Ch18: Market Analysis and Financial Statements

In an expansionary period, investors will buy … equities

cyclical

In a recessionary period, investors will buy … equities

defensive

Diversification is

investing in different types of securities, markets, and industries

Having a portfolio with a beta value below 1.0 means that

the portfolio will be less risky than the market

Alpha is

performance over the risk adjusted expected return

A bull market is

an extended financial period of rising stock prices, high investor confidence, consumer spending, and strong economic growth

A bear market is

a period of falling prices (dropping 20% or more from recent highs), consumer pessimism, and economic contraction

In a bull market, high beta portoflios will outperform/underperform the market/

outperform

Technical analysis …

predict future performance/value based on charted prices, volume data, and patters

Technical analysts do NOT consider

economic trends, management’s history, sector conditions, business fundamentals (these are fundamental analysis)

Advance/decline line (technical analysis method):

plots the number of stocks in an index that have advanced (gone up in price) versus declined (fallen in value) to measure the degree of participation

Degree of participation:

how many of the stocks in the index are advancing when the index is up and how many are declining even if the index is up

A bullish movement with narrow participation (just a few stocks driving the index) may signal

a reversal

The Advance-Decline (A/D) Line is always a … indicator. It is calculated by …

cumulative indicator. It is taking the net advances (advancing stocks minus declining stocks) on a given day and adding or subtracting that number from the previous day’s running total

A bearish divergence is when

an index is advancing overall but the advance/decline line shows that more stocks are actually declining

A bullish divergence is when

an index is declining overall but the advance/decline line shows that more stocks are actually advancing

Buying shares at a support level means

purchasing stock at a price point where a downtrend historically tends to pause or reverse due to a concentration of buying demand

Dollar cost averaging (DCA) is

buying a fixed dollar amount of shares at regular intervals

Would technical analysts buy shares at a support level?

yes

Would technical analysts buy shares as short interest increases?

yes

Would technical analysts buy shares when trading volume increases?

yes

Fundamental analysis predicts future value based on

an individual company’s business fundamentals, financial statements, management, and industry trends. NOT historical market data, trading trends, or price patterns

Working Capital =

current assets minus current liabilities

Current Ratio =

current assets divided by current liabilities

Quick Ratio =

current assets - inventory, all divided by current liabilities

Quick ratio excludes … to see …

inventory to see what the company could do quickly

Recording declaration of dividends →

Dividends Payable (L) increases, comes out of Retained Earnings (L, declines), with no change in cash

Does the declaration of dividends affect working capital?

Working capital decreases since current assets do not change but current liabilities increases

Does the payment of dividends affect working capital?

No, it remains the same since cash current assets go down the same amount of dividends payable current liabilities

Recording payment of dividends →

Cash (A) decreases, Dividends payable (L) decreases, and Retained Earnings do not change

The ex-date is the … the record date

ex-date is the day before the record date

Retained earnings:

profits a company makes from selling goods or services

Additional paid in capital:

the total amount of money a company raises when it sells shares of stock at an issue price above their stated par value

The amount over par paid for common stock goes into the …, and the amount paid at par goes into the ….

Additional Paid in Capital Account, and amount paid at par goes into the Par Account.

Income statement order from top to bottom:

revenue minus cost of goods sold equals gross (operating) profit, minus fixed costs equals net operting profit EBIT, minus interest equals pre-tax income, minus taxes equals net income

EPS =

net income minus preferred dividends, all divided by number of common shares outstanding

Current Yield =

annual dividends divided by current market share price

Dividend payout =

annual dividend divided by EPS

P/E Ratio =

stock price divided by EPS

Riskless and simultaneous transactions are when

a broker-dealer buys securities in order to sell them to a customer who has already placed a buy order

Mail to a client may be sent to third parties on … and do/don’t also need to be mailed to the client.

the client’s written instructions and don’t need to also be mailed to the client

ACATS Steps →

the customer and receiving new firm submit a Transfer Initiation Form (TIF) to ACATS which forwards it to the carrying old firm, the carrying firm has 1 business day after receipt to create an asset report of the customer’s account to validate the transfer OR protest it, then finally the securities automatically transfer within 3 business days after the validation date

ACATS:

the automated customer account transfer service

ACATS timeline is … business day after receipt to verify or protest and … business days after the validation date to transfer

1 business day after receipt to verify or protest and 3 business days after the validation date to transfer

General business records are required to be retained for …, which includes …

3 years from the day of the last use of the record, which includes retail and institutional communications, customer trade confirmations, Forms U4 and U5, fingerprint records, and Reg D Private Placement records

Customer complaints required to be retained for

4 years

Anti-money laundering records are required to be retained for

5 years

Important records are required to be retained for …, which includes …

6 years (default), which includes blotter, ledger, securities (stock) records, and records of the person at each office who can explain the records maintained there and the principal overseeing compliance

The default retention length of a record if not specified is

6 years

Lifetime records:

articles of incorporation, partnerships, and the Form BD which establishes the entity as a broker dealer

For the first … all records must be easily accessible

2 years

If a BD receives a trade comparison (BD sends to other BD to confirm what was traded) that it doesn’t recognize or is incorrect, the BD …

sends a Don’t Know Form notice, called “DK the trade”

The record retention period for customer account records, including deceased clients, is

6 years