GlOBAL CAPITAL quiz 1

Money

money has changed from gold/silver to paper currency to electronic funds

cash can be obtanied from an atm aby where in the world

bills are paid and trasnaction are checked online

Financial instruments

transfer resoures from savers to investors

buying and selling individuals stocsk used to be only fr the wealthy

mutual funds, exchange traded fucds are widley available through banks or online

finanical markets

allows the buying and selling of financial instruments easiley '

transactions are mostly handled by electroic markest

financial institutions

provide all the serives of the finical system like provdiding access to finical market and gathering information

banks began as vaults, devolped into insttrutions that acctped deposts and gave loans

government regulatory agenices

make sure the elements of the finical system operate saftey and reliably

introducted after the great depression

central banks

monitor and stabilize the financial system

control the avabilibity of money and credit to promote low inflation, high growth and stability of financial system

5 core principles of money and banking

1. time has vaule

2. risk requires compensation

3. information is the basis for decisions

4. market determine prices and allocate resources

5. Stability improves welfare

Time has value

Time affects the value of fianical instruments

intrest is paid to compensate the lenders for the time borrowers have thier money

Risk requires compensation

in a world of uncertainity, individuals will accpet risk only if they are compensated

in the finanical world, compensation comes in the form of explixt payments : higher the risk the bigger the payment

information is the basis for decisions

the more important the decision, the more information we gather

Collection and processing of info is the foundation of the finical system

Markets determine prices and allocate resources

markets are the core of the economic system

Markets channel resources and minimize the cost of gathering info and making transactions

the better developed the finical markets, the faster the country will grow

Stablity improves welfare

a stable economy reduces risk and improves everyones welfare

stable economy grows faster than an unstable one

main roles of central banks is stabilizing the economy

Money has 3 characteristics

1. means of payment

2. unit of account

3. store of vaule

liquidity

measure of the ease with which an asset can be turned into a means of payment

inflation

the proocces of prices rising

inflation rate

the measurement of the process

you need more money to buy the same basket of goods

the primary cause of inflation is too much money

computing CPI inflation

survey people to see what they bought

figure out what it would cost to buy the same basket of goods and services today

compute the % change in the cost of the basket of goods

Fiat currency

is government-issued money that is not backed by a physical commodity like gold or silver, but derives its value from government decree and public trust.

common stocks

ownership converys rights =

a stockholder is entailed to participate in the profits on the enterprise

Stockholders are entitled to vote at the fims annunal meeting

Stockholders are paid last after all credtiors have been paid

limited liability

an individual share is only a small faction of the companies value

replace mangers who are doing a bad job

Stock market indices

we need to be able to measure the level of fluctons in all stock vaules

the concept is the vaule of the stock market

We will refer to its meausre as stock-market indexes

Stock indexes

Tell us how much the vaule of an average stock has changed, and how much total wealth has gone up or down

Provide benchmarks for performance of money mangers

DJIA

Is the first and best known stock market index

PRICE_WEIGHTED AVERGE - greater wight to shares with higher prices

is based on the stock prices of 40 of the largest companies in the U.S

measures the vaule of purchasing a single share of each week

the % change in the DJIA over time s the % change in the sum of the 30 prices

s&p 500

based one the vaule of 500 largest firms in the u.s economy

tracks the total vaule of owning the enerirly of thoses firms

it uses a market cap-weighted index where larger firms carry more weight

Fundamental analysis

estimate value of stock based on company fundamentals, such as proftbailty

Technical analysis

predict changes by looking at patterns or past movments

Behavioral analysis

analyze perceptions of investor psychology and bahviar

Underlying versus

used by savers/lenders to trasfer resources directly to investors/borrowers example: stock and bonds

Derivative instruments

where thier vaule and payoffs are dirived from the behavior of the underlying instruments

ex: future, options and swaps

size of payment

larger payments - valuable

Timing of payments

payments is sonner - more valuable

likelihood that payment is made

more likey to be made - more valuable

conditions under with payment is made

made when we need them - more valuable

BONDS

LOANS

STOCKS

OWNERSHIP

Insurance contracts

Primary purporse is to assure that payments will be made under particular circumstances

Future contracts

an agreement between two parties to exchange a fixed quanitlity of a commondity or an assets at a fixed price on a set future date

a price is always specified

options

Derivative instruments whose prices are based on the value of an underlying asset.

Give the holder the right, not obligation, to buy or sell a fixed quantity of the asset at a pre-determined price on either a specific date or at any time during a specified period

swaps

Agreements to exchange two specific cash flows at certain
times in the future.

Come in many varieties reflecting differences in maturity,
payment frequency, and underlying cash flows

active fund

PM selects individual securities to attempt to beat an index

Passive

Seeks to replicate an index (like S&P 500)

Growth

Focus on higher-growth stocks

Value

Focus on stocks that currently sell at an attractive valuation, i.e. discount to fundamental value

Quantitative

Use set of quantifiable rules to select securities

Fundamental

Use analysis to select securities

Future value

value on some future date of an investment made today

the higher the intrest rate or the higher the amount invested, the higher the future value

compound intrest

is the interest on the interest

Present Value

Value today in the present of a payment that is promised to be made in the future

or amount that must be invested today in order to realize a spesfic amount on a given future date

stock

ownership of a % of the company

dividend-discount model

The fundamental price of a stock is the current
dividend divided by the interest rate, minus the
dividend growth rate

p/e

basic measure of the value of stock relative to earnings

how much you are paying for each dollars of earnings

allows comparsion acorss sectors, markets, time

Growth

higher growth justifies higher multiples

Sentiment

Postive sentiment leads to higher multiples

risk

higher risk suggest lower multiple

Intrest rates

higher rates lead to lower multiples

why stocks are risky

When you buy stocks, you are effectively
buying the company and taking on its debt.

Stockholders get part of the profits, but only
after everyone else is paid, including
bondholders.

The borrowing creates leverage, and leverage
creates risk.

The more debt, the more leverage and the
greater the owners’ risk

never know fr sure how much

theory of efficent markets

is the notion that prices of all financial instruments reflect all available information

markets adjust immedialty and continisuky chnage in funsdanmental vaules

IPO (initial public offering )

company raises captial in the market place

secondary offering : transfer of ownership between existing shareholders

direct listing (direct public offering)

a private company will g public by selling shares to investors on the stock exchanges without an IPO

Preferred stock

Security with features of equity and debt

instruments

Pays fixed dividend

Preferred owners receive dividends before

common

Preferred owners have claim priority over

common shareholders

Straight, cumulative, convertible, participating,

callable

accertive

deals increase the earnings per share of the scquiror

Dilutive

deals decrease the earnings per share of the acquiror