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67 Cards in this Set
- Front
- Back
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Random Risk
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risk associated with owning only one investment of a particular type (such as one company) that, by chance, may do very poorly in the future due to uncontrollable or random factors that do not affect the rest of the market
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Market Risk
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risk that the value of an investment may drop due to influences and events that affect all similar investments
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Business Failure Risk (Financial Risk)
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possibility that the investment will fail, perhaps go bankrupt, and result in a massive or total loss of one's invested funds
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Inflation Risk
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danger that your money will not grow as fast as inflation and therefore not be worth as much in the future as it is today
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Deflation Risk
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the chance that the value of an investment will decline when overall prices decline
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Market-volality risk
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the extent to which an asset's returns vary over time
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Liquidity Risk
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you can sell your stocks and bonds in one day, although it make take a few days to have the proceeds available in cash
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Marketability Risk
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when you have to sell a certain asset quickly, it may not sell at or near the market price
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Speculative risk
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exists in situations that offer potential for gain as well as for loss
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Risk Tolerance
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investor's ability and willingness to weather changes in security prices, that is, to weather market risk. factored into your investment philosophy
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investment philosophy
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investor's general tolerance for risk in investments, whether it is conservative, moderate, or aggressive, given the investor's financial goals
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conservative investment philosophy
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you accept very little risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate amount of current income and preservation of capital
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moderate investment philosophy
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seek capital gains through slow and steady growth in the value of their investments along with some current income
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aggressive investment philosophy
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you strive for a very high return by accepting a high level of risk
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Yield
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total return on an investment stated as a percentage of its price
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current income
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money received while you own an investment; usually received regularly as interest, rent, or dividends
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capital gain
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money received when you actually sell the investment; results from an increase in the value of the initial investment.
=(higher price sold at)-(total amount paid for investment) |
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interest
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charge for borrowing money; bond investors earn it
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dividend
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portion of the company's earnings that the firm pays out to its shareholders
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factors affecting investment returns
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1. speculative risk
2. leverage: use of borrowed funds to invest, enhances returns but also a risk 3. taxes 4. inflation 5. real-return: yield after inflation & taxes 6. transaction costs: commissions on purchases & sales |
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portfolio diversification
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practice of selecting a collection of different asset classes of investments that are chosen not only for their potential returns but also for their dissimilar risk-return characteristics
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dollar-cost averaging
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buying a specific dollar amount of an investment on a regualr time interval rather than buying a specific number of investments; buy more when prices are low, less when prices are high
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asset allocation
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form of diversification in which investor decides on proportions of an investment portfolio that will be devoted to various categories of assets
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stock
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shares of ownership in the assets and earnings of a business corporation
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common stock
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the most basic form of ownership of a corporation; stocks represent potential income because the investor owns a piece of the future profits of the company
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preferred stock
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type of fixed income ownership security in a corporation; owners receive a fixed dividend per share
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Initial Public Offering (IPO)
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when a company issues common stock or shares to the public for the first time
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Earnings per Share (EPS)
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a firm's profit divided by the number of outstanding shares; it indicates the income that a company has available to pay dividends and reinvest as retained earnings-used to compare stocks across the board
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Price per Earnings (PE)
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current market price divided by earnings per share; how much to pay for $1 of earning
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Dividends per share
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translates the total cash dividends paid out by a company to common stockholders into a per-share figure; =total cash dividends/number of shares
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Dividend Yield
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cash dividend paid to an investor expressed as a percentage of the current market price of a security; =dividend per share/current market price
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Book Value
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net worth of a company, determined by subtracting total liabilities from assets
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income stocks
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stock that may not grow too quickly, but year after year it pays a cash dividend higher than that offered by most companies
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growth stocks
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stock of a company that offers a promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings; high PE ratio
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speculative stocks
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stock of a company that has a potential for substantial earnings at some time in the future; high risk
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Blue-chip stocks
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suggest company has been around for a long time, dominates its industry, and is known for being a solid, relatively safe investment; have good earnings and consistent cash dividends; very stable
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value stocks
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stock that tends to trade at low price relative to its company and thus is considered undervalued based on its book value per share
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cyclical stocks
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stock of a company whose profits are greatly influenced by changes in the economic business cycle
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counter-cyclical stocks
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exhibits price changes opposite to movements in the economy; perform well during weak economic activity
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bond
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an interest-bearing negotiable certificate of long-term debt issued by a corporation, the U.S. government, or a municipality
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coupon rate
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interest rate printed on the certificate when a bond is issued
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market price
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current price that a buyer is willing to pay to a willing seller for a share of stock
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sources of return from a bond investment
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1. interest
2. gains from increased market value of bond |
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U.S. Treasury bills
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U.S. government securities with maturities of one year or less
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Treasury notes
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mature in 10 years or less
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Treasury bonds
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mature in more than 10 years
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discount yield
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difference between the original price of a Treasury bill and what the treasury pays you at maturity
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mutual fund
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investment company that pools funds by selling shares to investors and makes diversified investments to acheive financial goals of income or growth, or both
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Net Asset Value (NAV)
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price one pays to buy a share of a mutual fund;
=(market value of assets-market value of liabilities)/number of shares |
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advantages of investing through mutual funds
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1. diversification
2. affordability 3. professional management 4. liquidity: mutual fund co. will always buy the shares you want to sell 5. low transaction costs: not expensive 6. uncomplicated investment choices |
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sources of return from investment through a mutual fund
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1. current income: on annual basis
2. capital gain |
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aggressive growth funds
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make investments in speculative stocks with volatile price swings, seeking the greatest long-term capital appreciation possible
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value funds
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specialize in stocks that are fundamentally sound and whose prices appear to be low, based on the logic that such stocks are currently out of favor and undervalued b ythe market
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growth and income funds
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invest in companies that have a high likelihood of both dividend income and price appreciation; less risk-oriented than aggressive growth funds or growth funds
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small company funds
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invest in lesser-known companies with a market capitalization of less than $500 million that offer strong potential for growth
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sector funds
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concentrate investment holdings in one or more industries that make up a targeted part of the economy that is expected to grow
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global/international funds
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invest in growth stocks of companies listed on foreign exchanges as well as in the U.S.
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index funds
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invest in stocks of 30 specific companies; do not have to manage them; very cheap
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stock funds
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funds that invest in common stock of companies that hve above average growth potential
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bond funds
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aim to earn current income higher than a money market fund without incurring undue risk by investing in a portfolio of bonds and other investments
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money market funds
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invest in highly liquid, relatively safe securities with very short maturities
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contingent deferred sales charges
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sales commission that is imposed only when shares are sold; often charges are on a sliding scale, with the fee dropping 1% point per year that the investor stays in the fund
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redemption fees
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similar to a deferred load but often much lower; used to reduce excessive trading of fund shares
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12b-1 fees
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annual charge deducted by the fund company from a fund's assets to compensate underwriters and brokers for fund sales
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load funds
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mutual funds that always charge a "load" or sales charge upon purchase; the load is the commission used to compensate brokers
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no-load fund
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sells shares at the net asset value without the addition of sales charges
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how to select mutual funds
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match goals to mutual fund objectives; use "volality ranking" as measure of risk
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