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mortgage
a long-term loan extended to someone who buys property
stocks vs bonds
- Stock: Gives the holder an equity or ownership interest in a corporation, measured in units of shares
- more risky than bonds, but offer a larger return.
-one share = one vote
- dont need to to give money to investors
-better to buy stocks if you have time, money, and knowledge
Bonds: loans -> someone borrows money, but it has interest...
- from investors to corporations (most have coupon rates)
- us govnt (savings or treasury bonds/bills; bills = less than a year, bonds = over a year)
- municipals (state or local govnt)
BB or lower = junk bonds (high risk bonds), if you hit it big, you get a lot
primary market vs secondary market
Primary Market:
- stocks sold for the first time (only happens once)
- cannot sell own stock on the stock market (illegal)
ex. IPOs (initial public offering): first time company sells its shares to the pubic -> building new securities
Secondary Market:
- all stocks traded after initial selling (doesn't involve corporations, where most people trade)
ex. New York Stock Exchange and the NASDAQ
diversification
a strategy of increasing sales by introducing new products into new markets
- company growth through starting up or acquiring businesses outside the company's current products and markets
-spreading out investments to reduce risk
- min of 5 big stocks from diff industries to be properly diversified
dow jones
indicator of stock market prices
- The average cost of 30 selected stocks, used to give an indication of the direction (up or down) of the stock market over time.
blue chips
shares of stock issued by large well-known companies who have consistently shown qualities of good earnings and paying generous dividends
- prices isn't changing fast, but usually safe
ex. disney, coca cola
mutual funds
pay someone to pool your money and invest
- developed so you can be diversified w low startup money
- financial comps (american express: growth + income mutual fund, european mutual fund, energy mutual fund, etc.)
pros:
- low startup money
- diversification
- professional money managers
- gives dividends and capital gains every year
cons:
- double taxation (increases taxed double too)
- fees (differ by company)
- not part of IRA
bull market vs bear market
bull market: investors = crazy
- stock market is booming(high sales/demand)
- investors are optimistic and buying stocks
bear market: investors = cautious
- declining market(prices dropping , no investments, leads to recession)
- investors are pessimistic and are selling
3 uses of money
1. medium of exchange
- makes trade easier!!
- bartering = not efficient
- need common denominator/currency to make everything more efficient
2. store of value
- represents + stores value
- time and effort --> stored in the currency
3. unit of account
- common + uniformed
3 sources of value of money
1. commodity
- the currency itself has value (ex. oranges have value)
- gold: #1 currency commondity
- only metal that won't rust
--> eventually not conductive
- not enough, distributed
2. representative
- govnt uses different currency to represent a commodity
- silver certificate: bank had $1 worth of silver -> use certificate to exchange for the actual commodity (silver)
3. fiat (latin for "trust")
- fiat currency has value bc the govnt says it does
- you have yo use that currency unless otherwise stated in a contract (rule stated in the bill)
*current state
- goes into supply and demand of wages:
- strength of govnt (to enforce the law)
- strength of economy
- other countries want to trade w/ our currency means increase in demand, values increase -> demand decreases, value decreases
story of commodity to fiat
- people didn't like paper currency bc there were so many types since each bank had their own
- many counterfeit paper currency made
- further from your reg bank, the lower the value of your paper currency
- us first issue paper currency for civ war (greenback: first national paper currency)
- was promised you could trade the currency back for your gold (most ppl did bc they liked the uniformity)
- pop increases as years go by, but money stays the same bc you can only print money based on how much gold you have
- free silver movement
- bimetalism: introduced a new commodity (silver)
- farmers WANTED inflation bc then they can pay their debts in cheaper dollars
5 characteristics of money
1. Stability
- how well it can hold its value (is it easy to counterfeit?)
2. Portability
- has to be able to be carried around easily
3. Acceptability
- people have to be able to agree to use it
4. Divisibility
- ex. cow is hard to divide up
5. Durability
- can withstand being passed around, weather, wear and tear (ex. money has cotton/denim)
*the more money you print, the lower the value (inflation)
M1/M2 (purpose and whats included)
M1 (as liquid as currency could be back in the day)
- currency in the hands of the public and the checkable deposits of commercial banks
- coins and currency in circulation
- checkakble deposits (demand deposits = checking accounts)
- no interest bc cash comes in and out so fast, the bank doesn't know how profitable your money would be
- traveler's check
- if stolen or lost, the bank can restore it
M2 (has everything M1 has plus...)
- non checkable savings accounts, small time deposits, and individual money market mutual funds balances
- savings deposits = liquid (federally insured)
- had to go to bank and fill out form back in the day
- money market funds: glorified checking account (big time tickets)
- pays INTEREST bc it interrupts your liquidity (lower), they know they will keep your money longer (limits access)
-> minimum balance (usually $500)
-> max # of checks (per month is 3-5)
-> min per check (usually $250-300)
- time deposits: savings instruments where you cannot touch your money for a certain amount of time
- CDs (certificate of deposits): dont need to use your money
liquidity
the ease with which an asset can be converted into cash/how easily you can access your money
- pure liquid = money in hand
interest rate
risk: how likely are you to see your money again
liquidity: how accessible your money is
amount of money: more money = high %, less money = lower%
savings accounts vs time deposits (CDs)
savings accounts: higher liquidity, lower interest rate
CDs: lower liquidity, higher interest rate
4 types of banks (excluding mutual savings banks)
1. commercial banks: run for profit
- many locations
- can be online
- makes money off of loans
home equity loan: banks loan homeowners money based on the properties equity (difference b/w what you owe and the value of the property: equity = value - remaining balance)
2. credit union (has everything commercial banks have, but specific purpose bank, better rates, + not profited):
- not run for profit
- ppl get tgt + pool their money to start
- not as convenient -> not as many locations
3. savings and loans: loan money to members
- offers savings accounts
- used to not be regulated -> stole ppls money, but now is safer
4. finance companies: handle the riskiest investments
- give loans to ppl w/ not as good credits
-> offers higher interest rates to offset the risk
finanical intermediaries
institutions (like banks, insurance companies) that channel funds from savers to borrowers
FDIC
Federal Deposit Insurance Corporation: A federal guarantee of savings bank deposits (insures deposits in banks) initially of up to $2500, raised to $5000 in 1934, and frequently thereafter; continues today with a limit of $250,000
what backed confederate money?
cotton bc it was the hope that their money would be paid back if the confederates won
- didn't have actual backing
confederate money: currency issued by the confederates during the war
demand deposits
money deposited in a commercial bank in a checking account that you can use anytime
CDs/money markets
cds: fixed-term savings with higher interest rates but has penalties for early withdrawals
money market: deposit money for a fixed period and get higher interest
federalist vs antifederalists
Federalist:
- for the Constitution
- wanted central federal government
Anti-Federalist:
- not for the constitution
- thought central govnt would take power away from States
- scrapped articles from Constitution when they were only supposed to alter them.
greenbacks
paper money issued by the government during the Civil War, so called because the back side was printed with green ink (black ink on front side); represented gold
- They were not redeemable for gold, but $300 million were issued anyway.
- Farmers hit by the depression wanted to inflate the notes to cover losses, but Grant vetoed an inflation bill and greenbacks were added to permanent circulation.
- In 1879 the federal government finally made greenbacks redeemable for gold.
bimetalism
use of both gold and silver for currency; gives citizens either gold or silver in exchange for paper money
supply and demand of loanable funds
- As interest rate rises:
quantity demanded declines, quantity supplied increases
- demand curve: slopes downward
- supply curve: slopes upward
capital gain vs capital loss
capital gain occurs when the market price of an asset increases
- profit that results from selling smth more than you pay for
capital loss occurs when the market price of an asset declines
- difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller
selling short: investor borrows stocks and sells it on the market —> hopes the prices will drop so they can buy it back at a lower price and keep the difference as profit
ex. borrowed stock sells for $10, so investor has $10 right now. the stock's value drops to $5, and the investor rebuys it, earning a profit of $5 ($10-$5)
dividends
company's share profits to the shareholders based on the corporation's performance.
rule of 72
a technique for estimating the number of years required to double your money at a given rate of return
formula: 72/interest rate
IRA
individual retirement accounts (ex. 401K -> work company can contribute to your funds, usually 100%, 403B (for teachers)
- govnt allows you to have w certain tax advatages
- penalty if early withdrawal
traditional:
- in: not taxed (decrease tax burden NOW)
- out: taxed (every time you pull money out, it is taxed)
- taxed less though, bc you prob make less towards your retirement
ROTH:
- in: taxed
-out: not taxed
- the earlier you start, the more time money has to grow
interest (risk, amount, liquidity)
risk: The risk that interest rates will go up and devalue the current, lower-interest loan.
amount: the dollar amount of interest that is paid or earned
liquidity: interest rates and liquidity are inversely proportionate to each other --> the more money most likely means lower interest rates (cheaper for ppl to borrow), less money usually means higher interest rates (more expensive to borrow can can cause slowdowns)
maturity
how long until loan or bond is paid back fully
coupon rate
any bond can be one --> pay at face value for the bond, but then they give you interest on it (depending on the interest, you get what you paid for plus the interest amount)
- most corporate bonds are coupon rates
trading volume
The number of shares traded in a single transaction
discount rate
the minimum interest rate set by the Federal Reserve for lending to commercial banks.
- pay less for higher bonds, but only after a few years you can get the full values of the bond back (interest = the diff b/w the interest and face value of bond)
junk bonds
a special type of high interest-rate bond that carries higher inherent risks, but also higher yield
municipal bonds
tax-exempt bonds issued by state and local governments (known as munis)
stock splits
occurs when investors (owners of company) think the price is limiting trade/volume
- most blue chip stocks have split many times
- divides each existing share into multiple shares, thus creating more shares; no change in wealth
NYSE/NASDAQ
major stock exchanges that handle most of the transactions during the trading day in the US (both in secondary market)
nyse: traditonal stock exchange on a trade floor (physical)
nasdaq: online stock exchange
insider trading (legal and illegal)
legal: work for a company, you are allow to buy stock from that company
illegal: buying or selling stock based on info that is not publicly known
- worker knows the company will be trading w a diff country before it happens and buys/sells stock
- penalty is usually 3x the profit + jail time