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75 Cards in this Set
- Front
- Back
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Due diligence (relative to stocks) |
create a portfolio analysis of the client's current holdings and needs |
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Possible investment objectives: |
Preservation of capital (safe), current income (cash dividends), capital growth (new companies/high-growth potential), total return (growth and income), tax advantages (municipal bonds), liquidity (bought/sold easily), diversification, speculation (higher risk for higher reward), trading profits (buy/sell on constant basis), long-term or short-term (tie up money for long or short time) |
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Asset allocation |
splitting up an investor's portfolio among diff. asset classes such as bonds, stocks, and cash, purpose to reduce risk by diversifying |
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Strategic asset allocation |
type of investments that make up a long-term investment portfolio, typically subtract the investor's age from 100 to determine the percentage invested in stocks and the remainder invested in bonds and cash or cash equivalents |
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Tactical asset allocation |
rebalancing a customer's portfolio due to market conditions, if market is supposed to do well-put more in stocks, if market is supposed to do poorly-put more in bonds |
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Defensive investment strategy |
Blue chip stock w/ low volatility (stocks of well-established companies), AAA rated bonds, U.S. Gov. bonds |
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Aggressive investment strategy |
Highly volatile securities, put/call options, buying securities on margin |
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balanced portfolio |
mix of both aggressive and defensive portfolios |
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Market (systematic) risks |
risk of a security declining due to negative market conditions |
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Business (nonsystematic) risks |
risk of a corporation failing to perform up to expectations |
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Credit risk |
risk that the principal and interest aren't paid on time, rated by Moody's, Fitch, Standard and Poor's |
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Liquidity (marketability) risk |
risk that the security is not easily traded, long-term bonds and limited partnerships have more liquidity risk |
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Interest (money rate) risk |
risk of bond prices declining w/ increasing interest rates |
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Reinvestment risks |
risk that interest and dividends received will have to be reinvested at a lower rate of return, zero coupon bonds, T-bills, T-STRIPS have no interest payments so they have no reinvestment risk |
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Purchasing power (inflation) risk |
risk that return on the investment is less than the inflation rate, long-term bonds and fixed annuities have high inflation risk, investors should purchase stocks and variable annuities to avoid inflation risk |
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Capital risk |
risk of losing all money invested and warrants, because options and warrants have expiration dates, investors may lose all money invested at expiration date, to reduce risk investors should invest in investment-grade bonds |
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Regulatory (legislative) risk |
risk that law changes will effect the market |
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Currency risk |
risk that investments will be affected by a change in currency exchange rate, investors with international investments are most at risk |
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Nonsystematic risk |
a risk unique to a certain company or a certain industry, avoided w/ diversified portfolio |
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Political (legislative) risk |
risk that the value of the security could suffer due to instability or political changes in a country |
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Prepayment risk |
mostly associated w/ real-estate investments such as CMO's, have an average expected life but if mortgage rates decrease, more investors will refinance and the bonds will be called earlier than expected |
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Timing risk |
risk that an investor buys a security at the wrong time failing to maximize profits |
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Call risk |
risk that a callable bond is called before maturity, typically called when interest rates drop |
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Fundamental analysis |
perform an in-depth analysis of companies, look @ management of company and financial condition and compare to other companies, also look @ overall economy and specific industry conditions Fundamental analysts determine what to buy also determine if the security is over priced or under priced |
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Balance sheet |
provides an image of the company's financial position at a given time given this name because the assets must always balance out the liabilities plus the stockholder's equity |
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Types of assets |
items that the company owns: Current assets, fixed assets, intangible assets |
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Current assets |
owned items that are easily converted into cash within the next 12 months, including; cash, securities, inventory and prepaid expenses (like rent and advertising) |
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Methods of inventory valuation |
LIFO (last in first out), FIFO (first in first out), straight line depreciation (equal amount each year), accelerated depreciation (more in earlier years and less in later years) |
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Fixed assets |
owned items that are not easily converted into cash, including; property, plants, equipment...can depreciate |
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Intangible assets |
owned items that don't have any physical properties, including; trademarks, patents, formulas, goodwill/reputation (McDonald's beats Mike's Burgers) |
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Liabilities |
what a company owes (current or long-term): current liabilities, long-term liabilities |
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Current liabilities |
debt obligations that are due to be paid within the next 12 months, including; accounts payable ( what a company owes in bills), wages, debt securities due to mature, notes payable (balance due on money borrowed), cash dividends, taxes |
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Long-term liabilities |
debt obligations due to be paid after 12 months, including; mortgages, outstanding corporate bonds |
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Stockholder's equity |
diff. between assets and liabilities (basically what the company is worth) includes; par value of common stock and preferred stock, paid in capital/surplus, treasury stock, retained earnings (earned surplus) |
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Par value of common stock |
arbitrary amount that the company uses for bookkeeping purposes Ex. 1 million shares w/ par value of $1 = $1million on balance sheet |
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Par value of preferred stock |
usually $100 per share, value company uses for bookkeeping purposes Ex. if company issues 10,000 shares x $100 per share = $1million on balance sheet |
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Paid in capital/surplus |
the amount over par value that the company receives for issuing stock Ex. if par value is $1 but company receives $7 per share, paid in capital is $6 per share |
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Treasury stock |
stock that was outstanding in the market but was repurchased by the company |
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Retained earnings / earned surplus |
percentage of net earnings the company holds after paying out dividends (if any) to its shareholders |
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Balance sheet calculations |
working capital = current assets - current liabilities assets = liabilities + stockholder's equity net worth = assets - liabilities |
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Working capital |
the amount of money a company has to work with right now |
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When a company declares a cash dividend... |
that cost becomes a current liability which is part of the overall liabilities owed in the net worth equation, both the net worth and the working capital increase |
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When a company pays a cash dividend... |
the current liabilities fall and the current assets decrease because the company has to use cash to pay the dividend, if they decrease by the same amount, the working capital and net worth both remain the same |
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When a company issues stock... |
it receives cash, which is a current asset (and part of the overall assets), the company doesn't owe anything to investors so the overall liabilities (and current liabilities) remain the same, therefore the net worth and working capital remain the same |
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Income statements |
list a corporation's expenses and revenues for a specific period of time |
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Income statement calculations |
earnings per share (EPS) = (net income - preferred dividends) / (# of common shares outstanding) price/earning (P/E) ratio = (market price) / (EPS) Current yield = (annual dividends per common share) / (market price) Dividend payout yield = (annual dividends per common share) / (EPS) |
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Technical Analysis |
look at market to determine if it is bullish or bearish, trendlines (direction of price), trading volume, market sentiment, market indices, advance-decline ratio (how many securities are increasing vs. decreasing), odd lot volume (how small investors are purchasing), short interest (amount of short sales taking place), put-to-call ratio...these analysts believe history tends to repeat itself, decide when to buy |
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Consolidation |
occurs when a stock stays in a narrow trading range or trading channel |
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A 'support' and 'resistance level' |
when a stock moves horizontally for a long period of time it creates a bottom of the trading range (support) and top of the trading range (resistance level) |
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A 'breakout' |
when a stock falls below its support or goes above its resistance level |
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Uptrend and downtrend |
When a stock has been gradually moving up or down for a long period of time |
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Saucer and inverted saucer |
AKA: semicircle, gradually decreasing and then increasing (or reverse for inverted saucer) Saucer pattern = bullish Inverted saucer = bearish |
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Head and shoulders and inverted head and shoulders |
occurs when a stock has been increasing, peaks and goes down, hits the second tallest peak and goes down then hits a second peak near the first's height, two lower are shoulders and tallest is the head Head and shoulders = bearish Inverted head and shoulders = bullish |
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Oversold market |
market index such as S&P 500 is declining but there are more stocks are advancing than declining, good time to buy |
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Overbought market |
market index such as S&P 500 is increasing but there are more stocks are declining than increasing, good time to sell or sell short |
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Research reports |
documents prepared by analysts who are part of a firm w/ recommendations for investors Rules: quiet periods (must wait 10 days after IPO), information barriers (aka:firewalls, protect analysts from any pressure they may feel from investment bankers or other 3rd parties), third-party disclosure (if the research is conducted by a 3rd party outside of the firm this must be disclosed in the research report) |
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Money supply |
affects the market, if the money supply is higher than average, interest rates go down, people borrow more money and people spend more money, sounds good but can lead to negatives like inflation and weakening of U.S. currency, Federal Reserve Board (FRB) has to do a balancing act to help the economy grow at a slow and steady rate |
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Economy (relative to money supply) |
ease money supply: helps U.S. get out of or avoid recession, consumers can borrow more money at lower interest rates tighten money supply: slows down economy because people aren't spending as much money, small business failures increase |
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Market (relative to money supply) |
ease money supply: as a result of lower interest rates, investors have more money to invest and can buy more goods, businesses don't have to may as much to borrow so profits increase tighten money supply: high interest rates which hurt market because investors have less to spend, corps have to pay higher interest on loans and therefore report lower earnings |
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Inflation (relative to money supply) |
ease money supply: lower interest rates lead to inflation, companies see consumers are buying more then prices increase tighten money supply: helps curb inflation |
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Strength of the U.S. dollar (relative to money supply) |
ease money supply: U.S. dollar weakens and U.S. exports increase because foreign currency strengthens therefore buying U.S. products is cheaper for foreign countries, foreign imports decrease tighten money supply: U.S. dollar increases, foreign imports increase but U.S. exports decrease |
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How can the Fed ease money supply? |
Buy U.S. gov securities in the open market, lowering the discount rate, reserve requirements, and/or Regulation T (although changing Reg T is not likely) |
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How can the Fed tighten money supply? |
Selling U.S. gov securities (pulling money out of the banking system), increasing the discount rate, reserve requirements, and or Regulation T (although changing Reg T is not likely) |
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Do interest rates increase or decrease when the money supply is eased? |
Interest rates decrease, AKA 'easy' money |
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Open market operations (Fed Reserve Toolbox) |
tool Fed uses most often, buying and selling of U.S. gov bonds or securities to control money supply, if sells securities=pulls money out of banking system, if purchases securities=puts money in banking system |
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Discount rate (Fed Reserve Toolbox) |
the rate that the Fed banks charge member banks for loans, rate increases= money supply tightens, rate decreases=money supply eases |
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Reserve requirement (Fed Reserve Toolbox) |
percentage of customers' money banks are required to keep on deposit in form of cash, if Fed increases reserve requirement banks have less money to lend to customers so interest rates increase |
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Regulation T (Fed Reserve Toolbox) |
the percentage that investors must pay when purchasing securities on margin, currently set at 50%, doesn't change often, if raised, investors have less cash which tightens money supply |
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Interest rate indicators |
if these go up, money supply will tighten and interest rates increase, likewise; the opposite is true Reserve requirements, discount rate, Fed Funds rate (very volatile), call loan rate/broker loan rate (rate banks charge firms for customers' margin accounts, prime rate (rate that banks charge best costumers (usually corporations) for loans) |
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Yield curves |
graphic representations of bond yields as compared to the amount of time until maturity |
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Normal (easy money) yield curve |
what you would expect, yields on long-term securities are better than short-term securities |
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Inverted (tight money) yield curve |
opposite of what you would expect, in a tight money yield curve, short-term debt securities are actually paying higher yield than long-term securities, not cool |
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Flat yield curve |
yields on a long-term and short-terms securities are pretty much the same |
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Federal Reserve System |
established in 1913, controls money supple and therefore the economy, 12 diff. banks split up control of country, ours is the 4th District in Cleveland, each district prints currency for the business needs of its district and is distinguished by a letter printed on the face of the bill, the board in Washington oversees the 12 banks |
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For Further Review (Part 4 / Ch. 13) |
pgs. 202-203 |
