Studied by 7 people
Budget
Estimation of Revenue/expenses over specified period
Discretionary Income
$ leftover after paying needs
50/30/20 Rule
50% Needs, 30% Wants, 20% Savings
Compound Interest
Value is never greater than what it is now / Interest on interest
Rule of 72
# of years it takes for a $ value to double - 72/rate = years
Credit Worthiness (3 C’s)
1) Character
2) Capital (item of value)
3) Capacity (you can pay)
Life Insurance
Provides protection for assets in case of death
Premiums (Insurance)
Monthly payments to insurance companies for cost of insurance (higher risk = higher rate)
Term Life (payment)
limited amount time
lower premium
protection for times of need (mortgage/family)
Whole Life (investment)
entire life
cash value accumulates
guaranteed income after retirement
401(K)
Private sector retirement plan
contributions pretax (pay tax @ end)
employer match % of contributions
max: $22500/year
withdraw @ 59.5-70.5
403(B)
Public sector retirement plan
contributions pretax (pay tax @ end)
employer no match contributions
max: $22500/year
Roth IRA
pay tax NOW ($ deposited is taxed)
tax break lateR
$60,000 max
withdraw 59.5
TraditioNal IRA
pay tax later ($ put in no taxed)
tax break Now
$6,000 max
withdraw 59.5
Rule of 110
110 - age = % invested in stocks vs bonds
Dollar Cost Averaging
Decrease loss/volatility with payment plan - same investment same amount
Owning stock
become part owner of company
Public stocks
ANYBODY can own - ex: Nike, Amazon
Private stocks
Not traded on stock market - ex: Deloitte, KPMG
Initial Public Offering (IPO)
Company decides to sell to public by:
1) Investment banker underwrites stock offering
2) take responsibility/risk of selling certain amount of stock
3) Register with Securities and Exchange Commission (SEC)
Index
Measurement of group of companies
Dow Jones (DJIA)
30 Top companies
S&P 500
Baseline for stock of mutual fund (500 companies = more diversity)
NASDAQ
Technology index (3700+ companies)
Market Cap
Amount of Shares * Stock Price
Small Cap (20%)
$250M - $2B
Mid Cap (5-10%)
$2B - $10B
Large Cap (70%)
$10B >
Standard Deviation
How volatile? / Skew from average
Beta Number
Calculation to measure risk in stock
<1 stable
1 average
>1 volatile
P/E ratio
Price of Stock/Earning per Share (higher = riskier)
Earnings Per Share
Profit/# of Shares outstanding (want high)
Capital Appreciation
Buy/sell stock
Dividends
$ earned by holding onto company stock
Tech companies usually no
Big dividends = stable company
Stock Split
More shares without changing value
ex: $1M @ 50 Shares → $2M @ 25 Shares
Reverse Stock Split
Less shares without changing value
Conservative Investor
55-60, little change, bonds/high yield savings
Moderate Investor
Mid age, Crypto/bonds
Speculative investor
Younger, huge beta or P/E ratio
Short sell
Buy low sell lower (bet against company)
buy on margin (loan)
no limit to loss
margin fees
Market order
Buy security immediately @ price available
Limit order
Buy/sell @ price YOU determine
Margins
Borrow $ to trade
Bear Market
SUCK - decline of 20% or more of stock market index
Bull Market
GREAT - gains of 20% or more of stock market index
Financial Statements
fundamental statements
Balance Sheet
How much a company owns vs owes on specific date
Assets = liabilities + owner equity
Income Statement
$ made - net earnings/loses
Revenue - Expenses = Income/Loss
Cash Flow Statement
Inflow/Outflow of $
1) Operating Activities (lights, employees)
2) Investing (business investments, etc.)
3) Financing (loans, buying - building credit)
Working Capital
Ability to pay off short term liabilities
Current Assets - Current Liabilities
Current Ratio
Ability to pay off short term liabilities (higher = likely to pay off)
Current Assets/Current Liabilities
QuIck Ratio
Short term financial Strength (higher = better)
(Current Assets - Inventory) / Current Liabilities
Debt to Equity
Total Liabilities / Shareholder Equity (low!) - 0.5 low risk
ex: 3:1 ratio = $3 debt for every $1 shareholders invest
ReturN on Equity (ROE)
Measure profitability (high!)
Net Income / Shareholder Equity
Return on INvesteD capital (ROIC)
Profitability business must earn return on invested that exceed cost of capital (Want to be > cost = invested + working) - 15% good
(Net income - Dividends) / $ invested capital
Profit MaRgin
$ made / stuff sold (high!) ex: 20% = $0.20 for each $1 of sales
Net income (after tax) / Revenue
PEG Ratio
Stock’s value - lower = undervalued
PE Ratio / EPS Growth
Mutual Fund
Take and organize into one fund w/ different holdings + professionally managed
NAV
Price per share of fund
(Assets - Liabilities) / # of Shares
Value Fund
Seeks to invest in stocks that are deemed to be undervalued in price
Growth Fund
Capital Apperciation Stocks
Income Fund
Dividends
Index Fund
Tracks S&P / Index
lower fees, average performance, little variation
Bond Mutual Fund
People = lenders to companies, gov, etc.
Corporate
State/local
Government
Municipal Bonds
A security issued by or on behalf of a local authority
Government Bonds
Treasury bonds – > 10 years
T Notes – 1-10 years
T bills – < 1 year
Zero-coupon bond (purchased at discount)
Bond ratings
AAA - AA = high credit
AA - BB = medium
BB - C = low
C - D = junk
Investment Grade
High ratings/stable/success
Callable Bonds
Redeemable prior to maturity
Junk Bond
Low rate, high yield (HIGH RISK, POTENTIAL HIGH REWARD)
Par/face value
Principal/Maturity value of a security on face of instrument
Coupon payment
% rate or yield
Coupon rate
Initial rate
Current rate
Rate based on market
Relationship between pricing and interest rates
Inverse
SD of 10 w/ average annual return of 10%
Range: 0% - 20% SD
R²
How close match index - 1.0 = perfect vs 0.0 = no coRRelation
Sharpe
Potential Return - Potential Volatility (higher = better)
1 = good, 2= better, 3 = excellent!
Bond amount > face value
Sell @ Premium
Bond amount < face value
Sell @ Discount
Note 
Flashcard (25)