First Quiz PR 429

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138 Terms



the branch of economics that studies decision-making by a single individual household, firm, industry, or level of government

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Gross Domestic Product

market value of all goods and services in an economy; widely followed economic indicator of a country or region's economic health

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the branch of economics that studies decision-making for the economy as a whole

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GDP...more info

GDP is used to measure economic output. The U.S. growth rate in GDP is closely evaluated by the Federal Reserve to determine whether the economy is growing too slowly, or too quickly. Recessions are often defined as two consecutive quarters of contraction in GDP.

- "expanding" or "contracting"

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what should the US's GDP be?

US - a mature market - should be 2-3%

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What should the GDP of emerging countries countries be?


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Global version of federal reserve

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Leading economic indicators - macro: the figures to watch

Gross Domestic Product, Interest Rates, Employment, Inflation/Deflation, Consumer Price Index, Consumer Confidence, Currency Exchange Rate, Stock Market

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Interest Rate

the rate at which interest is paid by people or organizations to borrow money from lenders, such as banks; the Federal Reserve and other central banks impact interest rates

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What is the current interest rate?

Current rate 5.35 to 5.5%; 16th month of rate hikes

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When the interest rates go negative...

the idea is that the commercial banks won't want to pay to park their excess reserves and will instead be motivated to lend their money to businesses and consumers, which will in turn spur economic growth

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3 Things to Look at with Employment

1. How many people are unemployed - weekly claims and monthly rate

2. How many new jobs are added each month and what types of jobs

3. Average hourly rate

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What US unemployment % is basically full employment

under 4%

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Who reports on unemployment?

US Department of Labor (Bureau of Labor Statistics) and ADP (Payroll company)

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July 23 Unemployment


Lowest since 1969, 5.8 million people unemployed

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Unemployment and Different States

Unemployment still different by state, CA is always worse than other states

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What job saw the biggest growth (jobs added per month)


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Labor Participation Rate

63.3% in Feb 2020, 61.9% in Dec 2021, 62.3% in Dec 2022

There are those who have dropped out of the workforce altogether

- 70% of those who left the workforce during the pandemic over 55

- 40.3% pre-pandemic

38.4% now

- Covid, Women Staying Home, Incarceration, Drugs

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when prices for goods and services go up; decreases the value of money and reduces its purchasing power; when prices go up too much, people consume less

In the U.S., the Fed aims to keep inflation at 2%

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Big Story Right Now - Inflation

- The Fed said they would let it run higher if needs be until employment/economy fully recovers

- Said inflation would be "transitory" as linked to supply chains and strong consumer demand. People buying "things" as they weren't spending on services (vacations/restaurants)

- Peaked at 9.1% in June 2022. Now at 3.2%

--But "CORE" inflation (which excludes volatile food and energy prices) at 4.7%

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when prices for goods and services go down; consumers then a) delay purchases and b) the value of assets declines

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Consumer Price Index (CPI)

is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care

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Consumer Price Index (CPI) - More Info

- calculated by taking price changes for each item in the predetermined basket of goods and averaging them

- Changes in the CPI are used to assess price changes associated with the cost of living

- one of the most frequently used statistics for identifying periods of inflation or deflation

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CPI and the Gov't

The CPI is used by the president, Congress and Federal Reserve Board to formulate fiscal policies based on the monthly findings and how inflation or deflation is presented. The CPI rate is expected to be 2% or under by the U.S. Department of Labor. If this inflation measure hits above the 2% level, borrowing rates may be raised to help fight off inflation

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Consumer Confidence

survey-based measures of how the public feels about current and future economic performance; can be predictive of future economic behavior

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Consumer Confidence Right Now

- Was riding at near record high Feb 2020 at 132.6 PRE COVID

- Plunged in April 2020 to 85.7 COVID HITS

J- uly 2021 at 129.1 VACCINES ARRIVE

- July 2022 at 95.7 INFLATION

July 2023 at 117

- Lowest level ever was 2008/9: Great Recession 25.3

- Consumers spending on experiences but holding back on big ticket items such as housing and appliances

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Currency Exchange Rate

the rate at which one currency will be exchanged for another; fluctuate based on shifts in the economic conditions of the various countries

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Stock Market

also known as the equity market or the share market, the collection of stock exchanges where shares of publicly traded companies are traded

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Stock Market Exchanges

The New York Stock Exchange (NYSE) and NASDAQ

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The New York Stock Exchange (NYSE)

the oldest stock exchange in the United States, and it's located on Wall Street in lower Manhattan. It is the world's largest stock exchange by market capitalization of listed companies ($13.39 trillion as of March 2011).

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has more listed companies (approximately 3,100), trades more volume (approximately 2 billion shares daily), and handles more IPOs (over 1,044 since 2000) than any other U.S. exchange.

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Stock Market Exchange (book def)

a market where securities, such as shares of stock in a company, are bought and sold; a company must meet listing requirements to have its stock listed on an exchange

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Stock Market Index

Takes various data from the 2 exchanges and bundles it together and tracks it for a particular purpose

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S&P 500

American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ

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Dow Jones Industrial Average

is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.

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Russell 2000

FTSE Russell, an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

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a financial instrument that represents an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option

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The Great Depression

severe worldwide economic depression that started in 1930 for at least a decade; in the United States, sparked the first wave of federal securities laws

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What caused The Great Depression in 1929?

buying stocks on margin

Maldistribution of wealth: Inequality of wealth in America by 1929. Some extremely rich people while 40% lived in poverty. It was not that there wasn't enough money. It was too concentrated with the few. It was not in the hands of enough of the people who would spend it.

Weakness in the economy: Agriculture, and the coal, iron and textile industries were already having problems in the 1920s. When the Depression started they collapsed quickly.

Cycle of Depression: As more banks and companies failed, and people were put out of work, they had less money to spend, so more companies went bankrupt and made their workers unemployed leading to a spiral of the worse getting even worse

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Buying Stocks on Margin

buying with borrowed money

- The amount you borrow to buy a stock if you do not have enough on your own

- Prior to Crash, stocks being bought with 90% borrowed money (10% margin)

- If the stock crashes, you loose your 10% BUT YOU STILL OWE THE OTHER PERSON THE 90%

- No rules and regulations around this

- Prior to the crash, 20 cents of every dollar loaned was for buying stocks

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The New Deal


- Offered hope to the unemployed with experimental programs: Aimed to put America back to work

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The plan for the New Deal

- put people back to work

- This would put money in their pockets

- Which they would spend

- Spending would stimulate the economy

- WPA Project: pouring money into building things

- Social Security

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effects of The New Deal

- ended forever the view that government and the economy should be separate

- vastly increased forever the size and power of the federal government

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Federal Reserve

is the central bank of the United States, created in 1913 by the US Congress; the Fed sets monetary policy with a goal of full employment and stable prices

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What does the Fed do?

serves as banker and financial agent for the U.S. government; issues currency; clears checks; supervises lending practices; acts as a lender of last resort; regulates the banking system through reserve requirements and bank examinations; regulates the money supply

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Jerome Powell

Head of the United States Federal Reserve

- The most important person on the planet

- He is trying to do something nobody has done for almost 40 years -> Interest rates, inflation

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Janet Yellen

US Secretary of the Treasury

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Conducting Monetary Policy

- Keeping our economy healthy is one of the most important jobs of the Federal Reserve

- The Federal Reserve System has been given a dual mandate - pursuing the economic goals of price stability and maximum employment

- It does this by managing the nation's system of money and credit - in other words, conducting monetary policy

- A key tool it uses to achieve this is the interest rate

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Monetary Policy

concerned with deciding how much money the economy should have or perhaps more correctly deciding whether to increase or decrease the purchasing power of money; done by central bank

- Involves changes in: policy interest rates, exchange rate, the size of the monetary base, the availability of credit

- Aims to influence the level and growth of the economy

- Central Bank is the U.S. is the Federal Reserve

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fiscal policy

is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

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Fiscal + Monetary Policy

These two policies are used in various combinations to direct a country's economic goals

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Adam Smith (summarized)

- Start of industrialization

- Father of Modern Economics

- Founder of free market economics

- Gov't stay out of it, stay out of it, it will be successful if not - it is your fault

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Adam Smith (1723-1790)

- The ideas it promoted generated international attention and helped drive the move from land-based wealth to wealth created by assembly-line production methods driven by the division of labor.

- Responsible for key Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets and the idea that an "invisible hand" guides supply and demand.

- A man would invest his wealth in the enterprise most likely to help him earn the highest return for a given risk level.

- Dominant school of thought through to the Great Depression.

- Wrote The Wealth of Nations (1776)

- The theory went out of favor during the depression

Rise in popularity again with Margret Thatcher (Prime Minister 1979-1990)

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John Maynard Keynes (1883-1946)

- The aggregate demand created by households, businesses, and the government and not the dynamics of free markets, is the most important driving force in an economy.

- Free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists urge and justify a government's intervention in the economy through public policies that aim to achieve full employment and price stability.

- Greatly influenced governments the world over in accepting their responsibility to provide full or near-full employment through measures (such as deficit spending) that stimulate aggregate demand.

- Wrote The General Theory of Employment, Interest, and Money (1936)

- FDR = The New Deal

- Obama = The New New Deal

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John Maynard Keynes (summarized)

- Most important writing in the 30s

--The economic crisis of the first world war and banking crisis of 1929

- Banking philosophy impacted US and the World until the 1980s

- Obligation for the govt to be involved in the economy; can't just leave everything alone

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What caused the Great Recession in 2008?

- A Crisis From Main Street to Wall Street (US families lost $11 trillion in wealth in 2008)

- Started with a housing bubble that burst (mortgages)

- Many other countries also had housing bubbles ready to burst

- The banking world and stock markets are global

- Capital Injections & TARP: Troubled Asset Relief Program

--Forced all the banks to take capital injections - stimulate all, people have confidence in the entire banking system

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Who were the main players in the Great Recession? (general categories)

Commercial Banks, Investment Banks, Governmental Providers, Insurance Comapnies

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Who were the main Commercial Banks in the Great Recession?

Bank of America

Wells Fargo



Countrywide Home Loans - not around

Wachovia - not around

Washington Mutual - not around

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Who were the main Investment Banks in the Great Recession?

Goldman Sachs

Morgan Stanley

Merrill Lynch - sold to Bank of America

Bear Stearns - not around

Lehman Brothers - not around

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Who were the main Governmental Providers in the Great Recession?



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Who were the main Insurance Companies in the Great Recession?


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Sub-prime lending

carries an interest rate higher than the rates of prime mortgages

- "A great idea that got perverted"

- "Subprime" refers to the below-average credit score of the individual taking out the mortgage, indicating that they might be a credit risk

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Mortgage-backed securities

an investment secured by a collection of mortgages bought by the banks that issued them

- "If you spread the risk into little chunks there would be no harm."

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Moral hazard

if you keep bailing out these banks, they will never learn; Lehman Brothers

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Systemic Risk

government bailed them out; Bear Stearns

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V-Shaped Recovery

characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline

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U-Shaped Recovery

form of economic recovery where the recession portion typically lasts for several quarters with a slow return to growth form of economic recovery where the recession portion typically lasts for several quarters with a slow return to growth

- Massive amounts of unemployment

- How deep and long the "U" last

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K-Shaped Recovery

occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes

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no set definition; two consecutive quarters of contraction (Negative GDP growth); unemployment 15-20%

- So we had one in 2020...First time since the last "Great Recession," which went from Dec 2007 to June 2009

- ...and we "technically" had one in 2022

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"panic" vs. recession; global impact + unemployment impact + collapse of whole industry sectors

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Financial Communication

a specialty of strategic communication concerned with communicating financial matters to the financial community and other stakeholders; privately held companies

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Why do private companies engage in financial communications?

Private companies are not required to disclose any information on financial performance.

Reasons to do so include:

- Attracting private capital

- Attracting suitor for a merger or acquisition

- Attracting JV partner/key recruiting

- Pre-IPO, starting to act like a publicly traded company to start establishing credibility in advance of an offering and its quiet period

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Investor Relations (lecture def)

provides company information to investors to help them make informed buy and sell decisions; persuasive communications to limited audience in a heavily regulated environment; publicly traded company

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Investor Relations (book def)

function in most public companies that serves as the primary interface for relationship building between the financial community, such as shareholders, and the compnay

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what is involved in investor relations?

strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation

- At the core of all IR...DISCLOSURE

--Disclosure = transparency

--Building trust → sustains/increases valuation of company

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U.S. Securities and Exchange Commission

A government commission created by Congress (1934) to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S.

- Composed of five commissioners appointed by the President and approved by the Senate

- The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets.

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Form 8-K

the "current report" companies must file with the SEC to announce major events ("material current event") that shareholders should know about between a periodic report

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Form 10-K

reports a company's annual results and forms the foundation for a firm's annual report. Independently audited

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Form 10-Q

reports a company's quarterly results; these financials are unaudited

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Form 4

whenever there are changes in an insider's ownership (i.e. a purchase or sale) of company securities

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Form S-1

Also known as a prospectus, is the registration document required to be filed by companies planning to go public

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Bull Market

period of generally rising prices

- start of a bull market is marked by widespread pessimism.

- This point is when the "crowd" is the most "bearish"

- The feeling of despondency changes to hope, "optimism", and eventually euphoria, as the bull runs its course.

- This often leads the economic cycle, for example in a full recession, or earlier.

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Bear Market

a general decline in the stock market over a period of time

- it is a transition from high investor optimism to widespread investor fear and pessimism.

- The Vanguard Group, "While there's no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period."

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is the "top line" or "gross income" figure from which costs are subtracted to determine net income; calculated by multiplying the price at which goods or services are sold by the number of units or amount sold

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Net Profit

also called net income, net earnings, or the "bottom line", shows how much money a firm made after taking into account both operating and non-operating expenses

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Gross Profit

also called gross income is a company's revenue minus its cost of goods sold. How much money is left after deducting the direct operating expenses

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Net vs Gross

Net is always smaller than gross

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Net Loss (also referred to as Net Operating Loss)

the result that occurs when expenses exceed the income or total revenue produced for a given period of time. Businesses that have a net loss don't necessarily go bankrupt because they may opt to use their retained earnings or loans in order to stay afloat. This strategy, however, is only short-term, as a company without profits cannot continue surviving for a long period of time

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Initial Public Offering (IPO)

marks the first time that a company sells stock to the public and its shares are listed on a stock exchange and widely available for purchase by investors

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Advantages of IPO

- Raise cash

- Attract seasoned executives

- Enhance reputation

- Increase publicity

- Cash out for VC/other investors

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Disadvantages of IPO

- Short term emphasis

- Shareholder information

- Shareholder approval

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Risk and Rewards of Buying IPO Stocks

- In the right market environment, newly issued stocks can rise quickly, particularly those showing exceptional earnings and sales growth and strong demand among mutual fund managers and other large investors.

- But new issues can also be quite volatile, and not all of them generate such impressive gains.

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a security that represents an ownership interest in a company and its future earnings

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Stocks and people

- Only 55% of Americans report owning stocks

--Peak was 67% in 2002

- Richest 10% of households control 84% of total value of stocks

- "A Correction" in the stock markets

- Defined as a 10% drop in market value

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an investor makes money only when a shorted security falls in value

- Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit

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Income Statements (P&L Statement)

tracks what a company made or lost and spent over a period of time

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Balance Sheets

tracks company assets, liabilities and net worth: what a company own and owes at a set point in time

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something a company owns that has value and the potential to generate revenue and contribute to earnings: cash, securities, inventory, real estate, equipment, copyrights, trademarks, etc.

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some sort of monetary obligation that a company owes to others: money borrowed, mortgages, future income tax liabilities

- current and non-current liabilities

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Current Liabilities

are those that are expected to be paid within a year

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