Markets, Money and Finance

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Chapter 8

• Markets, Money and Finance

2
Learning Objectives

• After reading and studying the chapter, you
  should be able to
• Describe the stock market and the principal terms
  used in buying and selling stock.
• Define what is meant by an IPO.
• Describe the SEC and its primary responsibility.
• Demonstrate the ability to read and explain stock
  quotes.
• Define and explain the history of money and how
  it is used.
• Differentiate between depository and
  nondepository institutions and give examples of
  each.
• Describe the history and purposes of the FDIC.
• Define business finance.

3
Business Finance

• Defined the study of credit, investing, funds
  management, risk management and capital
  acquisition.

4
Stock Market

• Defined the place where stocks or shares of
  ownership are bought and sold. Examples of stock
  exchanges are
• New York Stock Exchange (NYSE)
• National Association of Securities Dealers
  Automated Quotations (NASDAQ)
• American Stock Exchange (AMEX)

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Stock Terms

• Stock Shares of ownership in a company. The most
  basic form is common stock and it gives the owner
  voting rates and a share of the profit.
• Dividends A portion of the companys profits
  that are distributed to the shareholders.
• Stock Broker A registered representative who
  serves as an intermediary between a client and a
  stock exchange member who negotiates a price for
  selling or buying stock in a company.

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Going Public

• IPO The initial public offering for sale of a
  companys shares. This occurs in the primary
  market. The secondary market refers to buying
  and selling previously traded or issued shares of
  stock.

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Why Issue Stock?

• To raise funds for the business. Issuing stock
  is one of the primary advantages to the
  corporation organizational form. Other forms
  like sole proprietor, partnership, and even the
  LLC cannot raise funds through issuance of stock.

8
Reading Stock Quotes

• Symbol Company Name Volume Hi Low
  Last Net Change
• PDQ PDQ, Inc. 8 15.09 14.64
  15.00 1.00
• Symbol The company stock symboloften similar
  to the company namerepresents its stock. For
  example
• IBM IBM
• Wal-Mart WMT
• McDonalds MCD
• Company Name The actual name of the company.
• Volume Number of shares that traded on the last
  day the stock was tradedgiven in hundreds.
• Hi Stocks highest price the last day it was
  traded.
• Low Stocks lowest price the last day it was
  traded.
• Last Called the Closing Price or Close, refers
  to the stocks last traded price.
• Net Change Amount of change in the closing
  price from the prior trading days closing price.

9
Understanding Money and Banking

• MONEY anything that is accepted in exchange
  payment for goods and services or for the
  repayment of a debt. Money is used as a medium
  of exchange, a unit of account, and a store of
  value.
• Medium of Exchange the primary function of
  money is to serve as a generally accepted payment
  for products and resources.
• Unit of Account part of the function of money
  is to serve as an assignment of value to a good
  or service.
• Store of Value another function of money, this
  refers to its value over a period of time in
  other words it can be stored for use at another
  time without perishing or deteriorating.

10
Understanding Money and Banking

• Chairman of the Federal Reserve, Alan Greenspan
  remarked that, To accept money in exchange for
  goods and services requires a trust that the
  money will be accepted by another purveyor of
  goods and services. In earlier generations, that
  trust adhered to the intrinsic value of gold,
  silver, or any other commodity that had general
  acceptability.
• Greenspan implies that money is something,
  anything with valuebe it gold or silver or
  another commodityaccepted in payment for goods
  and services. 1
• 1 Alan Greenspan, The History of Money,
  American Numismatic Society, New York, January
  16, 2002, http//www.federalreserve.gov/boarddocs/
  speeches/2002/200201163/default.htm

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Money Historical Perspective

• Ancient Bartering people would trade something
  of value for something else of valuethe barter
  system. Barter refers to transferring or
  exchanging goods without involving money.
• Certain goods or commodities became preferred and
  used more often and therefore became more widely
  accepted as a means of exchange and so the
  concept of money began to develop. Why did
  some ancient cultures prefer cattle or crops,
  cowrie shells or whales teethcalled tambua
  among Fijian societies?
• Some objects became more widely accepted and used
  as primitive forms of money because they were
  easier to carry, had multiple uses. Some served
  as decoration or ornamentation like the manilas,
  metallic objects that west Africans wore as
  jewelry and also used as money up until the late
  1940s. 1 Native American tribes would use
  wampum, or beaded shells, as a common form of
  money. By 1637, there is some evidence that the
  Massachusetts Bay Colony declared wampum legal
  tender.2 Some linguistic evidence suggests that
  words such as capital, chattel, and cattle all
  have a common root. 3
• 1 Glyn Davies, Origins of Money and of
  Banking, http//www.ex.ac.uk/RDavies/arian/origin
  s.html
• 2 History of Money, http//www.pbs.org/newshour/
  on2/money/history.html
• 3 Glyn Davies, Origins of Money and of Banking,
  http//www.ex.ac.uk/RDavies/arian/origins.html

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Money Historical Perspective

• Ancient Mesopotamia and Egyptian Banking The
  Biblical story of Joseph, a former slave employed
  by Pharaoh to oversee a huge system of deposits,
  withdrawals and dispersements of grain and food
  supplies during a seven-year famine.
• Coinage Transitioning from bartering to the use
  of crops or livestock to objects such as cowrie
  shells and wampum, gives way about 1000 BC to the
  use of precious metals and some use of coinage.
• Precious metals began to be used in China and
  among the ancient Greeks and Romans.
• Coinage used among the Romans during the time of
  Christ (Mark 12).

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Money Historical Perspective

• Colonial America17th and 18th Centuries One
  frustrations among many of the British citizens,
  was a lack of formal currency and a constant
  shortage of coinage for use in trade.
• Silver, gold, and even tobacco were used as a
  form of currency. England did not allow the
  colonies to mint their own coinage or print their
  own paper currencies, so early settlers often
  used foreign coinage such as the Spanish silver
  dollar.
• These were often cut into halves, and these
  halves cut into halves, resulting in four quarter
  dollars. Even these were cut into pieces of
  eightliterally a single Spanish silver dollar
  sliced like pie into eight pieces.
• Two bits were worth a quarter of a dollar
• Four bits were worth half a dollar
• Six bits would have been worth an equivalent of
  75 cents
• Add two more bits and you would have a total of a
  dollar.

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Money Historical Perspective

• Chinas Use of Paper Money The Tang dynasty
  (618-907) around A.D. 800 indicates the first use
  of paper money. Marco Polo, upon seeing paper
  money during his travels to China in the 13th
  century, described how it was made, used and
  valued.
• Europeans Use of Paper Money Europeans began
  using paper money around the 17th century.
• What makes paper currency so attractive?
• Like coins, paper is portable, standardized,
  divisible and is fairly stable and durable.
  Using cash and coins as units of value makes
  exchanges easier.
• Suppose you want to purchase a dozen eggs for
  your family. You own a banana farm and so decide
  to trade your bananas for the eggs. After
  negotiating, you agree that three pounds of
  bananas is the payment for one dozen eggs. The
  trade is made and both parties are satisfied.
  Your currency of bananas is next used to purchase
  some straw hats. After negotiating, it is
  determined the twelve pounds of bananas is
  sufficient reimbursement for each straw hat.
  Now, imagine having to calculate the price in
  pounds of bananas for every other item you need
  to purchase. Quite daunting!
• How much easier if all simply agree on some unit
  of account, on some store of value, on some
  standard of deferred payment! How much smarter!

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Money Historical Perspective

• USA Use of Paper Money Paper currency in the US
  began during the Revolutionary War when Congress
  began printing currency.
• In the days of the free banking era, America
  was inundated with currency printed and issued by
  individual banks.
• By 1860 an estimated 8,000 different state banks
  were issuing their own currency, sometimes called
  wildcat notes.1
• Following the Federal Reserve Act of 1913, the
  Federal Reserve Note became the dominant form of
  paper currency in the United States. Its whats
  in your wallet right now.
• In 1955, Congress added the words, In God We
  Trust, to the currency. 2
• 1 History of Money, http//www.pbs.org/newshour
  /on2/money/history.html
• 2 ibid

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Money Facts Did You Know?

• More than half of a dollar bill is considered
  legal tender, and only the front of a dollar bill
  is valuable. If you could separate the front of a
  bill from the back, only the front half would be
  considered "money."
• In 1955 a law was passed that all new designs for
  coin and currency would bear the inscription "In
  God We Trust." Those words had first appeared on
  a U.S. coin--the two-cent piece--in 1864.
• Until 1929 currency measured 7.42 x 3.13 inches.
  Since then it has remained at its present size of
  6.14 x 2.61 inches--an easier size to handle and
  store. Since that size requires less paper, it is
  also less expensive to produce.
• By 1865 approximately one-third of all
  circulating currency was counterfeit, and the
  Department of the Treasury established the United
  States Secret Service in an effort to control
  counterfeiting. 1
• 1 Federal Reserve Bank of San Francisco, About
  the Fed, http//www.frbsf.org/publications/federa
  lreserve/annual/1995/history.html

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Depository Institutions

• Depository Institution financial institutions in
  which individuals, businesses and the government
  deposit finances which are then invested in
  businesses, real estate or other personal loans
  made for interest. Three examples include
• 1. Banks the most dominant type, they use
  deposits to make loans to businesses and
  individuals for interest.
• 2. Thrift Institutions also called savings and
  loans or building and loan associations, deal
  primarily with the business of making home loans
  to consumers for interest.
• 3. Credit Unions not-for--profit companies that
  pay no state or federal income tax, primarily
  make personal consumer loans and charge interest
  they only serve customers who share a common bond
  such as an employer, religious identification or
  profession.

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Non-Depository Institution

• Non-depository Institution financial
  institutions that do not hold deposit accounts.
  Three examples include
• 1. Insurance Companies businesses that sell
  protection against financial losses. Two major
  categories property-casualty and life insurance
• 2. Investment Companies firms that offer
  investment products related to various stock
  exchanges, including bond markets and mutual
  funds
• Mutual funds pool the savings of many investors
  who buy unit shares of a portfolio of funds.
  Such investments spread savings across different
  kinds of securities.
• Bond markets are debt instruments issued by the
  government or a corporation that obligates the
  issuer to pay the bondholder the original bond
  plus interest (basically an I.O.U.) at a
  specified future date.
• 3. Pension Funds retirement plans which invest
  savings of an employee and are typically matched
  by an employer and invested in stocks, bonds and
  real estate.

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Markets, Money and FinanceDiscussion Questions

• Describe how stocks are bought and sold.
• Define the following terms stock dividends
  broker stock market and IPO.
• Define money and give three historical examples
  of what has been used for money.
• Describe two examples of depository institutions
  and two examples of non-depository institutions.

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Markets, Money and FinanceActivities

• Over a two-week period, invest 100,000 in your
  choice of stocks. Assume a 20 fee on every buy
  and sell transaction. Keep track of your trades
  and a daily log of each stock price. At the end
  of the two-week period, report your performance
  and summarize your gains or losses.
• Prepare a timeline outlining highlights in the
  use of money, using the text and two additional
  sources.

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Markets, Money and FinanceIntegrating Faith and
Discipline

• Using a Bible software program or online Bible
  search website such as www.biblegateway.com, do a
  word search on money and on investment(s). How
  many direct references were generated?
• Give an example from the New Testament that
  encourages investment.
• Pretend for a moment that money is no object.
  Name two specific investments you believe could
  serve to advance the cause of Christ. Be
  prepared to justify your thinking.