2.03 Federal Reserve & 2.03 Federal Reserve & Stock MarketStock Market

Objective 2.03 Explain how the Federal Objective 2.03 Explain how the Federal Reserve, Stock Market, and e-Reserve, Stock Market, and e-

commerce impact the United States’ commerce impact the United States’ economic system. economic system.

The Federal ReserveThe Federal Reserve

Central Bank of the United StatesCentral Bank of the United States Regulates the money supply in the Regulates the money supply in the

US economyUS economy Raises and lowers the discount Raises and lowers the discount

interest rateinterest rate Puts money into circulationPuts money into circulation Removes money from circulationRemoves money from circulation

Impact of the Federal ReserveImpact of the Federal Reserve If the Federal Reserve raises the If the Federal Reserve raises the

discount ratediscount rate Consumer credit becomes more expensiveConsumer credit becomes more expensive Consumers buy fewer large goods—Consumers buy fewer large goods—

refrigerators, boats, etc.refrigerators, boats, etc. If the Federal reserve lowers the If the Federal reserve lowers the

discount ratediscount rate Consumer credit becomes less expensiveConsumer credit becomes less expensive Consumers buy more expensive goods—Consumers buy more expensive goods—

cars, washing machines, etc.cars, washing machines, etc.

What are stocks?What are stocks? Stocks are shares of ownership in Stocks are shares of ownership in

corporationscorporations Shareholders have partial Shareholders have partial

ownership in the corporationownership in the corporation Corporations are permitted to sell Corporations are permitted to sell

stock to raise capital for the stock to raise capital for the corporationcorporation

Shareholders may receive Shareholders may receive dividend payments from the dividend payments from the corporationcorporation

What other investments are traded?What other investments are traded? Bonds—loans made by the investor to Bonds—loans made by the investor to

the issuer; the investor is repaid with the issuer; the investor is repaid with interestinterest Corporate BondsCorporate Bonds Municipal BondsMunicipal Bonds Treasury BondsTreasury Bonds US Savings BondsUS Savings Bonds

Futures—agreement to buy or sell a Futures—agreement to buy or sell a commodity (oil, gold, etc.) at some pointcommodity (oil, gold, etc.) at some point

Mutual Funds—combination of individual Mutual Funds—combination of individual stocksstocks

Stocks, Bonds, Futures, and Mutual Stocks, Bonds, Futures, and Mutual Funds are called Securities.Funds are called Securities.

The Stock Market’s PurposeThe Stock Market’s Purpose

The stock market is where shares of The stock market is where shares of stocks, bonds, and futures are bought stocks, bonds, and futures are bought and sold (or traded). (Can be and sold (or traded). (Can be electronic.)electronic.)

The stock exchange is the actual The stock exchange is the actual physical location where stocks are physical location where stocks are listed and traded.listed and traded. New York Stock Exchange (NYSE)New York Stock Exchange (NYSE) American Stock ExchangeAmerican Stock Exchange NASDAQ—virtual exchangeNASDAQ—virtual exchange

The Stock Market’s FunctionsThe Stock Market’s Functions

Provides companies with a way Provides companies with a way of issuing shares of stock to of issuing shares of stock to people who want to invest in the people who want to invest in the company. The sale of shares of company. The sale of shares of stock is a way for the stock is a way for the corporations to raise money.corporations to raise money.

Provides a place for the buying, Provides a place for the buying, selling and trading of stocks (and selling and trading of stocks (and other securities).other securities).

Stocks are . . . Stocks are . . . you raise money from you raise money from

selling those "pieces" of selling those "pieces" of your business which can your business which can be used to build new be used to build new plants and facilities, pay plants and facilities, pay down debt, or acquire down debt, or acquire another company.another company.

smart owner will keep at smart owner will keep at least 51% of the stock, least 51% of the stock, which will allow them to which will allow them to retain control of the day retain control of the day to day activitiesto day activities

controlling shareholdercontrolling shareholder

Stock is ownership in a Stock is ownership in a company. (Equity)company. (Equity)

If you were to divide your If you were to divide your business up into small business up into small pieces and sell those pieces and sell those pieces, you would pieces, you would essentially have issued essentially have issued stock.stock.

Stocks help . . .

What is the Dow Jones What is the Dow Jones Industrial Average?Industrial Average?

An index of thirty, blue chip An index of thirty, blue chip stocks that are traded in the stocks that are traded in the United States. United States.

It is believed that by looking It is believed that by looking at the companies on the list, at the companies on the list, a person can get a general a person can get a general picture of how the market as picture of how the market as a whole is performing. a whole is performing.

The most quoted and The most quoted and followed index in the world, followed index in the world, and dates back to May 26, and dates back to May 26, 1896.1896.

Bear MarketBear Market A prolonged period in A prolonged period in

which investment prices which investment prices fall, accompanied by fall, accompanied by widespread pessimismwidespread pessimism

Bear markets usually Bear markets usually occur when the occur when the economy is in a economy is in a recession and recession and unemployment is high, unemployment is high, or when inflation is or when inflation is rising quicklyrising quickly

1929 Crash most 1929 Crash most famous crash in U.S. famous crash in U.S. historyhistory

Dow Industrials hit a Dow Industrials hit a high of 386 in high of 386 in September, 1929.September, 1929.

It did not get back to It did not get back to that level until that level until November, 1954November, 1954

Dow dropped 89%Dow dropped 89% 1987 – The Market fell 1987 – The Market fell

dramatically.dramatically.

Bull MarketBull Market long term uptrend long term uptrend

(months to years) price (months to years) price movement in any movement in any marketmarket

An extended period of An extended period of generally rising pricesgenerally rising prices

characterized characterized by optimism, investor by optimism, investor confidence and confidence and expectations that strong expectations that strong results will continue.results will continue.

Impact of E-commerce Impact of E-commerce on the Economyon the Economy

Because consumers can purchase goods on Because consumers can purchase goods on the Internet they have more choices in the Internet they have more choices in goods.goods.

Global competition is increased and US Global competition is increased and US businesses must compete globally.businesses must compete globally.

Fewer salespeople are needed in stores—a Fewer salespeople are needed in stores—a shift in jobs is required. More people are shift in jobs is required. More people are needed in order fulfillment and customer needed in order fulfillment and customer service.service.

Goods are manufactured just-in-time—as Goods are manufactured just-in-time—as they are needed for distribution.they are needed for distribution.