Investments FIN 4423

Bid Price

the price the dealer is willing to buy the security or the price the investor can sell the security

Asked Price

the price the dealer is willing to sell the security or the price the investor can buy the security

T Bills

short term investment, no risk or risk free investment, highly marketable, highly liquid, do not pay interest payment or hence sell at discount, the par value is $10,000

Prices<Face Value

T bill is selling at a discount from the face value

Prices>Face Value

T bill is selling a premium from face value

T Notes and T Bonds

intermediate and long term investment (more Ethan 10 years), no risk or risk free investment, highly marketable and liquid, do pay interest payments, and the par face value is $100, the common face value is in multiples of $10,000

Stocks

stockholders are owners of the firm, have residual claims on earnings or dividends of the firm, have the right to decide the management of the firm by voting.

Market Indexes

are useful to evaluate the investment performance. Example of domestic stock indexes: Dow Jones Industrial Average (DJIA), Standard and Poor's Composite Index (S&P 500 Index)

Price Weighted Index

An example is DJIA, is based on the price per share (high price stock are more weight than low price stocks) and is calculated by using the adjusted divisor approach. When a stock splits or issues a new dividend of 10% or more, the divisor is recalculated.

Stock Split

A 20 dollar bill is the same as two 10 dollar bills

Bull market

a market on the rise of 20%or more from the low

Bear market

a market on the decline of 20% or more from the high

Market Value Weighted Index

also known as Simply Value Weighted Index, like S&P 500 and NASDAQ Index is based on the market value or market capitalization (high market value weighted indexes have more weight than low market value stocks)

Primary Market

the initial sale of new shares by an issuer to the public in the initial public offering (IPO). The issuer receives proceed or cash from the sale of new shares

Investment Bankers

financial institutions such as Goldman and Sachs or Morgan Stanley that specialize in the creation and placement of securities in the primary market

Investment Bankers; firm commitment or general cash offer

investment bankers buy all the shares from the issuer, the firm that is going public, at a bid price, and sell the shares to the public at the asked price or the offering price. Typically the bid asked spread is 7%, the investment bakers act as dealers and take the risk of not able to sell the shares or must sell the shares at a loss. To minimize risk, they from a syndicate that consist of several investment bankers. In order to avoid the risk of selling IPOs at a loss, they commonly underprice IPOs by setting offering price lower the the fair price. and hence oversubscribing in order to generate more demand at the offering price than the supply.

Investment bankers; best effort

investment bankers act as brokers to assist the issuer to sell the shares to the public. The issuer takes the risk of not able to sell shares or not able to raise the intended amount of money. Investment bankers now have risk, so more incentive to sell at a higher price.

investment bankers; distribution

investment bankers can distribute the new issues to the public

Direct listing

SEC is still in process of approving this new underwriting alternative

Average first day IPO

In the US, 18%. Or an underpricing of 18% Ex: if offering price was $10 the closing price would we $11.8, $10(1.18)

IPOs performance in the long run

bad performance in the long run, from 1980- 2015 underperformed by 7.16% per year over a 5 year holding period

Secondary Market

buying and selling between investors. The issuer is not involved in this market

Auction Markets

such as the NYSE, uses specialists

Dealer markets

such as the NADAQ uses market makers

Buying on margin

investors buy securities by BORROWING MONEY from a broker. Investors who use this method expect an increase in the stock price (bullish).

Initial Margin

set by regulation of the T of the federal Reserve (currently at 50%, meaning that at most, 50% of the purchase price or market value may be borrowed from a broker)

Maintenance margin

is set by brokers (currently above 25%, must maintain at least this level), minimum amount of equity before additional fund or cash must be added to this account

Margin Call

decline in stock price leads to maintenance margin falling below the set level, investors will receive a margin call from their broker to send cash or sell shares

Limit sell order

set at a price above the market price

Ex- $15, by instructing the broker to sell when the stock price is $15 or higher, considering the stock price is $10 at the moment and hasn't reached $15, the order to sell will be left with the specialist or market broker

Stop loss order

sell at a price below the market price

Ex- 8$, by instructing the broker to sell when the stock price is $8 or lower, considering the stock price is $10 at the moment and hasn't reached $8, the order to sell will be left with the specialist or market maker

Time dimension

limit and stop loss order are good for a day or good till cancelled

Short selling

investors sell a certain number of shares of a stock that the investor doesn't own by BORROWING SHARES from a broker and agree to return the same number of shares back to the broker after a certain time. Expect a decline in the stock price (bearish). Does well when the market is DOWN

Dangers of buying on margin

1. leverage

2. Investors just don't know what it means

3. Broker makes more money off interest payment for marginal account

Dangers of short selling

1. Think stock price will drop, investors believe stock price is too high and will eventually go down. Not always the case

Market order

instructs the broker to buy or sell at the MARKET PRICE

Limit order

requests to buy or sell at a SPECIFIED PRICE or better. Is left with the specialist or market maker

Stop order

request to buy (stop buy order) or sell (stop loss order) at a SPECIFIED PRICE or better.