securities move in relation to one another Values are from -1 to 1. Values close to -1 indicate an inverse correlation, values close to 1 indicate a positive correlation Beta: a measure of the systematic risk of an investment, compared to the market Generally: how the return is related to the market's return The higher the value, the more the investment moves compared to the market Beta of 1 indicates the security moves the same amount as the benchmark

6 Measuring Performance: Market Indices/Indexes Stock index: a value that represents the prices of various stocks Used to determine the change in prices of stocks Price-weighted index: arithmetic average of current security prices Sum of stock prices divided by number of stocks in index Dow Jones Industrial Average: price-weighted index of 30 blue chip stocks Market-value (capitalization) weighted index: total value of all stocks in index Market cap is price times number of shares outstanding S&P500: cap-weighted index of 500 stocks, balanced by sector

7 Let s Compare: Stock vs. Index, Part II Stocks can be compared to indices to determine relative performance Outperforms the index if the stock s returns are better than the index returns Underperforms the index if the stock s returns are worse than the index Which index do you choose to measure performance? NASDAQ? Russell 2000? FTSE 100?

8 All About A Stock: Details Open: price at the open of trading Vol/Avg: Number of shares traded today/average number of shares traded each day Market Cap: size of the company; number of shares times price P/E: price / earnings per share EPS: earnings per share Div. Yield: dividend yield; value of dividend divided by price of share Inst. own: percent owned by institutions

9 Bulls and Bears, Continued Bull market: a steady rise in stock prices Generally, a 20% rise over at least two months Bear market: a steady decline in stock prices Generally, a 20% decline over at least two months

10 Bonds and Other Financial Instruments Equity vs. debt securities security: a contract that can be assigned a value, and traded negotiable financial instrument -- its ownership can be legally transferred to another party equity security: a security that represents an ownership stake debt security: a security that represents debt, or a promise to repay a balance borrowed include corporate bonds (corporates), government bonds (treasuries)

11 How Do Bonds Work? A bond is a security where the issuer (borrower) promises to pay the holder the money borrowed, plus interest not always the same as the coupon: bonds may trade at a premium or discount Principal: the amount borrowed; the face value of the bond bond price and yield move inversely also used: par value at par: yield = coupon Coupon: the interest rate the holder receives may be paid annually, semiannually, or not at all Yield: the annual rate of return above par: yield < coupon below par: yield > coupon Maturity: the date the bond is due to be repaid Usually 1-30 years

12 Are These Things Safe? Do They Carry Risks? Some don t... Treasuries, debt securities issued by the US government, are considered risk-free Backed by the full faith and credit of the US government States and municipalities also issue debt: municipal bonds, or munis The main risk is default risk: the likelihood that the issuer will be unable to pay at maturity Rating agencies: Fitch, Moody s, Standard & Poor s