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61 Cards in this Set
- Front
- Back
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Dodd–Frank Wall Street Reform and Consumer Protection Act
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Signed into federal law by President Barack Obama on July 21, 2010.
In response to the recession. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation's financial services industry. |
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internal rate of return (IRR)
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The higher a project's IRR, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.
A firm (or individual) should, in theory, undertake all projects or investments available with IRRs that exceed the cost of capital. Investment may be limited by availability of funds to the firm and/or by the firm's capacity or ability to manage numerous projects. a rate of return used in capital budgeting to measure and compare the profitability of investments. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation). |
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rule of 72
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%/72=years needed to double principal
72/x(number of years you want) =% needed |
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Why shoot for higher returns or lower costs? (fund fees)
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a few percentage points in investment returns or interest rates can mean a huge difference in your future wealth
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Dow Jones Industrials Index
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a basket of 30 of the most popular, and some of the best, companies in America.
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Stocks are ownership in a company, so to buy stocks, you must...
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This means learning how to read financial statements, considering how companies actually make money, spotting trends, and figuring out which businesses have the best competitive positions. It also means coming up with appropriate prices to pay for the businesses you want to buy.
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Perspective on "volatility"
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Does the value of any given business really change up to 50% year-to-year? (Imagine the chaos if the value of our homes changed this much!) The fact is, "Mr. Market" tends to be a bit of an extremist in the short term, over-reacting to both good and bad news.
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Competitive positioning
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the ability of a business to keep competitors at bay
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Key to Successful Investing
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knowing how to value a company properly and outside the media frenzy or public opinion. How? Understand everything about how a business works. How THIS business works. The mechanics of it, the tools it has, its management style, goals, etc. Lots of reading and absording. PLUS general market knowledge and news following. Only make note of things that may be long term trends. Never assume
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return on capital
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The ratio of profit to the capital. It is important to remember that the absolute level of profits in dollar terms is less important than profit as a percentage of the capital invested.
For example, a company may make $1 billion in profits for a given year, but it may have taken $20 billion worth of capital to do so, creating a meager 5% return on capital. Another firm may generate just $100 million in profits but only need $500 million to do so, boasting a 20% return on capital. This company is highly profitable. A return on capital of 20% means that for every $1.00 that investors put into the company, the company earns $0.20 per year. |
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two types of investors
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creditors ("loaners"):
reditors are typically banks, bondholders, and suppliers. They lend money to companies in exchange for a fixed return on their debt capital, usually in the form of interest payments. Companies also agree to pay back the principal on their loans. The interest rate will be higher than the interest rate of government bonds, because companies generally have a higher risk of defaulting on their interest payments and principal. and shareholders ("owners"): Shareholders are entitled to the profits, if any, generated by the company after everyone else--employees, vendors, lenders--gets paid. The more shares you own, the greater your claim on these profits and potential dividends. Owners have potentially unlimited upside profits, but they could also lose their entire investment if the company fails. |
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A note on dividends
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Companies that care about shareholders will reinvest the money only if they have promising opportunities to invest in. A dividend could mean that the company is large, profitable, and likes to please, or that they want to make the shareholders happy with something in tough times, so they issue a dividend.
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Return on capital
vs Return on stock |
Return on Capital: Profit / (Invested Capital)
Return on Stock: Shareholder Total Return = Capital Gains + Dividends These do not mirror eachother. In other words, in the short term, there can be a disconnect between how a company performs and how its stock performs. This is because a stock's market price is a function of the market's perception of the value of the future profits a company can create. Sometimes this perception is spot on; sometimes it is way off the mark. But over a longer period of time, the market tends to get it right, and the performance of a company's stock will mirror the performance of the underlying business. |
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Benjamin Graham on
THE VOTING AND WEIGHING MACHINES |
n the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.
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10-K
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FIRST STOP:
annual report that outlines a wealth of general information about a company, including number of employees, business risks, description of properties, and strategies. The 10-K also contains the company's audited year-end financial statements. In addition to possessing crucial facts and figures, the 10-K also includes management's discussion and analysis of the past business year and compares it with preceding years. isit the SEC Web site, click on "Filings & Forms," and then "Search for Company Filings." After plugging your company's name into the "Companies & Other Filers" search, you can pick the 10-K out of the list of forms. Morningstar.com also has links directly to the SEC Web site. Just enter a company's name or ticker into the search box, and choose the "Filings" tab on the quote page navigation. |
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10-Q
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Quarterly report on businesses. Good way to keep tabs on them
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DEF 14a
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PROXY STATEMENT:
detailed information about executive compensation, the board of directors, and the shareholder voting process. The proxy is a must read for gaining better insight into the corporate governance of the company you're researching and determining your rights as a potential shareholder. |
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8-K
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If you're interested in a recent event, typically associated with an earnings release or major company announcement, you can find the details in the most recent 8-K.
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Form 4s
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Every time company insiders make a transaction in company stock, they are required to file the Form 4, allowing you a peek into whether they are buying or selling shares. While an insider's trading activity may be no smarter than your own, it can at least reveal if management's investment behavior is consistent with its tone.
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Company websites: another tool
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The investor section of a company's website can offer a variety of information. Copies of the public filings are usually available in more flexible, downloadable formats--such as PDF, Microsoft Excel, or Microsoft Word. Also, you can sort through the firm's press releases and examine the latest investor presentations (typically in PDF or Microsoft Power Point formats).
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Setting up a watch list
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1. Go to the Morningstar.com and click on the tab labeled "Portfolio."
2. In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio." 3. You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue." 4. Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done." 5. In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again. 6. Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com. By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell de |
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How to get informed about a company: Step by step guide
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1. Obtain the firm's 10-K and really try to give it a thoughtful read. Don't feel bad if you spend a lot of time on this step. (Give it a couple of days to digest.)
2. Read through the 10-Qs when they are released each quarter. These are usually much shorter than the 10-K and shouldn't require more than an hour or two of your time. 3. Set up a watch list to organize the steady flow of news on all the companies that interest you. 4. Poke around on the company's Web site. This takes less than a half hour. 5. When time allows, visit relevant industry Web sites and catch up on some of the industry trends. |
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The Income Statement
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irms with low expenses relative to revenues--and thus, high profits relative to revenues--are particularly desirable for investment because a bigger piece of each dollar the company brings in directly benefits you as a shareholder.
Expenses. Although there are many types of expenses, the two most common are the cost of sales and SG&A (selling, general, and administrative) expenses. Revenues. The revenue section is typically the simplest part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, Gross profit = revenues minus cost of goods sold ***Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. |
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The Balance Sheet
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Assets=Liabilities+Owners Equity
Assets: current=liquid non-current=not easily converted in one year Liabilities: current-must pay back in 1 yr non-current- long term loans |
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Statement of Cash Flows
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The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a firm generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures--money spent on items such as new equipment or anything else needed to keep the business running--or monetary investments such as the purchase or sale of money market funds. The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section. |
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Free cash flow
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represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations
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Earnings Per Share
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EPS = (Total Company Earnings) / (Shares Outstanding)
higher is better |
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Market Capitalization = Market value of a company
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Market Capitalization = (Stock Price) x (Shares Outstanding)
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Profit Margins
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Gross Margin = (Gross Profits) / Revenues
Operating Margin = (Operating Profits) / Revenues Net Margin = (Net Profits) / Revenues |
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Price/Earnings and Related Ratios
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P/E = (Stock Price) / EPS
a rough idea of the price investors are paying for a stock relative to its underlying earnings. Generally, the higher the P/E ratio, the more investors are willing to pay for a dollar's worth of earnings from a company. High P/E stocks (typically those with a P/E above 30) tend to have higher growth rates and/or the expectation of a profit turnaround. Meanwhile, low P/E stocks (typically those with a P/E below 15) tend to have slower growth and/or lesser future prospects. |
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Stock Options
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call option: to buy
put option: to sell LEAPS (long-term equity anticipation securities): LEAPS typically don't expire for two to three years, sometimes as long as five or ten years. Other than that key distinction, LEAPS trade like regular options. |
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dividend
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determined by the board of directors. paid on a set schedule, such as quarterly, semiannually, or annually. Dividends may be paid directly to the investor or reinvested into more shares of the company’s stock. Even if dividends are reinvested, the individual is responsible for paying taxes on the dividends earned. Mutual funds also pay dividends, from the income earned on the underlying investments of the fund portfolio.
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dividend yield
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annual dividend divided by the market price per share of a security. Used to compare dividend-paying shares of different corporations.
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dividend reinvestment plan (DRIP)
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A plan allowing investors to automatically reinvest their dividends in the company’s stock rather than receive them in cash. Many companies waive the sales charges for stock purchased under the DRIP.
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earnings growth
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increase in in earnings per share from one period to another, which usually causes a stock’s price to rise.
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Truth in Lending Act
made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
he rule requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical inspection of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.
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escrow
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Money or other assets held by an agent until the terms of a contract or agreement are fulfilled. For example, many mortgage companies require borrowers to pay prorated property taxes monthly along with their mortgage payments; these funds are held in an escrow account until payment is due to the local government.
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exchange-traded fund (ETF)
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An investment pool, similar to a mutual fund, whose shares trade over an exchange much like shares of stock. Most ETFs mirror a benchmark index, holding the securities tracked by that index.
Differences between Index and ETF?: http://www.investopedia.com/articles/mutualfund/05/etfindexfund.asp#axzz2IjDinvsY |
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futures
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contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset . For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures Futures contracts can help reduce volatility in certain markets, but they contain the risks inherent to all speculative investing. These contracts may be sold on the secon |
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Hedge - hedging
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To reduce the risk of an investment by making an offsetting investment. There are a large number of hedging strategies that one can use. To give an example, one may take a long position on a security and then sell short the same or a similar security. This means that one will profit (or at least avoid a loss) no matter which direction the security's price takes. Hedging may reduce risk, but it is important to note that it also reduces profit potential.
A security transaction that reduces the risk on an already existing investment position. An example is the purchase of a put option in order to offset at least partially the potential losses from owned stock. Although hedges reduce potential losses, they also tend to reduce potential profits. Case Study A hedge that limits potential losses is also likely to limit potential gains. In May 1997 Georgia entrepreneur and billionaire Ted Turner entered into an arrangement whereby Mr. Turner had the right to sell four million of his Time Warner shares to a |
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interim
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between two periods
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Offering Circular
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An abbreviated prospectus for a new security listing. Delivered to individuals and brokerage houses, these documents are issued to arouse interest in the new issue.
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forex
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Foreign currency exchange markets.
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intrinsic value
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A term favored by value-oriented fundamental analysts to express the actual value of a corporation, as opposed to the current value based on the stock price. It is usually calculated by adding the current value of estimated future earnings to the book value.
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junk bond
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A high-yield bond that comes with a high risk of default. Junk bonds are generally low-rated bonds and are usually bought on speculation. Investors hope for the yield rather than the default. An investor with high risk-tolerance may choose to invest in junk bonds.
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load
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A sales charge or commission paid to a broker or other third-party when mutual funds are bought or sold. Front-end loads are incurred when an investor purchases the shares and back-end loads are incurred when investors sell the shares.
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National Association of Securities Dealers Automated Quotation (NASDAQ)
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A global automated computer system that provides up-to-the-minute information on approximately 5,500 over-the-counter stocks. Whereas on the New York Stock Exchange (NYSE) securities are bought and sold on the trading floor, securities on the NASDAQ are traded via computer.
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real rate of return
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The annual return on an investment after being adjusted for inflation and taxes.
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socially responsible investing
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Investing in companies that meet an ethical standard, by using a carefully employed screening process before purchasing any securities.
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split
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When a corporation increases its number of shares outstanding. The total shareholders’ equity does not change; instead, the number of shares increases while the value of each share decreases proportionally. For example, in a 2-for-1 split, a shareholder with 100 shares prior to the split would now own 200 shares. The price of the shares, however, would be cut in half; shares that cost $40 before the split would be worth $20 after the split.
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top-down approach
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An investment-selection method in which an investor first looks at trends in the general economy, then selects attractive industries and, finally, companies that should benefit from those trends.
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value investing
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An investment approach that focuses on companies that may be temporarily out of favor despite strong success potential or whose earnings or assets are not fully reflected in their stock prices. Value stocks will tend to have a lower price-to-earnings ratio than growth stocks, and are considered to be currently undervalued, making them good investment ‘deals.’
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underwriter
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A person (or company) who distributes securities as an intermediary between the issuer and the buyer of the securities. For example, an underwriter may be the agent selling insurance policies or the person distributing shares of a mutual fund to broker/dealers or investors. Generally, the underwriter agrees to purchase the remaining units of the security, such as remaining shares of stocks or bonds, from the issuer if the public does not buy all specified units. An underwriter may also be a company that backs the issue of a contract by agreeing to accept responsibility for fulfilling the contract in return for a premium.
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The 80-20 rule
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A rule of thumb that states that 80% of outcomes can be attributed to 20% of the causes for a given event. In business, the 80-20 rule is used to help managers identify problems and determine which operating factors are most important and should receive the most attention based on an efficient use of resources.
An example of the 80-20 rule in economics would be that 80% of a country's wealth is controlled by 20% of the population, although this can be explained by the Gini index. |
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Acquisition Cos
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. Acquisition costs recognize more realistic costs on a company’s financial statements. The acquisition cost of property and equipment recognizes any discounts or additional costs that the company will experience.
2. Customer acquisition costs are also important for companies to measure, as it aids in planning future capital allocations to things like marketing budgets and sales discounts. The company should also look at customer loyalty and whether the company will be able to retain customers easily. Read more: http://www.investopedia.com/terms/a/acquisition-cost.asp#ixzz2Iq8IFZ3I |
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Active Risk
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The more an active portfolio manager diverges from a stated benchmark, the higher the chances become that the returns of the fund could diverge from that benchmark as well. Passive managers who look to replicate an index as closely as possible usually provide the lowest levels of active risk, but this also limits the potential for market-beating returns.
Read more: http://www.investopedia.com/terms/a/activerisk.asp#ixzz2IqElQ99P |
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Actuarial Assumption
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An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits. For example, a common actuarial assumption relates to predicting a person's lifespan, given their age, gender, health conditions and other factors. Actuaries use large tables of statistical data which correlate the uncertain variable to a variety of key predictive variables. Given the values for the predictive variables a sound actuarial assumption can be made for the uncertain variable.
Investopedia explains 'Actuarial Assumption' Actuarial assumptions are important because they allow for the equitable transfer of risk in many situations. For instance, when underwriting life insurance policies, it is important to understand the probability that the insured might pass away during the policy period. Given an accurate actuarial assumption for this probability, it is easy to calculate a fair premium for such a policy. Without the ability to accurately |
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Ad Infinitum
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Going on forever
Payments received ad infinitum do indeed go on a very long time. But it's important to realize that, because of the time value of money, the present value (i.e, the value today) of those payments very far off in the future (say, 50 years from now) is negligible. Thus the present value of an ordinary annuity (i.e., one with a fixed end) of 50 years is not very much less than that of a perpetuity whose payments go on ad infinitum. |
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Warren Buffet's Strategy
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Berkshire Hathaway
They have a good return on capital without a lot of debt. They are understandable. They see their profits in cash flow. They have strong franchises and, therefore, freedom to price. They don't take a genius to run. Their earnings are predictable. The management is owner-oriented. Read more: http://www.investopedia.com/university/greatest/warrenbuffett.asp#ixzz2J0wf6gzY |
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economic moat
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Warren Buffet
1. Evaluate the firm's historical profitability. Has the firm been able to generate a solid return on its assets and on shareholder equity? This is probably the most important component to identifying whether or not a company has a moat. While much about assessing a moat is qualitative, the bedrock of analyzing a company still relies on solid financial metrics. 2. Assuming that the firm has solid returns on its capital and is consistently profitable, try to identify the source of those profits. Is the source an advantage that only this company has, or is it one that other companies can easily imitate? The harder it is for a rival to imitate an advantage, the more likely the company has a barrier in its industry and a source of economic profit. 3. Estimate how long the company will be able to keep competitors at bay. We refer to this time period as the company's competitive advantage period, and it can be as short as several months or as long as several decades. The longer the competitiv |
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margin of safety
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Benjamin Graham
his common-sense formula that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals, for the long run, are sound. The margin of safety on any investment is the difference between its purchase price and its intrinsic value |
