{"id":299,"date":"2015-04-21T18:25:21","date_gmt":"2015-04-21T18:25:21","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&#038;p=299"},"modified":"2015-07-11T05:29:25","modified_gmt":"2015-07-11T05:29:25","slug":"putting-it-together-4","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/chapter\/putting-it-together-4\/","title":{"raw":"Putting It Together: Financial Markets and System","rendered":"Putting It Together: Financial Markets and System"},"content":{"raw":"<h2>Summary<\/h2>\r\nThis module covered the financial markets and system.\u00a0Below is a summary of the topics covered in this module.\r\n<h3>Money<\/h3>\r\nMoney serves three basic functions:\r\n<ul>\r\n\t<li><strong><em class=\"im_emphasis\">Medium of exchange<\/em>:<\/strong> because you can use it to buy the goods and services you want, everyone\u2019s willing to trade things for money.<\/li>\r\n\t<li><strong><em class=\"im_emphasis\">Measure of value<\/em>:<\/strong> it simplifies the exchange process because it\u2019s a means of indicating how much something costs.<\/li>\r\n\t<li><strong><em class=\"im_emphasis\">Store of value<\/em><\/strong>: people are willing to hold on to it because they\u2019re confident that it will keep its value over time.<\/li>\r\n\t<li>The government uses two measures to track the money supply: <strong class=\"im_emphasis im_bold\">M-1<\/strong> includes the most liquid forms of money, such as cash and checking-account funds. <strong class=\"im_emphasis im_bold\">M-2<\/strong> includes everything in M-1 plus near-cash items, such as savings accounts and time deposits below $100,000.<\/li>\r\n<\/ul>\r\n<h3>Federal Reserve System<\/h3>\r\n<ul id=\"collins-ch13_s03_s02_l02\" class=\"im_itemizedlist\">\r\n\t<li>Most large banks are members of the central banking system called the <strong class=\"im_emphasis im_bold\">Federal Reserve System<\/strong> (commonly known as \u201cthe Fed\u201d).<\/li>\r\n\t<li>The Fed\u2019s goals include price stability, sustainable economic growth, and full employment. It uses <em class=\"im_emphasis\">monetary policy<\/em> to regulate the money supply and the level of interest rates.<\/li>\r\n\t<li>To achieve these goals, the Fed has three tools:\r\n<ul id=\"collins-ch13_s03_s02_l03\" class=\"im_orderedlist\">\r\n\t<li>it can raise or lower <strong>reserve requirements<\/strong>\u2014the percentage of its funds that banks must set aside and can\u2019t lend out;<\/li>\r\n\t<li>it can raise or lower the <strong class=\"im_emphasis im_bold\">discount rate<\/strong>\u2014the rate of interest that the Fed charges member banks to borrow \u201creserve\u201d funds;<\/li>\r\n\t<li>it can conduct <strong class=\"im_emphasis im_bold\">open market operations<\/strong>\u2014buying or selling government securities on the open market.<\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<h3>Financial Institutions<\/h3>\r\n<ul id=\"collins-ch13_s02_s05_s01_l01\" class=\"im_itemizedlist\">\r\n\t<li>Financial institutions serve as financial intermediaries between savers and borrowers and direct the flow of funds between the two groups.<\/li>\r\n\t<li>Those that accept deposits from customers\u2014depository institutions\u2014include <strong class=\"im_emphasis im_bold\">commercial banks<\/strong>, <strong class=\"im_emphasis im_bold\">savings banks<\/strong>, and <strong class=\"im_emphasis im_bold\">credit unions<\/strong>; those that don\u2019t\u2014nondepository institutions\u2014include <strong class=\"im_emphasis im_bold\">finance companies<\/strong>, <strong class=\"im_emphasis im_bold\">insurance companies<\/strong>, and <strong class=\"im_emphasis im_bold\">brokerage firms<\/strong>.<\/li>\r\n\t<li>Financial institutions offer a wide range of services, including checking and savings accounts, ATM services, and credit and debit cards. They also sell securities and provide financial advice.<\/li>\r\n\t<li>A bank holds on to only a fraction of the money that it takes in\u2014an amount called its <strong class=\"im_emphasis im_bold\">reserves<\/strong>\u2014and lends out the rest to individuals, businesses, and governments. In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers. The <strong class=\"im_emphasis im_bold\">money multiplier<\/strong> effect ensures that the cycle expands the money supply.<\/li>\r\n<\/ul>\r\n<h3>Technology and Money<\/h3>\r\n<ul>\r\n\t<li>Virtual currencies, such as BitCoin, are using the traditional concept of \"money\" but as an alternative to the established Federal Reserve System. Although gaining in popularity, these virtual currencies are unregulated and pose some serious risks to those using this medium of exchange.<\/li>\r\n\t<li>Cashless payment systems such as Google Wallet and ApplePay leverage NFC technologies to allow consumers to carry their \"cash\" in their mobile devices. As more retailers move to \"tap to pay\" or scanning QR codes to complete transactions, the need to carry conventional paper money and coin diminishes. The question raised by this technology is not whether it will lead to a cashless society, but rather which mobile payment service will rise to the top and capture the market.<\/li>\r\n<\/ul>\r\n<h3>Securities Exchanges<\/h3>\r\n<ul>\r\n\t<li>The\u00a0<strong>NYSE<\/strong> (New York Stock Exchange) is the oldest established securities exchange in the United States. It is considered the largest equities-based exchange in the world, based on total market capitalization of its listed securities. The NYSE relied for many years on floor trading only. Today, more than half of all NYSE trades are conducted electronically, although floor traders still set pricing and deal in high-volume institutional trading.<\/li>\r\n\t<li>The\u00a0<strong>NASDAQ<\/strong> is\u00a0an electronic exchange where stocks are traded through an automated network. It stands for National Association of Securities Dealers Automated Quotations System. As a general rule of thumb, it is where most technology stocks are traded.\u00a0The first electronic stock market, and the successor to the over-the-counter (OTC) system of trading, the NASDAQ differs from the NYSE in that it is a fully automated network. The NASDAQ is also recognized for its high relative concentration of technology-sector stocks.<\/li>\r\n<\/ul>\r\n<ul>\r\n\t<li>Some of the common securities most investors choose are:<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 60px;\"><strong>Bonds:\u00a0<\/strong>a way to raise capital through borrowing, used by corporations and governments; an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity; traded on bond exchanges through brokers.<\/p>\r\n<p style=\"padding-left: 60px;\"><strong>Stocks:\u00a0<\/strong>a way to raise capital by\u00a0selling ownership or equity; an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value; traded on stock exchanges through member brokers.<\/p>\r\n<p style=\"padding-left: 60px;\"><strong>Commodities:\u00a0<\/strong>natural or cultivated resources; traded to hedge revenue or production needs or to speculate on resources\u2019 prices; traded on commodities exchanges through brokers.<\/p>\r\n<p style=\"padding-left: 60px;\"><strong>Mutual funds:\u00a0<\/strong>\u00a0portfolios of investments designed to achieve maximum diversification with minimal cost through economies of scale. An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index. An exchange-traded fund is a mutual fund whose shares are traded on an exchange.<\/p>\r\n\r\n<h3>Risks and Rewards<strong>\u00a0\u00a0<\/strong><\/h3>\r\n<ul>\r\n\t<li>There is a direct relationship between risk and return because investors will demand more compensation for sharing more investment risk.\u00a0<strong>Actual return<\/strong> includes any gain or loss of asset value plus any income produced by the asset during a period.\u00a0<strong>Expected return<\/strong> is the average return the asset has generated based on historical data of actual returns.<\/li>\r\n\t<li><strong>Investment risk<\/strong> is the possibility that an investment\u2019s actual return will not be its expected return.\u00a0Investment risk is exposure to\u00a0economic risk, industry risk, company- or firm-specific risk, asset-class risk, or\u00a0market risk.<\/li>\r\n<\/ul>\r\n<h2>Synthesis<\/h2>\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2015\/06\/02031812\/133498854_2f3bd5ee90_o.jpg\"><img class=\"alignright wp-image-2491 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2015\/06\/02031812\/133498854_2f3bd5ee90_o-300x225.jpg\" alt=\"dollar bill folded to resemble a shirt\" width=\"263\" height=\"197\" \/><\/a>\r\n\r\nStill have that dollar bill handy that you pulled out earlier when you learned about the Federal Reserve System? Do you think about it the same way you did before you completed this module? Perhaps you do, but now you should have a better understanding of what that dollar bill represents, how it came into existence, and where its value comes from. \u00a0Money will always exist in some form, whether it's based on NFC technology in your iPhone or we go back to a barter system where we trade seashells for bread. \u00a0It will still motivate people to work, study, achieve, and unfortunately even break the law. But, as you consider everything you have read and heard in this module, is it the money itself that is the motivator or the \"store of value\" that we work to obtain? In fact, you can look at that dollar bill and, really, it's just a piece of paper with a picture of a dead president on its face\u2014it has no intrinsic value. \u00a0So where is the value in the\u00a0dollar bill you're holding? Is it that our society recognizes it as having value, and business and individuals are willing to \"trade\" you dollars for shoes, cars, houses, food, and the other things that you need or want in your day-to-day life? Yes, we could go back to trading chickens for shoes, but technology is pushing us further and further away from that model, and as the monetary system evolves, it's unlikely that it will become less complex. That's one big reason you've spent all this time understanding this\u00a0thing that \"makes the world go 'round.\"","rendered":"<h2>Summary<\/h2>\n<p>This module covered the financial markets and system.\u00a0Below is a summary of the topics covered in this module.<\/p>\n<h3>Money<\/h3>\n<p>Money serves three basic functions:<\/p>\n<ul>\n<li><strong><em class=\"im_emphasis\">Medium of exchange<\/em>:<\/strong> because you can use it to buy the goods and services you want, everyone\u2019s willing to trade things for money.<\/li>\n<li><strong><em class=\"im_emphasis\">Measure of value<\/em>:<\/strong> it simplifies the exchange process because it\u2019s a means of indicating how much something costs.<\/li>\n<li><strong><em class=\"im_emphasis\">Store of value<\/em><\/strong>: people are willing to hold on to it because they\u2019re confident that it will keep its value over time.<\/li>\n<li>The government uses two measures to track the money supply: <strong class=\"im_emphasis im_bold\">M-1<\/strong> includes the most liquid forms of money, such as cash and checking-account funds. <strong class=\"im_emphasis im_bold\">M-2<\/strong> includes everything in M-1 plus near-cash items, such as savings accounts and time deposits below $100,000.<\/li>\n<\/ul>\n<h3>Federal Reserve System<\/h3>\n<ul id=\"collins-ch13_s03_s02_l02\" class=\"im_itemizedlist\">\n<li>Most large banks are members of the central banking system called the <strong class=\"im_emphasis im_bold\">Federal Reserve System<\/strong> (commonly known as \u201cthe Fed\u201d).<\/li>\n<li>The Fed\u2019s goals include price stability, sustainable economic growth, and full employment. It uses <em class=\"im_emphasis\">monetary policy<\/em> to regulate the money supply and the level of interest rates.<\/li>\n<li>To achieve these goals, the Fed has three tools:\n<ul id=\"collins-ch13_s03_s02_l03\" class=\"im_orderedlist\">\n<li>it can raise or lower <strong>reserve requirements<\/strong>\u2014the percentage of its funds that banks must set aside and can\u2019t lend out;<\/li>\n<li>it can raise or lower the <strong class=\"im_emphasis im_bold\">discount rate<\/strong>\u2014the rate of interest that the Fed charges member banks to borrow \u201creserve\u201d funds;<\/li>\n<li>it can conduct <strong class=\"im_emphasis im_bold\">open market operations<\/strong>\u2014buying or selling government securities on the open market.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3>Financial Institutions<\/h3>\n<ul id=\"collins-ch13_s02_s05_s01_l01\" class=\"im_itemizedlist\">\n<li>Financial institutions serve as financial intermediaries between savers and borrowers and direct the flow of funds between the two groups.<\/li>\n<li>Those that accept deposits from customers\u2014depository institutions\u2014include <strong class=\"im_emphasis im_bold\">commercial banks<\/strong>, <strong class=\"im_emphasis im_bold\">savings banks<\/strong>, and <strong class=\"im_emphasis im_bold\">credit unions<\/strong>; those that don\u2019t\u2014nondepository institutions\u2014include <strong class=\"im_emphasis im_bold\">finance companies<\/strong>, <strong class=\"im_emphasis im_bold\">insurance companies<\/strong>, and <strong class=\"im_emphasis im_bold\">brokerage firms<\/strong>.<\/li>\n<li>Financial institutions offer a wide range of services, including checking and savings accounts, ATM services, and credit and debit cards. They also sell securities and provide financial advice.<\/li>\n<li>A bank holds on to only a fraction of the money that it takes in\u2014an amount called its <strong class=\"im_emphasis im_bold\">reserves<\/strong>\u2014and lends out the rest to individuals, businesses, and governments. In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers. The <strong class=\"im_emphasis im_bold\">money multiplier<\/strong> effect ensures that the cycle expands the money supply.<\/li>\n<\/ul>\n<h3>Technology and Money<\/h3>\n<ul>\n<li>Virtual currencies, such as BitCoin, are using the traditional concept of &#8220;money&#8221; but as an alternative to the established Federal Reserve System. Although gaining in popularity, these virtual currencies are unregulated and pose some serious risks to those using this medium of exchange.<\/li>\n<li>Cashless payment systems such as Google Wallet and ApplePay leverage NFC technologies to allow consumers to carry their &#8220;cash&#8221; in their mobile devices. As more retailers move to &#8220;tap to pay&#8221; or scanning QR codes to complete transactions, the need to carry conventional paper money and coin diminishes. The question raised by this technology is not whether it will lead to a cashless society, but rather which mobile payment service will rise to the top and capture the market.<\/li>\n<\/ul>\n<h3>Securities Exchanges<\/h3>\n<ul>\n<li>The\u00a0<strong>NYSE<\/strong> (New York Stock Exchange) is the oldest established securities exchange in the United States. It is considered the largest equities-based exchange in the world, based on total market capitalization of its listed securities. The NYSE relied for many years on floor trading only. Today, more than half of all NYSE trades are conducted electronically, although floor traders still set pricing and deal in high-volume institutional trading.<\/li>\n<li>The\u00a0<strong>NASDAQ<\/strong> is\u00a0an electronic exchange where stocks are traded through an automated network. It stands for National Association of Securities Dealers Automated Quotations System. As a general rule of thumb, it is where most technology stocks are traded.\u00a0The first electronic stock market, and the successor to the over-the-counter (OTC) system of trading, the NASDAQ differs from the NYSE in that it is a fully automated network. The NASDAQ is also recognized for its high relative concentration of technology-sector stocks.<\/li>\n<\/ul>\n<ul>\n<li>Some of the common securities most investors choose are:<\/li>\n<\/ul>\n<p style=\"padding-left: 60px;\"><strong>Bonds:\u00a0<\/strong>a way to raise capital through borrowing, used by corporations and governments; an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity; traded on bond exchanges through brokers.<\/p>\n<p style=\"padding-left: 60px;\"><strong>Stocks:\u00a0<\/strong>a way to raise capital by\u00a0selling ownership or equity; an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value; traded on stock exchanges through member brokers.<\/p>\n<p style=\"padding-left: 60px;\"><strong>Commodities:\u00a0<\/strong>natural or cultivated resources; traded to hedge revenue or production needs or to speculate on resources\u2019 prices; traded on commodities exchanges through brokers.<\/p>\n<p style=\"padding-left: 60px;\"><strong>Mutual funds:\u00a0<\/strong>\u00a0portfolios of investments designed to achieve maximum diversification with minimal cost through economies of scale. An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index. An exchange-traded fund is a mutual fund whose shares are traded on an exchange.<\/p>\n<h3>Risks and Rewards<strong>\u00a0\u00a0<\/strong><\/h3>\n<ul>\n<li>There is a direct relationship between risk and return because investors will demand more compensation for sharing more investment risk.\u00a0<strong>Actual return<\/strong> includes any gain or loss of asset value plus any income produced by the asset during a period.\u00a0<strong>Expected return<\/strong> is the average return the asset has generated based on historical data of actual returns.<\/li>\n<li><strong>Investment risk<\/strong> is the possibility that an investment\u2019s actual return will not be its expected return.\u00a0Investment risk is exposure to\u00a0economic risk, industry risk, company- or firm-specific risk, asset-class risk, or\u00a0market risk.<\/li>\n<\/ul>\n<h2>Synthesis<\/h2>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2015\/06\/02031812\/133498854_2f3bd5ee90_o.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-2491\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2015\/06\/02031812\/133498854_2f3bd5ee90_o-300x225.jpg\" alt=\"dollar bill folded to resemble a shirt\" width=\"263\" height=\"197\" \/><\/a><\/p>\n<p>Still have that dollar bill handy that you pulled out earlier when you learned about the Federal Reserve System? Do you think about it the same way you did before you completed this module? Perhaps you do, but now you should have a better understanding of what that dollar bill represents, how it came into existence, and where its value comes from. \u00a0Money will always exist in some form, whether it&#8217;s based on NFC technology in your iPhone or we go back to a barter system where we trade seashells for bread. \u00a0It will still motivate people to work, study, achieve, and unfortunately even break the law. But, as you consider everything you have read and heard in this module, is it the money itself that is the motivator or the &#8220;store of value&#8221; that we work to obtain? In fact, you can look at that dollar bill and, really, it&#8217;s just a piece of paper with a picture of a dead president on its face\u2014it has no intrinsic value. \u00a0So where is the value in the\u00a0dollar bill you&#8217;re holding? Is it that our society recognizes it as having value, and business and individuals are willing to &#8220;trade&#8221; you dollars for shoes, cars, houses, food, and the other things that you need or want in your day-to-day life? Yes, we could go back to trading chickens for shoes, but technology is pushing us further and further away from that model, and as the monetary system evolves, it&#8217;s unlikely that it will become less complex. That&#8217;s one big reason you&#8217;ve spent all this time understanding this\u00a0thing that &#8220;makes the world go &#8217;round.&#8221;<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-299\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: Linda Williams and Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Money Shirt. <strong>Authored by<\/strong>: Rob Lee. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/roblee\/133498854\/\">https:\/\/www.flickr.com\/photos\/roblee\/133498854\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":78,"menu_order":19,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"\",\"author\":\"Linda Williams and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Money Shirt\",\"author\":\"Rob Lee\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/roblee\/133498854\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"0886cfce-8538-4de6-a5b5-394edca8282f","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-299","chapter","type-chapter","status-publish","hentry"],"part":83,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/299","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/users\/78"}],"version-history":[{"count":23,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/299\/revisions"}],"predecessor-version":[{"id":4906,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/299\/revisions\/4906"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/parts\/83"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/299\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/media?parent=299"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapter-type?post=299"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/contributor?post=299"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/license?post=299"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}