2. Objectives
• Understand relationship between risk and return
• Learn about U.S. financial markets and investment
products
• What affects market prices
• Government regulation of financial markets

3. Risk and Reward
• The bigger the risk the bigger the potential
payoff.

4. Investment Risks
• Interest Rate risk
– Risk of change in asset value due to change in interest rates
• Business Failure risk
– Risk that the business will fail
• Market Price risk
– Risk that the market price of the investment drops
• Inflation risk
– Risk that return on an investment will lose purchasing power
• Political risk
– Risk of government actions negatively affecting the value of the
investment
• Fraud risk
– Investment is designed to deceive or misrepresent facts

5. How Financial Markets Work
• Financial markets is where people and money
come together
• Supply and demand
─ Demand is the quantity of goods that consumers want to
purchase
─ Supply is the quantity of goods available for consumers
to purchase
─ If supply outweighs demand the price of a good will go
down and vice versa

6. Exchanges
• Exchanges serve as central locations
where buyers and sellers meet
• Can be a physical location or a network of
computers
• Several exchanges make up the stock
market
− New York Stock Exchange (NYSE)
− Nasdaq stock market
• Private companies are not traded on
exchanges

7. The Market Meets the Web
• Investing can take place online
• Need to be informed
– Know the investment you purchase
– Know the ground rules of the market
– Know the level of risk
• It’s easier to lose than to make money through a
click of a button

8. Saving
• Returns for saving at a bank are low, so is the risk
• Most accounts are insured by the FDIC or NCUA
• Certificates of deposit (CD)
– Specific amount of money at a fixed interest rate over a
specified period of time
– The longer the time frame the higher the interest rate
– CDs are insured up to a certain amount if the financial
institution where they were purchased is a member of the
FDIC or NCUA

9. Stocks
• Stocks represent a partial ownership of a company
• Common stocks versus preferred stocks
– Common stock carries a voting right
– Preferred stock does not carry a voting right, but normally
receive a fixed dividend
– Preferred shareholders need to be paid before common
shareholders
• Stock price
– Amount paid for one share of stock
• Dividends
– Distribution of a company’s profit
– Generally paid quarterly

10. Different Kinds of Stock
• Different size classifications:
Classification Market Capitalization Example
Mega Cap Greater than $200 Billion Exxon Mobil
Large Cap Greater than $10 Billion IBM
Mid Cap Between $2 Billion and $10 Billion Vulcan Materials
Small Cap Less than $2 Billion Panera Bread Company
Micro Cap Between $50 Million and $300 Million Reddy Ice
Nano Cap Less than $50 Million Autobytel
• Growth stocks
• Income stocks
• Blue chips
• Value stocks

11. Bonds
• Loans given to a company or a governmental entity
• Bond prices fluctuate with interest rates
• Types of bonds
– Municipal bonds
– Treasury bonds
– Federal agency bonds
– Corporate bonds
– Asset backed securities
• Bonds are traded in the over the counter market
• Quoted in percent of face value

12. Mutual Funds
• Invests pooled money in various types of
investments
– Fund manager buys and sells on behalf of the fund’s
shareholders
– The price of a share of a(n) (open end) mutual fund is
called its net asset value (NAV)
• Benefits of mutual funds
– Diversification
– Professional management
– Liquidity
• Commissions and fees
– “12(b)-1 fee”

13. Derivatives
• Financial instrument whose value depends on the
value of a another asset
• Speculative investment
• Need to be a knowledgeable investor who is willing
to take high risk
• Have to be prepared to lose all of their investment

14. Moving Markets
• Values of investment securities rise and fall
• Five important factors
– Investor action
– Business conditions
– Government actions
– Economic indicators
– International events and conditions

15. Regulation of Financial Markets
• State regulation
• Federal regulation
– Securities and Exchange Commission (SEC)
– Security Investors Protection Corporation (SIPC)
– Commodity Futures Trading Commission (CFTC)
• Self Regulatory Organizations (SRO)
– Financial Industry Regulatory Authority (FINRA)
– National Futures Association (NFA)