THHEEE FIN2100 FINAL EXAM UCF QUIZLET

beta

a number showing how much a stock moves relative to the overall market

why is beta used?

investors need to know how risky or jumpy a stock is

what if beta=1?

moves exactly like the market ie. if the market increases by 10% the stock will increase by 10%

what beta is greater than 1

amplifies market moves (more volatile) ex. beta 1.2 -moves 20% more than the market, market increases 10% than the stock increases by 12%

when is beta used

to compare risk between stocks or against the S&P 500

IPO (initial public offering)

when a company sells stock to the public for the first time

why does one use an IPO

to raise money for growth

systematic risk (market risk)

-affects all companies/ entire market (inflation, recession, interest rates)

- CANNOT be diversified away

non-systematic (diversifiable) risk

-company-specific (CEO resigns, lawsuit)

-CAN be diversified away by owning many stocks

Market Order

a request to buy or sell a stock at the current market value

Limit Order

a request to buy or sell a stock at a specified price/ sets a limit on price. protects us from overpaying

-buy/sell limit

primary market

a market in which new issues of securities (stocks) are offered to the public

Secondary Market

where shares are traded after IPO.

-NY stock exchange

-Robinhood

most trading happens in the ________ market

secondary market

what is beta less than one

stock is more stable than the market ie. market up 10% the stock may go up by 5% (beta=0.5)

higher beta=

more risk, more potential return

Why can't diversification fix systematic risk?

Because the risk comes from the whole system/economy you are invested in.

stop order (protection from loss)

trade is not to be executed unless stock hits a price limit

-A contingent order to sell a stock if price falls below X and then becomes a market order

dividends

cash payments from a company's earnings to shareholders

-comes from after-tax earnings

qualified dividends

Qualified dividends are a type of dividend payment that qualifies for lower tax rates, specifically the long-term capital gains tax rates of 0%, 15%, or 20%, instead of the higher ordinary income tax rates.

- This preferential tax treatment is intended to encourage long-term investing.

non-qualified dividends

Are taxed at the shareholder's ordinary income tax rate. Qualified dividends are taxed at a lower rate. Dividends are identified as qualified on form 1099.

capital gain

the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller

short term capital gain

held for less than one year - taxed as regular income

long term capital gain

held for more than one year - taxed at lower long-term rates

capital loss

you sell for less than you paid

- You can use losses to offset gains. If your net result is a loss, you can deduct up to $3,000 per year against your ordinary income and carry extra losses forward.

P/E Ratio

= price per share / earnings per share

High P/E:

market expects high growth (fast growing, high expectation stocks)

Low P/E:

slower-growing, more "value" or boring stable stocks

A stock with a very high P/E is most likely a:

Growth / high expectation stock.

Market Capitalization (Market Cap)

The value of a firm.

=stock price x # of shares outstanding

- size of cap affects risk

large cap

greater than 10 billion (stable, well-known)

-more stable

mid-cap

$2-10 billion

small-cap

less than $2 Billion dollar value (market cap)

-more volatile

US market is mostly large cap and equals...

54% of total worlds stock

cost basis for stocks

the original purchase price, including commissions and fees, and is used to calculate capital gains or losses for tax purposes when you sell your shares.

cost basis determines

how much tax you owe when you sell and determines your capital gain/loss

WHY is cost basis important?

Because taxes are based on:

Capital Gain = Selling Price − Cost Basis

soooo

Bigger cost basis → smaller gain → LESS tax

Smaller cost basis → bigger gain → MORE tax

true or false: you cannot use average cost for stocks

true

true or false: many investors use the FIFO

true because it minimizes gains which minimizes taxes

Which cost basis method CANNOT be used for stocks?

average cost

a "lot"

a batch of shares you bought at one specific time and price.

what is preferred stock

Stock that gets paid dividends first

-characteristics of both a stock and a bond

defensive stock

a stock that remains stable during declines in the economy (recession)

cyclical stock

moves with the economy

value stocks

Stocks that appear undervalued based on fundamentals. appeal to investors looking for bargains or long term return

-coca cola

stock with a low P/E is likely

a value stock

Blue Chip Stock

the stock of a large, well-established and financially sound company that has operated for many years

-ex. procter & gamble

Income Stocks

stocks that have a consistent history of paying high dividends.

focused more on dividends than long term growth

Growth Stock

A stock from a company which has a consistent record of relatively rapid growth and earnings in all economic conditions.

-amazon in its early days

defensive stock

a stock that remains stable during declines in the economy

-grocery stores

par value

the amount the bond will pay you at maturity.

the standard amount is 1,000

coupon rate (interest rate)

the interest the bond pays you every year, based on the 1,000 par

-fixed amount

true or false: theres an inverse relationship between interest rates and bond prices

true

what happens to a bond at maturity

it pays back its full par value, usually 1,000, regardless of what you originally paid

Which bond type is considered absolutely safe for interest payments?

Ginnie Mae (GNMA) and other government-backed securities.

What does a AAA bond rating indicate?

Highest credit quality, lowest default risk.

What are the investment-grade bond rating categories?

AAA, AA, A, BBB.

Which type of bond is most likely to be called: premium or discount?

premium bonds

Why do issuers call bonds?

To refinance at lower interest rates when market rates fall.

callable bond

a bond that the issuer has the right to pay off before its maturity date

discount bond

A bond trading below $1,000 because its coupon is lower than current market rates.

What is NAV (Net Asset Value)?

The price per share of a mutual fund, calculated once per day after the market closes.

(the current market value of all of the securities-liabilities)/(per share)

What is a load fund?

A load fund charges a fee for accepting investments. The fees may be at the beginning of the investment or may be charged when the funds are withdrawn

AVOID A/B/C LOAD FUNDS

expense ratio

best predictor of performance. how much the fund charges you every year for running it

-Lower expense = more money stays invested = better long-term returns.

12b-1 fee=marketing fee

AVOID IT

- It's a fee you pay so the fund can advertise to OTHER customers.

-it adds nothing. just wasted money.

global funds

invest in foreign and US securities

Global fund might own:

Apple (U.S.)

Toyota (Japan)

Nestlé (Switzerland)

international funds

invest strictly in foreign securities

-ONLY non-U.S. companies

International fund might own:

Toyota

Nestlé

Samsung

But NOT Apple.

Dollar Cost Averaging (DCA)

You invest the same dollar amount regularly, no matter the price.

S&P 500 only = investment style risk

If you only invest in ONE type of stock (large U.S. companies), you are missing:

-Small companies

-International companies

-Other sectors

Why it matters:

You're not fully diversified.

true/false: Mutual funds can use average cost basis

true but stocks cannot

-When you sell part of your mutual fund, you're allowed to average all your purchase prices together.

WHAT is a REIT?

A REIT is a company that owns income properties (apartments, shopping centers, offices, storage units, etc.) OR owns mortgages on real estate.

It’s basically a way to invest in real estate without buying property yourself.

why do REIT exist

To let regular people invest in real estate like they invest in stocks.

t/f: "REITs don't pay tax. Because they don't pay tax, they must distribute 90% of their income."

true

-They have to distribute 90% of income, which means the dividend yield is much higher — but you're going to pay higher tax on those dividends.

are REIT dividends high?

VERY

REIT dividends =

NOT qualified dividends. So they’re taxed as regular income, not the special 15% rate.

Equity REIT

Most common type of REIT

own actual properties

mortgage REIT

they dont own buildings but they own mortgages/loans and earn interests

How do REITs behave?

REITs are not safe like bonds.They move up & down like stocks.

So when you're building your retirement portfolio:

REITs count as stocks, not bonds

why do investors buy gold?

gold is often a hedge again inflation and market fear

what is the downside of investing in gold?

pays no income

What is a prenup?

A legal agreement made before marriage explaining how assets will be divided if the marriage ends.

What is a QDRO (Qualified Domestic Relations Order)?

A court order that lets divorcing couples split a 401(k) without taxes or penalties.

Why is a QDRO important in divorce?

It allows retirement funds to be split tax-free.

What is a 529 plan?

A tax-advantaged college savings plan where money grows tax-free and withdrawals for education are tax-free.

know that 529s = best way to save for college.

growing annuities

A series of payments that increase every year.

110- age rule

a rule that helps you decide how much of your retirement money should be in stock vs bonds

Formula:

110 − your age = % in stocks

true/false: REITs perform like stocks, not bonds

true

1098-T Form

tax form UCF gives you for tuition. You (or your parents) can get tax credits for being in college.

So your education costs reduce your taxes.

fiduciary

Someone who is LEGALLY required to act in your best financial interest. A fiduciary advisor must recommend the BEST investment for you,not the one that gives them the biggest commission.

retirement target

you should have 10 times your salary by the time you reach normal retirement age

How much do you pay in Social Security and Medicare taxes?

7.65%.

How much do employers pay in Social Security and Medicare taxes?

They match your 7.65%.

What is the IRA contribution limit for 2025?

$7,000, over 50 another $1,000 (8k)

What is the 401(k) contribution limit for 2025?

$23,500, if over 50 another $7500 (31k)

What is the annual gift tax exclusion for 2025?

$19,000 per person per year.

How much can a married couple give tax-free in 2025?

Each person can give $19,000 to any number of people.

What is the federal estate tax exemption for 2025?

$13.99 million per person.

What estate size would a married couple need before owing estate tax?

More than about $28 million combined.

What is the estate tax rate on amounts above the exemption?

Up to 40%

What is step-up in basis?

When you inherit an asset, its cost basis increases to the market value on the date of the original owner's death.