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Economics 11 - Financial Markets


 

11-1 SAVING AND INVESTING

Investment promotes economic growth. Investment is the act of redirecting resources from being used today so that they can create future benefits. The financial system makes investment possible by allowing the transfer of money between savers and borrowers. Savers are households and businesses that lend out their savings. Borrowers are governments and businesses who use the money they borrow to build roads, factories,

and homes. Borrowers may also use these funds to develop new products or provide new services. Financial intermediaries are institutions which help channel funds from

savers to borrowers. Examples include banks and mutual funds, funds which pool savings from many people and invest this money in different ways. Financial intermediaries provide three major advantages to investors. They reduce risk by helping people invest in a variety of opportunities. The idea of spreading out investments to reduce risk is called diversification. Financial intermediaries also provide information

and liquidity to investors. Saving and investing involves tradeoffs. For example, savings accounts have very low risk, and are liquid, but they also have a low return. Return is the money, such as interest, an investor receives above and beyond the sum of money initially invested. An investment with higher risk or less liquidity usually offers a higher

potential return. Investors will be more tempted to take on more risk, or to give up

liquidity, if they have a chance of earning more money on their investment.

 

 

11-2 BONDS AND OTHER FINANCIAL ASSETS

Bonds are loans that the government or a corporation must repay to an investor.

Bonds usually pay a fixed amount of interest at regular intervals for a set amount of time. At maturity, the end of that period, the issuer repays the par value, or the original amount of investment, to the bondholder. Investors like bonds because they are

good investments and usually have low risk. However, because bonds are low-risk

investments, their returns are often less than those of other investments. Issuers

like bonds because once the bond is sold interest rates on that bond will not go up

or down. However issuers must make fixed interest payments and repay the principal when due—even in bad years. There are several types of bonds. Savings bonds are issued by the United States government. The United States Treasury Department issues treasury bonds, and state and local governments and municipalities issue municipal bonds. Interest on government-issued bonds is exempt from certain taxes. Corporations sell corporate bonds to raise money to expand their businesses. Other types of financial

assets include certificates of deposit (CDs) and mutual funds. Markets for financial

assets are often classified according to the length of time for which funds are

lent. Capital markets are markets in which money is lent for longer than a year. Money markets are markets in which money is lent for less than a year.

 

11-3 THE STOCK MARKET

 

 

By selling stock, corporations raise the money that is necessary to start their businesses

and keep them growing. Investors in stocks may make a profit in two ways: by receiving dividends, a payment made by corporations to stockholders; and by selling the stock for more than they paid for it. The difference is called a capital gain. However, purchasing stock is risky. The stock price may decrease. Investors who sell their stock for less than they paid for it experience a capital loss. Stock is bought and sold in markets called stock exchanges. When people talk about "the stock market" they usually mean the New York Stock Exchange (NYSE), the largest in the country. The performance of the NYSE is often measured by the performance of the few stocks included in the Dow Jones Industrial Average, or "The Dow." When the stock market rises steadily over a period

of time, a bull market exists. When it falls for a period of time, people call it a bear market. During the bull market of the 1920’s, there was a great amount of speculation, high-risk investment with borrowed money in hope of big returns. This period ended in the stock market collapse called the "Great Crash" of October 1929. Another great bull market occurred in the 1990s.

 

 

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http://www.americasaves.org/how-to-save-money/the-miracle-of-compound-interest

http://www.americasaves.org/how-to-save-money/financial-products

 

 

 

Jump $tart Coalition Personal

Financial Management

Guidelines

 

Income

Students will be able to:

A. Analyze how personal choices, education/training, technology, and other factors affect future income.

B. Identify sources of income, including entrepreneurial activity.

C. Explain how tax policies, personal taxes, and transfer payments affect disposable income.

Money Management

Students will be able to:

A. Identify the opportunity cost of a financial decision as applied to income, spending, and saving.

B. Establish and evaluate short- and long-term financial goals and plans regarding income, spending, and saving.

C. Develop, analyze, and revise a budget.

D. Explain relationships among taxes, income, spending, and financial investment.

E. Develop a risk-management plan that includes life, automobile, property, health, and income protection/disability insurance.

F. Explain personal financial responsibility.

G. Perform basic financial operations, such as using checking and savings accounts.

Spending and Credit

Students will be able to:

A. Compare the advantages and disadvantages of spending now and spending later.

B. Evaluate the benefits and costs of using different transaction instruments, such as cash, checking accounts, debit cards, credit cards, money orders, electronic fund transfers, and other financial services.

C. Explain how the price of credit is affected by the risk level of the borrower.

D. Explain how payment performance determines credit history and why credit records are maintained and accessed.

E. Describe the rights and responsibilities of buyers, sellers, and creditors under various consumer protection laws.

F. Use cost-benefit analysis to choose among spending alternatives, such as housing, transportation, and consumer durables.

G. Identify and analyze pros and cons of alternative actions to deal with credit over-extension or other financial difficulties.

Saving and Investing

Students will be able to:

A. Compare the advantages and disadvantages of saving now and saving later.

B. Explain the importance of short- and long-term saving and financial investment strategies.

C. Identify and evaluate the risk, return, and liquidity of various saving and investment decisions.

D. Explain how taxes, government policy/regulation, and inflation impact saving and investment decisions.

See www.jumpstartcoalition.org

Page 14

http://www.p12.nysed.gov/ciai/socst/pub/economics.pdf