Personal Finance Final

Economy

System that drives production and consumption of goods and services in a society

Traditional Economic System

Mainly community centered. They produce enough goods to satisfy the need of community members. Relies on old production methods rather than old

Command Economic System

Centralized government makes all economic decisions (most important for communist governments, north korea)

Market Economic System

Consumers can decide what good or services to produce and what price to sell them without government interventions (U.S. + Japan)

Mixed Economic System

Combinations of traditional, command, and market. They must adhere to laws in order to do business in that country (India + France)

Free Enterprise System

Market forces affect production and consumption decisions. There is little to no government interference

Economic Resources

Materials and labor used to produce goods and provide services (limited)

Natural Resources

Materials that are available from nature (solar, biomass, fuel, and wind energy) (coal, crude oil)

Human Resources

Physical and mental efforts (factory workers)

Capital Resources

Man made machinery, tools, buildings

Entrepreneurship

People who invest money and effort to build new businesses

The Law of Demand

As prices rise, consumer demand decreases

The Law of Supply

As prices rise, quantity rises

Prosperity

Unemployment at its lowest (best)

Recession

Demand begins to decrease

Depression

Unemployment at its highest (bad)

Recovery

Demand begins to increase (rising)

Advertising

Billboards, commercials, magazine, newspaper, internet

Direct Marketing

Emails, letters, telephone calls, newsletters

PR and Publicity Campagins

Press releases, new articles, press conferences, community relations

Sales Promotion

Sales

Person Selling

involves face-to-face selling between a sales rep and a customer

4P's of marketing

Price, Place, Promotion, Product

Price (4ps)

How much it'll be for consumers

Place (4ps)

Where the product will be sold and how it'll be transported

Promotion (4ps)

How the product or service will be advertised

Product (4ps)

The good the company plans to sell

Right to Safety

Food, toys, and chemicals should be manufactured and marketed to protect consumers from harm

Right to Choose

Consumers have the right to choose from among different products at a competitive price

Right to information

Have the right to access info to not be misled

Right to be heard

Have the right for fair treatment. Businesses are required to respond with professionalism and fairness

Federal Trade Commission (FTC)

Main federal agency that governs consumer protection laws

Sherman Act of 1890

Preserves competition among businesses

Clayton Act (1914)

Includes rules for mergers of companies in making decisions for multiple businesses in the same market

Fair Credit Reporting Act (1970)

Provides a framework for consumers to take action for errors in their credit reports

Fair Credit Billing Act (1974)

Empowers consumers to get billing mistakes in their credit card accounts corrected

The Federal Food, Drug, and Cosmetic Act (1983)

Allows the FDA to ask for substantial proof of safety of new drugs from manufacturers

The Kefauver-Harris Amendments (1962)

Requires manufacturers to provide evidence of the effectiveness of their drugs through clinical studies

Medical Device Amendments (1976)

Prescribes standards for medical devices

Nutrition Labeling and Education Act (1990)

Specific guidelines for common claims manufacturers make on food labels

Consumer Product Safety Commission (CPSC)

Protects consumers from accidents and harm

Contract Terms and Conditions

offer, acceptance, consideration, mutuality of obligation, legal purpose, capacity

Express Contract

Both parties explicitly agree on contract terms

Implied Contract

Both parties' agreement is implied through their conduct

Unilateral Contract

One party agrees to pay after the other performs an action

Bilateral Contract

Each party promises to fulfill the action requested by the other party

Clean Air Act

Requires all vehicles to comply with federal emission standards to control air pollution

Clean Water Act

Prescribes measures to maintain the quality of surface water in water resources

Atomic Energy Act

Ensures atomic energy is used primarily for peaceful purposes

Depository Institutions

Accept and manage customer deposits in different accounts, such as checking and savings (commercial banks)

Investment Institutions

Helps governments and businesses raise money from the capital markets by issuing stocks and bonds

Contractual Institutions

Deal with insurance policies and pension funds

Commerical Banks

Offers a wide variety of services for businesses

Financial Service Companies

Offers loans to customers with poor credit

Credit Union

Provides financial services to its members, who are its collective owners. Charge lower fees than traditional banks

Savings and Loan Associations

Use money from savings accounts to provide home loans to customers

Mortgage Loan Companies

Offer competitive mortgage lending rates and can approve loans more quickly than commercial banks

Insurance Companies

Consumers agree to make regular payments in exchange for compensation

Asset Management Firms

Invest client funds into a wide range of investments, from real estate to securities

Brokerage Firms

Facilitate transactions between companies and individuals selling and buying securities

Trust Companies

Provides asset management and other financial services to its clients

SMART

Specific, Measurable, Achievable, Realistic, Timely

Portfolio Income

Income received through dividends, interest, or capital gains from investments

Dividens

A portion of a company's profit is paid to shareholders

Interest

Income generated by investing money in savings accounts or bonds

Capital gains

a profit from the sale of property or of an investment.

Stock

Ownership in corporation

Bonds

Investors loan money to a government for a certain time

Mutual funds

Invests in a pool of stocks and bonds to diversify risk while maximizing return

Derivaties

A contract whose value comes from the market value of a commodity

Real estate

Buy and sell properties for profit

Passive Income

Income from rental activity

Disposable Income

The amount of money an individual has to spend after paying income taxes

Provisions

Terms of agreement are stated in property leases and rental agreements

Reasons for Investing

Pay college, increase wealth, plan for retirement, leave an estate to heirs, and achieve financial freedom

Investing examples

stocks, bonds, mutual funds, real estate, precious metals, business

Reasons for saving

Safety, liquidity, interest income, and emergency funds

Saving examples

Savings accounts, certificates of deposits, and money market accounts

Primary Markets

The initial sale of stocks and bonds from companies to investors, called imital public offerings

Secondary Markets

The trade of stocks and bonds between investors after the IPO

Investment Firms

Charges fees and commissions for advice for buying and selling stocks. Best for people who have little knowledge about investments

Discount Brokerages

They provide a way to buy stocks online, but you have to know what you want. Best for experienced investors

Portfolio Managers

Highly skilled professionals that buy and sell stocks and bonds on the investors behalf. Best for people who have substantial funds, greater than $100,000, and prefer to pay a professional

Government Bonds

Offered by the U.S. Federal government

Treasury Bills

One year or less

Treasury Notes

1-10 years

Treasury Bonds

10+ years

Municipal Bonds

Offered by state and local governments

Corporate Bonds

Offered by companies

The Federal Reserve

Central Bank of the U.S.

Securities and Exchange Commission

Responsible for enforcing federal securities laws and proposing new laws to protect investors

Federal Deposit Insurance Corporation

Insures deposits, savings, and checking accounts for up to $250,00 per account

Financial Industry Regulatory Authority

Protects investors and markets by regulating the securities industry (independent)

Consumer Financial Protection Bureau

Ensures consumer finance markets work effectively. Provides a forum for consumers to submit complaints

Federal Financial Institutions Examination Council

Proposes consistent principles, standards, and reports to examine banks and financial institutions

Basic Savings Account (liquidity + interest rate)

fairly liquid + Average is 0.06%

Money Market Account (liquidity + interest rate)

fairly liquid + average is 0.07%

Certificate of Deposit (liquidity + interest rate)

not very liquid + 1 CD= 0.17%

Total % Return Equation

total % return = (final value of investment - initial value/initial value) x 100

Rate of return equation

72/rate of return = # of years for investment to double