Secondary Markets Secondary markets, or secondary financial markets, trade existing securities (previously owned shares of stocks, bonds,

and other financial assets). Secondary markets consist of both organized exchanges, such as the New York Stock Exchange, and over-the-counter or electronic markets, such as NASDAQ: secondary markets consist of markets in which existing securities are traded. Organized stock exchanges: Organized stock exchanges are markets that are used to facilitate the trading of financial instruments. The main organized stock exchanges are the New York Stock Exchange and the American Stock Exchange. There are also regional stock exchanges, such as the Pacific, Chicago, Philadelphia, Cincinnati, Intermountain, Spokane, and Boston Stock Exchanges, but these stock exchanges are very small. The largest stock exchange in the United States is the New York Stock Exchange. This stock exchange is more than two hundred years old, and it is still limited to 1,366 seats: the same number of seats it has had since 1953. The New York Stock Exchange includes over 3,000 listed companies. Generally, 80 percent of the daily trading volume in the United States is done on the New York Stock Exchange. Over-the-counter (OTC) market: The OTC market is an electronic network of dealers that allows investors to execute trades without going through specialists or intermediaries. That is, there is no single physical location (exchange) where stocks are traded, rather these trades are executed through the National Association of Securities Dealer Automated Quotation System (NASDAQ) which links various dealers and brokers through a computer or telephone based system. Usually the bigger companies are traded on an exchange rather than an OTC. These trades are also executed through the National Market System, a system under the sponsorship of the National Association of Securities Dealers (NASD), which trades stocks of specific sizes, profitability, and trading requirements. NASD also trades pink sheets, or lists of small companies not listed on any exchange; these stocks are traded by brokers through a network of phone and computer systems and may be significantly more risky. Secondary bond markets: An organized exchange for individual retail investors to trade bonds does not exist. This may be because there is little demand for bonds among individual investors; this may also be because the transaction costs to trade bonds are so small. Generally, individuals must work with a broker who buys or sells bonds through a bond dealer. Government bond trading: Government bond trading is dominated by investment houses, commercial banks, and the Federal Reserve. Some bonds, such as Series EE and I Bonds and some Treasury securities, can be purchased directly over the Internet at www.treasurydirect.gov. International stock markets: There are domestic stock exchanges in the developed countries and in many of the emerging or developing countries.] Most nations have securities exchanges; these markets trade more than $25 trillion in assets. In the U.S. stock markets investors can often trade American Depository Receipts (ADRs), which are receipts for -shares that are held on deposit by foreign banks and represent ownership of companies which have their primary listing on exchanges outside the United States.-. Buying an ADR is very similar to buying the u-nderlying domestic share from their home market, except you get your dividends in U.S. dollars and your annual report information in English. Another way to invest in international shares is to invest in mutual funds: many mutual funds invest internationally. Primary Markets Primary markets, or primary financial markets, are where new financial assets are issued. There are two main types of primary-market issues. The first type of issue is known as an initial public offering, or IPO. These issues are the very first shares a company offers to the public. Investment bankers serve as underwriters for these issues: they facilitate the process of selling these initial public offerings. The second type of issue is known as a seasoned new issue. These issues are new shares that are being issued by a company that already has publicly traded shares on existing stock exchanges. A seasoned new issue is the way a company sells more shares to the investing public. Types of Securities We invest in four main types of securities: Bonds and Money Market Instruments pay out interest regularly and can be issued by various entities including governments and corporations. The price at which these securities are traded fluctuates less than the price of other securities, but they do fluctuate and this gives us the opportunity to obtain bonds at an advantageous price. Most bonds are rated by independent credit agencies, such as Moodys or Standard & Poors, but further analysis is often required. Equities are usually common stocks and represent the ultimate ownership of companies. Common stocks are entitled to all the residual profits and assets of a company, if any. As a class, the value of stocks rises over time and has historically beaten inflation. Markets can fall and rise sharply but during the last century, US stocks returned about 6% annually in real terms, that is, over and above inflation. This figure can only be used as a very rough guide. In general, on a long-term basis equities in developed democratic countries with property rights and the rule of law, such as Canada, the United States, and the United Kingdom, have been excellent investments. Risk of loss can come from various sources, such as a weak balance sheet, a product which is competing in a rapidly changing industry (digital technology, bio tech), the weather (increasingly), fashion, extreme market values during bubbles, and volatile politics. The best way to protect portfolios against the risk of loss is by diversifying and by investing in dividend paying stocks supported by great businesses with strong balance sheets. Equities also include preference stocks which take various forms but usually have a fixed rate of dividend and rank senior to common stock when dividends are distributed or in case of a liquidation. Preferreds are a hybrid between common stocks and bonds. Exchange Traded Funds (ETFs) are like mutual funds but traded on a stock exchange throughout the day much like stocks. ETFs are funds which hold a portfolio of assets such as stocks, bonds, commodities and currencies around the world or in a specific region or country. Most ETFs invest according to an index. An example would the ETF trading on the New York Stock Exchange under the symbol SPY. This ETF invests in all the stocks which make up the S&P 500. ETFs are organized and offered by major financial institutions and have very low costs and fees. ETFs are a great way to diversify widely and cheaply. We do not use ETFs exclusively because one drawback of ETFs is that since they invest across the board, their performance tends to be average and one also has to pay the fees, albeit they are usually low. So we balance them with individual stocks.

One important attraction of ETFs is that they are generally less volatile than individual stocks and this stabilizes the portfolio and allows us to time purchases and sales better. We often use ETFs to gain access to securities or other assets which have a good yield but are otherwise difficult to acquire or too risky to hold unless in a widely-diversified portfolio, e.g. high yielding corporate bonds. ETFs can also be used to hold high yielding foreign currency without having to open accounts in those currencies. ETFs are gaining in popularity because they are very useful, liquid and generally have low management charges. Exchange Traded Notes (ETNs) are similar to ETFs but are not funds and do not hold any assets. Rather, these are liabilities issued by financial institutions which pay investors in line with the performance of a particular asset. An option gives its buyer the right but not the obligation to buy or sell securities at an agreed price. The seller of the option, on the other hand, agrees to deliver the buyer's contracted rights and, in compensation, collects a premium from the buyer. Used wisely options can be an effective way of protecting a portfolio by hedging against market falls or for earning additional income on a portfolio while still getting price appreciation and dividends. We buy and/or sell options only when it is appropriate to do so and when it makes economic sense. Next.......Dividend Stocks

Macroeconomics is the branch of economics that examines the economic behavior of large collections, or aggregates, of decision-making units and the large-scale economic implications of aggregate behavior. Macroeconomics examines the "big picture;" it takes a "start from the top and work down" approach to economics.

We Will Focus on a Market Economy In This Course The Three Roles of Economic Decision Makers in a Market Economy Recall that Economics is the study of the rational allocation of resources under constraints to meet competing objectives. Allocation involves decision making, and there are many types of economic decision makers: individuals, families or households, city, county, state and national governments, and international groups such as the United Nations. Although these decision makers are very different in many ways,there are basically just three types of economic decisions that each decision maker needs to make in a Market Economy. The first is which resources to consume. Consumption is any activity that re-allocates resources in a way that decreases the value of the resources. The second type of economic decision is which resources to produce. Production is any activity that re-allocates resources in a way that increases the value of the resources. The third type of economic decision is whether or not to coordinate and regulate the consumption and production activities of other decision makers. By "Government Activity," we mean any activity that coordinates or regulates the consumption or production activities of others. We usually think of Consumers, or Households, as individuals or groups of individuals collectively making consumption decisions, Producers, or Firms, as individuals or groups of individuals collectively making production decisions, and "the Government" as individuals or groups of individuals collectively making coordination and regulation decisions. Hence, we speak of "Consumers," "Producers," and "Government" as the three "economic roles" of decision makers. However, it is important to realize that most individuals play all three "economic roles" simultaneously. For example, when I work I make production decisions, when I go to the store I make consumption decisions, and when I vote, I indirectly make coordination decisions by electing government officials who make coordination decisions for me as my representatives. Likewise, a business acts as a consumer when it buys materials to make its product, as a producer when it makes and sells its product, and indirectly as a coordinator when it lobbies the government for or against various policies. Hence, when we talk about a "consumer," what we mean is any individual facing a "consumption-type" decision. We mean similar things when we talk about a "producer," or the "government." The Circular Flow Model of a Market Economy The Circular Flow Model of a Market Economy gives a general schematic picture of the many interactions between the three basic types of economic decision makers in a market economy. The Circular Flow Model is at the border between Microeconomics and Macroeconomics; it shows how groups of individual decision makers begin to interact in markets. The model follows the exchange of resources (recall the definition of economics) and emphasizes the fact that physical resources are never created or destroyed (except, perhaps, in nuclear reactions) by market trading, resources simply change form and/or change hands. Circular Flow Model

We can describe the Circular Flow Model by beginning with Consumers. Consumers initially own all resources. Consumers trade these resources for money from Producers in Input, or Factor, Markets. The resources moving from Consumers to Producers are known as Inputs (to the production process) or Factors of Production. Examples of Factors of Production include Labor, Materials, Energy, Land, and Capital ("Capital" is a term used to describe Materials that have been fashioned into a durable form intended to last more than a year). Obviously, the money that Producers pay to Consumers for the Consumers' labor is called "wages." Similarly, money paid for land is called "rent," and money paid for materials is called "interest," or "dividends," (depending on whether the Consumers loan the materials to the Producers or "sell" the materials to the producers). Producers re-combine the Factors of Production received from Consumers into more valuable forms called Outputs, or Products. Producers trade these Outputs for money from Consumers in Output, or Product, Markets. Outputs can be goods, services or information. Examples include automobiles, hamburgers, air transportation services (e.g., FEDEX), stock information from stock brokers, the results of scientific research, professional football games, etc. Notice that there are actually two circular flows moving in opposite directions in the Circular Flow Model. The first flow is the Physical Flow of resources moving from Consumers to Producers and back again. The second flow is the Financial Flow of money moving in the opposite direction. Note also that for both Consumers and Producers, the amount of money that is spent must equal the amount of money that is earned (the whole field of accounting is based on this last point). The Government coordinates and regulates the interaction of Producers and Consumers in both Input and Output Markets. For example, in Input Markets, the Government requires certain workplace safety standards, prohibits child labor, regulates pollution, taxes Consumers' income, rents and interest, etc. In Output Markets, the Government requires food and medicine safety tests, defines and enforces units of measurement (e.g., so that one producer's "gallon" in the same as another producer's "gallon"), establishes laws and funds courts to enforce business contracts, etc. In Market Economies, three things determine the answers to the "Three Basic Economic Questions" posed earlier in this handout: (1) The Initial Allocation of Resources--the distribution of ownership of resources among Consumers before market trading begins, (2) the Choices of Consumers and Producers in the marketplace and (3) Government Coordination and Regulation of market transactions.