\r\n
Key Vocab Recap<\/h2>\r\n
Before moving on, make sure these terms are locked in:<\/p>\r\n
Financial Market<\/strong>\u00a0<\/span>\u2014 where buyers and sellers trade financial assets like stocks and bonds<\/p>\r\nStock<\/strong>\u00a0<\/span>\u2014 a small ownership stake in a company<\/p>\r\nBond<\/strong>\u00a0<\/span>\u2014 a formal loan made to a company or government that pays back interest over time and principal repayment at maturity<\/p>\r\nCommodity<\/strong>\u00a0<\/span>\u2014 a raw material or agricultural product that can be bought and sold (oil, gold, wheat)<\/p>\r\nCurrency<\/strong>\u00a0<\/span>\u2014 a system of money used in a country, which can be exchanged for other\u00a0<\/span>currencies<\/span>\u00a0<\/span>at the current exchange rate<\/p>\r\nIPO (Initial Public Offering)<\/strong>\u00a0<\/span>\u2014 the first time a company sells stock to the general public<\/p>\r\nPrimary Market<\/strong>\u00a0<\/span>\u2014 where new securities are issued and sold for the first time<\/p>\r\nSecondary Market<\/strong>\u00a0<\/span>\u2014 where existing securities are traded between investors<\/p>\r\n\r\n<\/div>\r\n \r\n\r\n
\r\n\r\nWhy This All Matters to You<\/h3>\r\n
Every time you hear that the stock market had a great day or a terrible one, you are hearing about the secondary market in action. Every time a new company goes public and makes its founders billionaires overnight, that is the primary market doing its job.<\/p>\r\n
These are not abstract concepts that only matter to people in suits on Wall Street. The performance of financial markets affects interest rates on student loans, the job market you are about to enter, and the value of any retirement savings you start building right now.<\/p>\r\n
Understanding the playing field is step one. Next, we are going to look at who actually runs it.<\/strong><\/p>\r\n\r\n\r\n
\r\n\r\n\r\n7.2 Financial Institutions<\/h1>\r\n<\/header>\r\nWho Runs the System?<\/h3>\r\n
Now that you understand what financial markets are and how they work, a natural question comes up: who actually keeps all of this running?<\/p>\r\n
The answer is financial institutions. These are the organizations that move money through the economy, connect borrowers with lenders, protect investors, and keep the whole system stable. There are two broad categories: institutions that hold your deposits, and institutions that do not. Then sitting above all of them is one powerful authority that oversees the entire system.<\/p>\r\n
Let\u2019s meet them all.<\/p>\r\n\r\n\r\n
\r\n\r\nPart A: Depository Institutions<\/h2>\r\n
A\u00a0<\/span>depository institution<\/strong>\u00a0<\/span>is a financial organization that accepts deposits from people and businesses, keeps that money safe, and lends it out to others.<\/p>\r\nIn simple terms: it is a place where you can store your money and also borrow money when you need it. Your checking account, your savings account, your car loan \u2014 all run through depository institutions.<\/p>\r\n\r\n
The 3 Main Types:<\/strong><\/h3>\r\nCommercial Banks<\/strong>\u00a0<\/span>(like Chase or Bank of America) are the most common type. They serve everyday people and businesses, offering checking accounts, savings accounts, and all kinds of loans. If you have ever had a debit card, you have already used one. If you have a credit card \u2026..\u00a0<\/span>is that a form of cash or a loan?\u00a0<\/span><\/p>\r\nCredit Unions<\/strong>\u00a0<\/span>(like Navy Federal \u2013\u00a0<\/span>available to military who served for at least 20 years, veterans, DoD employees, and their families<\/em>) work similarly to banks, but with one big difference: they are nonprofit and owned by their members. Because they are not trying to make a profit for shareholders, they often offer better interest rates on savings and lower rates on loans. The catch is you usually have to qualify for membership based on your employer, location, or another affiliation. Although, there are increasingly more opportunities for \u201copen charter\u201d or \u201ceasy to join\u201d credit unions, where membership is available to anyone.<\/p>\r\nSavings Institutions<\/strong>\u00a0<\/span>(like Savings and Loan Associations) focus mainly on helping people save money and secure home mortgage loans, bridge loans, or home equity loans. They are more specialized than commercial banks and tend to serve specific communities.<\/p>\r\n\r\nSo How Do They Actually Make Money?<\/strong><\/h3>\r\nHere is the clever part. When you deposit money into a bank, the bank does not just let it sit in a vault. It lends that money out to other people, charging them interest on mortgages, car loans, business loans, and more.<\/p>\r\n
The bank pays you a small interest rate on your savings account, maybe 1 or 2 percent, and even lower for your checking account, maybe .08%. But it charges borrowers a much higher rate, sometimes 6, 7, or even 20 percent on credit cards. That gap between what they pay you and what they charge borrowers is where their profit comes from.<\/p>\r\n
You are essentially letting the bank use your money, and they are paying you a small fee for the privilege.<\/p>\r\n\r\n\r\n
\r\n\r\nPart B: Non-depository Financial Institutions<\/h2>\r\n
A\u00a0<\/span>non-depository financial institution<\/strong>\u00a0<\/span>provides money related services but does NOT accept traditional deposits like a bank does. You cannot walk in and open a checking account, but they still play a massive role in how money moves through the economy.<\/p>\r\n\r\nThe Main Types:<\/strong><\/h3>\r\nInsurance Companies<\/strong>\u00a0<\/span>(like State Farm or Allstate) collect regular payments from you called\u00a0<\/span>premiums<\/strong>. In return, they agree to cover your financial losses if something bad happens, like a car accident, a house fire, or a medical emergency. They take all those premium payments and invest them to grow their funds while they wait to pay out claims.<\/p>\r\nInvestment Companies and\u00a0<\/span>Mutual Funds \/ ETFs<\/span><\/strong>\u00a0<\/span>(like Vanguard or Fidelity) pool money from thousands of investors and use it to buy a diversified mix of stocks, bonds, and other assets. This lets everyday people invest without needing to be financial experts or having a ton of money to start.<\/p>\r\nPension Funds<\/strong>\u00a0<\/span>are set up by employers to help workers save for retirement. A portion of your paycheck goes in over your working years, and when you retire, you receive regular payments. There are two types worth knowing:<\/p>\r\n\r\n\r\n \t- A\u00a0<\/span>Defined Benefit Plan<\/strong>\u00a0<\/span>promises you a fixed monthly payment when you retire, based on your salary and years of service. Your employer manages the investments and takes on the risk. Example: \u201cI will receive $2,000 a month when I retire.\u201d<\/li>\r\n \t
- A\u00a0<\/span>Defined Contribution Plan<\/strong>\u00a0<\/span>(like a 401k) means you and your employer both contribute money to an account, but how much you end up with depends on how the investments perform. You carry more of the responsibility and the risk. Example: \u201cI put money into my 401k and it grows based on the investments I choose.\u201d<\/li>\r\n<\/ul>\r\n
Finance Companies<\/strong>\u00a0<\/span>(like Sallie Mae) lend money to people and businesses but fund themselves by borrowing from investors rather than collecting customer deposits. Student loans are a very relevant example for most of you in this room.<\/p>\r\nBrokerage Firms<\/strong>\u00a0<\/span>(like Charles Schwab or Robinhood) act as the middleman between buyers and sellers in financial markets, helping people purchase stocks, bonds, and other investments. You cannot just call up the New York Stock Exchange and buy shares yourself. You need a broker to execute those trades on your behalf.<\/p>\r\n\r\n\r\n
\r\n\r\nPart C: The Federal Reserve<\/h2>\r\n
If depository and non-depository institutions are the players in the financial system, the\u00a0<\/span>Federal Reserve<\/strong>\u00a0<\/span>is the referee, the rule maker, and the emergency responder all rolled into one.<\/p>\r\nThe\u00a0<\/span>Federal Reserve<\/strong>, commonly called\u00a0<\/span>the Fed<\/strong>, is the central bank of the United States. It was created by Congress in 1913 to bring stability to the American financial system after a series of devastating financial panics. Think of it as the \u201cbank of banks.\u201d Regular people cannot open accounts there. It exists to serve the broader economy, not individual customers.<\/p>\r\nThe Fed Funds Rate is the\u00a0<\/span>primary tool for negotiating policy.<\/span>\r\n\r\n
The Fed\u2019s 3 Main Jobs:<\/strong><\/h3>\r\nControlling Monetary Policy<\/strong>\u00a0<\/span>is perhaps the Fed\u2019s most talked about role. The Fed manages the supply of money in the economy by raising or lowering interest rates. When inflation is high and prices are rising too fast, the Fed raises rates, making it more expensive to borrow money. People and businesses spend less, which cools the economy down. When the economy is sluggish, the Fed lowers rates to encourage borrowing and spending and get things moving again.<\/p>\r\nYou feel this directly. The interest rate on your future car loan, mortgage, or student loan refinance is shaped by what the Fed decides at its meetings.<\/p>\r\n
Supervising Banks<\/strong>\u00a0<\/span>means the Fed keeps a close eye on financial institutions to make sure they are operating safely, following the rules, and not taking on reckless amounts of risk. Think of it as a financial watchdog. Without this oversight, banks could take dangerous gambles with your deposits.<\/p>\r\nMaintaining Financial Stability<\/strong>\u00a0<\/span>means that when the economy is in serious trouble, the Fed steps in as a lender of last resort. During the 2008 financial crisis and again during COVID in 2020, the Fed pumped money into the financial system to prevent a total collapse. Without that intervention, many more banks would have failed and the damage to everyday Americans would have been far worse.<\/p>\r\n\r\n<\/div>\r\n \r\nHow Is the Fed Structured?<\/strong><\/h3>\r\nThe Fed is made up of three key parts:<\/p>\r\n\r\n
\r\n \t- The Board of Governors<\/strong>: Seven members appointed by the President and confirmed by the Senate, based in Washington D.C. They oversee the entire system and set broad policy direction.<\/li>\r\n \t
- 12 Regional Federal Reserve Banks<\/strong>: Spread across the country in cities like New York, Chicago, and San Francisco, each one serving their region and gathering economic data from local businesses and communities.<\/li>\r\n \t
- The FOMC (Federal Open Market Committee)<\/strong>: This is the group that meets eight times a year to make decisions about interest rates. When you hear news anchors say \u201cthe Fed raised rates today,\u201d this is the committee that made that call. Their decisions move markets instantly.<\/li>\r\n<\/ul>\r\n\r\n
\r\n\r\nPart D: The SEC<\/h2>\r\n
The Fed oversees banks. But who oversees the stock market itself? That job belongs to the\u00a0<\/span>Securities and Exchange Commission<\/strong>, or the\u00a0<\/span>SEC.<\/strong><\/p>\r\nThe SEC is a government agency created to make sure financial markets are fair, transparent, and honest. Their mission comes down to three things: protecting investors, keeping companies honest, and stopping fraud.<\/p>\r\n\r\n
What the SEC actually does:<\/strong><\/h3>\r\nThe SEC requires companies that sell stock to the public to disclose accurate financial information so investors can make informed decisions. It monitors trading activity to catch illegal behavior like\u00a0<\/span>insider trading<\/strong>, which is when someone trades stocks based on private information that the public does not have access to. It has the power to prosecute individuals and companies that break the rules, with real legal consequences.<\/p>\r\n\r\nWhy the SEC is generally seen as a good thing:<\/strong><\/h3>\r\nIt levels the playing field so that small individual investors have the same access to accurate information as giant Wall Street firms. It creates accountability, meaning companies cannot just say whatever they want to pump up their stock price. It builds trust in the overall system, which encourages more people to invest, which helps the economy grow.<\/p>\r\n\r\n
Fair criticisms of the SEC:<\/strong><\/h3>\r\nNo institution is perfect. Some argue the SEC\u2019s regulations are too complex, making it harder for smaller companies to raise money and grow. The SEC has also faced criticism for reacting too slowly to major scandals. The most famous example is Bernie Madoff, who ran a massive Ponzi scheme for decades right under the SEC\u2019s nose before it was finally uncovered in 2008.<\/p>\r\n
Overall, the SEC is a net positive for financial markets, but it is a reminder that oversight systems are only as strong as the people running them.<\/p>\r\n\r\n\r\n
\r\n\r\nUnit 3 Recap<\/h2>\r\n
The financial system does not run itself. It depends on a whole network of institutions each playing a specific role:<\/p>\r\n\r\n
\r\n
\r\n\r\n\r\n| Institution<\/th>\r\n | Role<\/th>\r\n<\/tr>\r\n<\/thead>\r\n |
\r\n\r\n| Commercial Banks<\/td>\r\n | Accept deposits, make loans<\/td>\r\n<\/tr>\r\n |
\r\n| Credit Unions<\/td>\r\n | Nonprofit banking for members<\/td>\r\n<\/tr>\r\n |
\r\n| Insurance Companies<\/td>\r\n | Protect against financial loss<\/td>\r\n<\/tr>\r\n |
\r\n| Mutual Funds \/ ETFs<\/td>\r\n | Pool investor money for diversified investing<\/td>\r\n<\/tr>\r\n |
\r\n| Pension Funds<\/td>\r\n | Help workers save for retirement<\/td>\r\n<\/tr>\r\n |
\r\n| Brokerage Firms<\/td>\r\n | Connect investors to financial markets<\/td>\r\n<\/tr>\r\n |
\r\n| The Federal Reserve<\/td>\r\n | Oversee the banking system, control monetary policy<\/td>\r\n<\/tr>\r\n |
\r\n| The SEC<\/td>\r\n | Regulate and police financial markets<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n Each of these institutions touches your life in some way, whether you realize it or not. Understanding what they do puts you in a much stronger position to navigate the financial world on your own terms.<\/strong><\/span><\/p>\r\n \r\n\r\n \r\n\r\n \r\nNext up: now that you know the system and who runs it, it is time to talk about how you actually put your money to work inside of it.<\/h3>\r\n\r\n
\r\n\r\n \r\n\r\n\r\n7.3 Investing in Securities<\/h1>\r\n<\/header>\r\nYour Money, Your Choices<\/pre>\r\n\r\n
\r\nYou now know what financial markets are, how they work, and who runs them. Now comes the part that directly impacts your wallet:\u00a0how do you actually invest?<\/p>\r\n This unit is about the different types of securities you can buy, the strategies you can use to invest, and the practical steps to get started. By the end of this unit, you should feel equipped to have a real conversation about investing and confident enough to take your first steps.<\/p>\r\n Let\u2019s start with the basics: what exactly can you buy?<\/p>\r\n\r\n\r\n
\r\n\r\nPart A: Types of Securities<\/h2>\r\nA\u00a0<\/span>security<\/strong>\u00a0<\/span>is a broad term for any financial asset that can be bought and sold. Think of it as anything that represents value in the financial markets. The three main types you need to know are stocks, bonds, and convertible securities.<\/p>\r\n\r\n\r\n
\r\n\r\nCommon Stock<\/h6>\r\nCommon stock<\/strong>\u00a0<\/span>is the most basic form of ownership in a corporation. When you buy a share of common stock, you are buying a small piece of that company.<\/p>\r\nAs a common stockholder, you get two important rights:<\/p>\r\n\r\n \r\n \t- The right to vote on important company decisions, like who sits on the board of directors<\/li>\r\n \t
- The right to dividends, which are payments a company makes to shareholders when it is profitable (though these are never guaranteed)<\/li>\r\n<\/ul>\r\n
The sale of stock is one of the primary ways companies raise money to fund their operations and growth. When Apple, Nike, or any major company needs capital, selling stock is one of their biggest tools.<\/p>\r\n\r\n What is a Capital Gain?<\/strong><\/h3>\r\nA\u00a0<\/span>capital gain<\/strong>\u00a0<\/span>is the profit you make when you sell an asset for more than you paid for it.<\/p>\r\nHere is a simple example: you buy a stock for $100. Later, you sell it for $150. Your capital gain is $50. If you sell it for less than you paid, that is called a\u00a0<\/span>capital loss.<\/strong><\/p>\r\nCapital gains matter beyond just the profit itself because the government taxes them. How much you pay depends on how long you held the investment and how much money you make overall. This is why you will sometimes hear politicians debating capital gains tax rates; it directly affects how much investors keep after a profitable sale.<\/p>\r\n\r\n\r\n
\r\n\r\nPreferred Stock<\/h6>\r\nPreferred stock<\/strong>\u00a0<\/span>is a different class of stock that gives its holder certain advantages over common stockholders, but also comes with some tradeoffs.<\/p>\r\nHere is how preferred and common stock compare side by side:<\/p>\r\n\r\n \r\n \r\n\r\n\r\n| <\/th>\r\n | Common Stock<\/th>\r\n | Preferred Stock<\/th>\r\n<\/tr>\r\n<\/thead>\r\n | \r\n\r\nDividends<\/strong><\/td>\r\n| Not guaranteed, variable<\/td>\r\n | Fixed, paid first<\/td>\r\n<\/tr>\r\n | \r\nVoting Rights<\/strong><\/td>\r\n| Yes<\/td>\r\n | Typically no<\/td>\r\n<\/tr>\r\n | \r\n| Priority if company goes bankrupt<\/strong><\/td>\r\n | | | |
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