Stocks and Bonds

American businesses need huge amounts of money to develop new products, purchase new equipment, build factories, and pay other expenses of doing business. This money is known as capital. Much of it comes from investors (capitalists), who expect to receive a profitable return on the money that they invest. Without investors, the Amer­ican economy would not be able to grow and produce the goods that consumers want. In other words, a capitalist economy depends on capitalists to keep it growing.

Most investments take one of two forms-stocks or bonds. Stockholders purchase shares of a business. If the business does well, they share in the profits of the company by receiving dividends. On the other hand, people who purchase bonds lend their money to a business in exchange for a fixed rate of return (a percentage of the face value of the bond) known as interest. Both stockholders and bondholders hope that the value of their investments will increase. Stocks and bonds are traded on national exchanges. The New York Stock Exchange is located on wall Street in New York City. As a result, the world of investors is commonly known as Wall Street. Stock prices are usually affected by the profits of the company, the general economic climate, and the outlook for the company in the near future. Bond prices are primarily influenced by interest rates. If inter­est rates rise, bond prices usually fall and vice versa.

In recent years, there has been a huge growth in the volume of stock and bond sales. Between 1990 and 1999, the number of shares of stock traded on exchanges each year rose from about 4.5 billion to more than 350 billion. On an average trading day, more than a billion shares of stock change hands on the New York Stock Exchange and on the Nasdaq Stock Exchange. It is not unusual for each of those exchanges to handle more than 2 billion shares in a day. In 1987, the value of all stocks traded on stock exchanges was $1.9 trillion. By 1999, that figure had jumped to more than $14 trillion.

In 1980, only about 27 million Americans owned stocks. Today, more than 120 million individuals are stockholders. And many more are indirectly involved in the markets through their participation in pension plans, credit unions, and insurance plans. In fact, most of the stocks and bonds that are traded are owned not by individuals but by large investors such as banks, insurance companies, pension funds, and mutual funds (com­panies that invest in many different businesses in order to minimize risk).

Check your comprehension.

What is the difference between stocks and bonds?

Where are stocks and bonds traded?

The Cashless Society

When people buy merchandise or services, they often do not pay for their purchases with cash. One very popular method of making payments is by check. Most Americans have checking accounts and have access to their money at the many ATMs (automatic teller machines) found all over the country.

Another form of payment is the use of credit cards. One type of credit card is issued by a particular store to its regular customers. At the end of each month, the customer receives a bill showing the charge purchases made during that period and how much is owed. The customer must pay the balance within three or four weeks. If the payment is late, the customer is usually charged a late fee. Most credit cards permit the user to pay only a small portion of the total due. If the customer does this, interest is charged on the unpaid balance.

Yet another type of credit card is issued by banks or other financial institutions. Some of the most widely used are MasterCard, Visa, American Express, and Discover. These cards can be used for purchases at any business establishment that has agreed to ac­cept them. The merchant sends the sales slip to the issuing institution, which pays the amount of the charge (less a discount) to the merchant and then bills the cardholder. As with store credit cards, interest is charged on any unpaid balance.

The easy availability of credit has given American consumers tremendous purchasing power. But it has also led to a huge amount of debt. Americans now owe more than $700 billion for credit purchases (not including mortgage loans). Most people pay their debts regularly. But if they have unexpected problems such as unemployment or an ill­ness, there may not be enough money to make the payments. If payments are not made for several months, the seller may sue the debtor in court or take legal action to repos­sess the merchandise.

The debtor who thinks that there is little chance to repay the debts may choose to go into bankruptcy to be relieved of them. If the debtor has any sizable assets, these may be sold to partially pay the creditors. Then, the debtor no longer has the obligation to pay back the rest of the debts. While bankruptcy may sound like an attractive solution, it is available only once every 6 years, and it results in a loss of credit to the bankrupt person. That is, the person will be unable to get loans or credit cards for a long period of time, until he can show the ability and willingness to pay debts. About 1 million Americans go into bankruptcy each year. However, most people pay their bills regularly, and the economy is greatly strengthened by the billions of dollars of credit purchases made each year.

A recent development in the cashless society is the use of debit cards. Like credit cards, debit cards can be used to make purchases. However, they do not involve credit. When a debit card is used, money is immediately deducted from the user's bank account and paid to the seller. The use of a credit or debit card is necessary in purchases made by telephone or on the Internet. Debit cards are a way of doing business without in­creasing one's indebtedness.

Another way of making purchases without cash is by obtaining a loan. A person wishing to buy an expensive item such as a car or house can borrow the money and pay it back over a period of years. The payments are usually made each month until the amount due has been paid with interest. For example, a car may be paid for over a five­-year period. A loan taken out to buy a house (a mortgage) may be paid back over 25 to 30 years. These loans enable Americans to buy the things they need and want before they have all the money to pay for them. Low-cost loans enable many Americans to go to college. Many college loans allow students to delay repayment until after graduation.

Check your comprehension.

Why is the U.S. called a cashless society?

What is one advantage and one disadvantage of buying on credit?