FIN 2114 Exam 4 (11, 12, 13, 14, 15)

Investment

Investment

An asset that generates value or a return.

Income return

Investment return received directly from the company or organization in which you’ve invested, usually in the form of dividends or interest payments

Speculation

Buying an asset whose value depends solely on supply and demand as opposed to being based on the return that it generates.

Gold coins and baseball cards  are worth more in the future only if someone is willing to pay more for them

Derivative Securities

Securities whose value is derived from the value of other assets

Option

A security that gives its owners the right to buy or sell an asset, generally common stock, at a specified price over a specified period

Call option

Which gives you the option to buy the underlying asset at a set price on or before the options maturity date

Put option

Which gives you the option to sell the underlying asset at a set price on or before the options maturity date

Lending investments

Savings accounts and bonds, which are debt instruments issued by corporations and by the government

Ownership investments

Preferred stocks and common stocks, which represent an ownership position in a corporation, and income-producing real estate

Maturity Date

The date at which the borrower must repay the loan or borrow funds

Par Value or Principal

The stated amount on the face of a bond, which the firm is to repay at the maturity date

Coupon Interest rate

The interest to be paid annually on a bond as a percentage of par value, which is specified in the contractual agreement

Stock

A fractional ownership in a corporation

Dividends

A payment by a corporation to its shareholders

Capital Gain or loss

The gain (or loss) on the sale of a capital asset. For example, any return (or loss) from the appreciation (or drop) in value of a share of stock would be considered a capital gain (or loss)

Nominal rate of return (or quoted)

The rate of return earned on an investment, unadjusted for lost purchasing power

Real rate of return

The current or nominal rate of return minus the inflation rate

Interest rate risk

The risk of fluctuations in security prices due to changes in the market interest rate

Inflation risk

The risk that rising prices will eat away the purchasing power of your money and that changes in the anticipated level of inflation will result in interest rate changes, which will turn causes security price fluctuations

Business risk

The risk of fluctuations in security prices resulting from good or bad management decisions or how well or poorly the firm's products  are doing in the marketplace

Financial Risk

The risk associated with a company’s use of debt. If a company takes on too much debt and can’t meet its obligations, the company may default, or the value of its stock may drop

Liquidity risk

Risk associated with the inability to liquidate a security quickly and at a fair market price

Market Risk

Risk associated with overall market movements

Political and Regulatory Risk

Risk resulting from unanticipated changes in the tax or legal environment

Exchange Rate Risk

The risk of fluctuations in security prices due to the variability in earnings resulting from changes in exchange rates

Call Risk

The risk to bondholders that a bond may be called away from them before maturity

Calling  a bond

Redeeming a bond before its scheduled maturity. Many bonds are callable

Portfolio

A group of investments  held by an individual

Systematic Risk ( or market-related or non diversifiable risk)

That portion of a security risk or viability that can’t be eliminated through investor diversification. This type of variability or risk results from factors that affect all securities

Unsystematic Risk (or Firm-Specific or Company-Unique Risk or Diversifiable Risk)

Risk or variability that can be eliminated through investor diversification. Unsystematic risk results from factors that are unique to a particular firm

Asset Allocation

An attempt to ensure that the investor’s strategy reflects his or her investment time horizon and that the investor is well diversified, generally with assets in several different classes of investments, such as domestic common stocks, international common stocks and bonds

Efficient Markets

A market in which all relevant information about the stock is reflected in the stock price

Stock bubble

The situation when the price of a stock or group of stock rises dramatically over a period of time, well in excess of it’s true or intrinsic value

Securities Market

Describes a place where financial securities or instruments for example, common stocks and bonds are traded

Primary Market

The markets in which newly issued, as opposed to previously issued, securities are traded

Initial Public Offering (IPO)

The first time a company’s stock is traded publicly

Seasoned new issues

A stock offering by a company that already has common stock traded in the marketplace

Investment Banker

The intermediary between the firm issuing securities and the buying policy. This term describes both the firms that specialize in selling securities to the public and the individuals who work for investment banking firms

Underwriter

An investment banker who purchases and subsequently resells a new security issue. The issuing company sells its securities directly to the underwriter, who then sells the new issue to the public and assumes the risk of selling it a satisfactory price

Prospectus

A legal document that describes a securities issue and is made available to potential investors

Secondary Market

The market in which previously issued securities are traded

Organized Exchange

An exchange that occupies a physical location where trading occurs, such as the New York Stock Exchange

Over the counter market

A market in which transactions are conducted over the telephone or via a computer hookup rather than in an organized exchange

Bid Price

The highest price someone is willing to pay for a security

Ask or offer price

The lowest price at which someone is willing to sell a security

American Depository Receipts

A marketable document that certifies a bank holds shores of a foreign firm's stock that back the receipt. As a result, the ADR trades just like a normal shore of stock

The Securities Exchange Act of 1934

spoke directly to the secondary market and created the Securities and Exchange Commission to enforce the trading laws

Investment Advisers Act of 1940

 protects investors against unethical investment advisors and requires advisors to register with the SEC and provide the SEC with semiannual reports.

Investor Protection Act of 1970

 the Securities Investor Protection Corporation (SIPC) was established to provide up to $500,000 of insurance to cover investors’ account balances in the event that their brokerage firm goes bankrupt.

The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988

 made it illegal to trade while in the possession of inside information, or “material” nonpublic information held by officers, directors, major stockholders, or anyone with special insider knowledge

Churning

Excessive trading in a security account that is inappropriate for the customer and serves only to generate commissions

Round lots

A group or lot of 100 shares of common stock. Stocks are traded in round lots on the New York Stock Exchange

Odd lots

An order involving between 1 and 99 shares of stock

Fractional Shares

A portion of a share of stock, less than a full share

Day orders

A trading order that expires at the end of the trading day during which it was made

Open Orders or Good till canceled orders (GTC)

A trading order that remains effective until filled or canceled

Fill or kill orders

A trading order that expires if not filled immediately

Discretionary account

An account that gives your broker the power to make trades for you

Market Order

An order to buy or sell a set number of securities immediate at the best price available

Limit order

An order that specifies a security is to be sold only at or above a certain price or bought only at or below a certain price

Stop or stop-loss order

An order to sell a security if the price drops below a specified level or to buy it if the price climbs above a specified level

Short selling

Borrowing stock from your broker and selling it with an obligation to replace the stock later

Margin Requirement

The percentage that an investor must have on deposit with a broker when selling short

Asset management account

we defined it as a comprehensive financial services package offered by a brokerage firm that can include a checking account; a credit card; a money market mutual fund; loans; automatic payment on any fixed debt (such as mortgages); brokerage services (buying and selling stocks or bonds); and a system for the direct payment of interest, dividends, and proceeds from security sales into the money market mutual fund.

Cash Accounts

A securities trading account in which the investor pays in full for security purchases, with the payment due within 3 business days of the transaction

Margin accounts

A securities trading account in which the investor borrows a portion of the purchase price from the broker

Margin or initial margin

A 50% limit set by the Federal Reserve on the minimum percentage of the purchase price of a security that an investor must initially pay

Maintenance margin

The minimum percentage margin of collateral that you must maintain

Margin Call

A requirement that you replenish your margin account by adding cash or securities to bring it back to a minimum level

Joint Tenancy account with the right of survivorship

A type of joint ownership in which the surviving owner receives full ownership of the assets in the account when the joint owner dies

Tenancy in common account

A type of ownership in which the deceased’s portion of the account goes to the heirs of the deceased rather than to the surviving account holder

Discount or online broker

A “no-frills” broker who executes trades without giving any advice and thus charges much lower commissions than a full-service broker

Full-service broker or account executive

A broker who gives advice and is paid on commission, where that commission is based on the sales volume generated

Online trading

Making trades on the internet

Day trader

An individual who trades, generally over the internet, with a very short time horizon, generally less than 1 day

Why consider investing in stocks?

• Over time, common stocks outperform all other investments

• Stocks reduce risk through diversification

• Stocks are liquid

• The growth in your investment is determined by more than just interest rates

Declaration Date

The date on which the board of directors announces the size of the dividend, the ex-dividend date and the payment date

Ex-dividend date

The date on which the stock “goes ex” meaning it begins trading in the secondary market “without dividend” In other words, if you buy the stock after its ex-dividend date, you don't get the dividend for that year

Proxy

A legal agreement a stockholder signs to allow someone else to vote for him or her at the corporations annual meeting

Stock split

Increasing the number of stock shares outstanding by replacing the existing shares of stock with a given number of new shares. For example, in a two-for-one split, for every share of existing stock you hold, you will receive two shares of new stock

Stock repurchase

A company’s repurchasing, or buying back, of its own common stock

Book value

Calculated by subtracting the value of all the firm's liabilities from the value of all its assets

Dividend yield

The ratio of the annual dividends to the market price of the stock

Stock market index

A measure of the performance of a group of stocks that represent the market or a sector of the market

Dow Jones Industrial Average or Dow (DJIA)

A commonly used stock index or indicator of how well stocks have done. This index is composed of the stock prices of 30 large industrial firms

Standard & Poor’s 500 Stock Index, or S&P 500

Another commonly used stock index or indicator of how well stocks have done based on the movements of 500 stocks, primarily from the NYSE

Bear Market

A stock market characterized by falling prices

Bull Market

A stock market characterized by rising prices

Fundamental analysis

Determining the value of a share of stock by focusing on such determinants as future earnings and dividends, expected levels of interest rates and the firm’s risk

Technical Analysis

A method of stock analysis that focuses on supply and demand, using charts and computer programs to identify and project price trends for a stock or for the market as a whole

Price/earnings ratio (P/E)

The price per share divided by the earnings per share. Also called the earnings multiplier

Factors that drive P/E ratios up and down

• The higher the firm’s earnings growth rate, the higher the firm’s P/E ratio

• The higher the investors required rate of return, the lower the P/E ratio

SWOT Analysis

A framework for analyzing a security in which you look both internally at the firm’s Strengths and Weaknesses and externally at the Opportunities and Threats that the firm faces to gain an understanding of what the future holds for that firm and its stock

Dollar Cost Averaging

A strategy for purchasing common stock in which the investor purchases a fixed dollar amount of stock at specified intervals, for example, quarterly

Lump sum investing

Investing all your money, perhaps from a bonus or inheritance, immediately

Buy and hold

An investment strategy that involves simply buying stock and holding it for a period of years

4 reasons why buy and hold is a strategy worth considering

• It avoids attempts at timing the market

• The buy and hold strategy minimizes brokerage fees and other transaction costs

• Holding and not selling the stock postpone any capital gain taxes

• A buy and hold strategy means your gains will be taxed as a long term capital gains

• It Works!

Dividend reinvestment plan (DRIP)

An investment plan that allows the investor to automatically reinvest stock dividends in the same company’s stock without paying any brokerage fees

As an investor what should you know?

• Value

• Quality

• Strengths and weaknesses

• Threats and opportunities