Chapter 10-11 Econ

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40 Terms

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mortgage

a long-term loan extended to someone who buys property

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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)

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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

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liquidity

the ease with which an asset can be converted into cash/how easily you can access your money
- pure liquid = money in hand

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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%

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savings accounts vs time deposits (CDs)

savings accounts: higher liquidity, lower interest rate

CDs: lower liquidity, higher interest rate

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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

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finanical intermediaries

institutions (like banks, insurance companies) that channel funds from savers to borrowers

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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

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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

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demand deposits

money deposited in a commercial bank in a checking account that you can use anytime

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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

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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.

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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.

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bimetalism

use of both gold and silver for currency; gives citizens either gold or silver in exchange for paper money

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supply and demand of loanable funds

- As interest rate rises:
quantity demanded declines, quantity supplied increases

- demand curve: slopes downward
- supply curve: slopes upward

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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)

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dividends

company's share profits to the shareholders based on the corporation's performance.

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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

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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

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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)

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maturity

how long until loan or bond is paid back fully

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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

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trading volume

The number of shares traded in a single transaction

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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)

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junk bonds

a special type of high interest-rate bond that carries higher inherent risks, but also higher yield

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municipal bonds

tax-exempt bonds issued by state and local governments (known as munis)

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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

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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

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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