Economics_Ch16 - 16(428-459 EMC Chap 16 9:33 AM Page 428...

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Why It Matters W all Street is a narrow street that extends only seven blocks, from Broadway to the East River, in Manhattan, in New York City. It was named for a wall built by Dutch settlers in 1653 to repel an expected English invasion. As you probably know, some of the chief financial institutions in the United States—the New York Stock Exchange, the American Stock Exchange, investment banks, the Federal Reserve Bank, and commodity exchanges—are located here. As a result, “Wall Street” has become shorthand for invest- ing, especially in stocks and bonds. More and more people are buying stocks and bonds and want to know what futures and options are and how they work. Will this information be use- ful to you? Most likely it will. The day will come (if it hasn’t already) when you have some extra savings that you want to invest. Should you buy stocks or bonds? Are some stocks bet- ter than other stocks? What does the price of a bond have to do with interest rates? It will be important for you to know the answers to these questions and more. In a nutshell, it is better for you to be informed about the markets you might want to invest in before you start investing. In this chapter you will begin to learn some investment basics. 428 Every day stock exchanges around the world process countless “buy” and “sell” trans- actions. This chapter will introduce you to the whys and hows of investing in stocks and bonds.
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The following events occurred one day in August. 7:13 A.M. During breakfast with her husband Paul, Priscilla says, “I think we should put a little money into the stock market. I heard that the Dow went up by 279 points yesterday.” “Is that good?” her husband asks. “I think it is,” said Priscilla. What is the Dow? 8:34 A.M. Jack lives in Kansas. He is a wheat farmer, his father was a wheat farmer, and his grandfather was a wheat farmer. Things haven’t been going well for Jack in the last year or so. He has been losing money. He will harvest a big wheat crop in the next few months and is afraid that wheat prices may drop before he takes his wheat to market. How can Jack protect himself from a drop in the price of wheat? 10:56 A.M. As Karen watches the financial news, someone on the television says, “If he times his purchases correctly, he can make millions.” Karen wonders whether the investment types on television know something she doesn’t know. How can a person make millions, she wonders, just by timing purchases (what purchases?) correctly. Does timing matter? 5:42 P.M. Wilson rides a commuter train home after a busy day at work. The person in the seat next to him is reading the Wall Street Journal . Wilson turns to him and asks, “What do you think about what the market did today?” “It was quite unusual,” came the response.
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