2. The Flow of Savings and Investments
Financial Institutions that
Savers make make loans to…. Investors
deposits to….
• Commercial Banks
• Saving and Loan
institutions
• Savings Banks
• Mutual Savings
Banks
• Credit Unions
• Life Insurance
companies
• Pensions Funds
• Finance
Companies
Investment promotes growth and contributes to our nations
wealth
3. Risk, Liquidity and Return
Types of Risk:
1. Credit Risk – borrower may not pay
back the loan. This is the main risk
banks face when lending out money.
2. Liquidity Risk – one may not be able to
convert that investment to cash as
quickly as they may like. (example –
Time deposit)
3. Inflation Rate Risk – Investment where
the inflation rate erodes the value of
the investment/asset.
4. Time Risk – idea where an investment
has tied up an investors money and
they cannot take advantage of a better
opportunity.
4. Junk Bonds: a lower rated, potentially higher-paying bond.
• Popular during the 1980’s and 1990’s.
• Generally appealing to aggressive investors.
• Ratings of junk bonds are low rated.
5. Two ways to make money or benefit from buying stock
1. Dividends: portion of the company’s profits that are paid to the
shareholders.
2. Capital Gains: selling stock for more than you originally paid for it. If an
investor can sell their stock for a profit, it is called a capital gain. If they sell it
for a loss, it is called a capital loss.
6. Measuring Performance in the Stock Market
Bull Market – a steady rise in the stock market over an extended period of
time.
Bear Market – a steady drop in the stock market over an extended period of
time.
Dow Jones Industrial Average – represents 30 large companies in various
industries such as food, entertainment, and technology
S & P 500 – gives a broad picture of how the stock market is doing. It tracks
500 companies to measure the overall stock performance.
