There are several other ways the Fed can regulate the money supply. It can raise and lower the discount rate, which is the interest rate it charges banks when they borrow from the Fed. This is often called the "prime" rate. Another way the Fed can help regulate the money supply is by adjusting the cash reserves it requires banks to keep on hand. More money is put into circulation through more liberal lending when the Fed sets reserve requirements at relatively low levels. To control inflation or overly rapid economic growth, the Fed can increase reserve requirements, causing a tightening of credit. Question 2: Why are stocks and bonds called securities? Answer 2: Stocks and bonds are called securities, because they represent secured or asset-based claims on the part of investors. Stocks represent an ownership stake, while bonds represent a financial stake.
Common stock provides the prospect of capital gains and dividend income. Stocks have delivered the highest returns over the long run-averaging 9–11% annually (short term returns can be much lower). Stocks typically account for the biggest portion of a long-term investment portfolio. A bond is essentially an IOU for which the issuer promises to pay the buyer a certain amount of money by a specified future date, usually with interest paid at regular intervals. People who desire a steady stream of income will typically hold bonds in their portfolios. Cash investments include bank CDs, U.S. Treasury bills, and money market funds. These types of accounts are used to hold ready money. They provide the lowest returns, but are considered the safest investments. Question 3: How can a person determine the best mix of investments? Answer 3: Most investor portfolios contain a mix of stock, bond, and cash investments. The exact mix will vary from one portfolio to the next, depending on the following factors: Time horizon: This refers to the amount of time before an investor expects to use the money. The more time that is available, the greater an investor's ability to weather short- term declines in the prices of his or her holdings. For example, if the investor's time horizon is 10 years or more, emphasizing stocks in an investment program may help the investor achieve his or her financial goals more readily. Bonds should begin to dominate the portfolio mix as the investor approaches retirement, and seeks to secure his or her gains. Financial situation: If an investor does not set aside enough money for emergencies, short-term financial problems could force him or her to tap long-term stock and bond investments at an inconvenient time, such as during the midst of a market downturn. Generally, there should be enough short-term bond and cash investments in a portfolio to provide three to six months' worth of emergency income if the investor should lose his or her job or suffer a misfortune that requires the investor to dip into his or her savings.
- Summer '13
- Financial Markets, Corporation, Stock exchange