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Module 20 Notes

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4 views

Module 20 Notes

Uploaded by

reeyanpeekaboo69
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MR ZIRKLE VIDEOS

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Average annual rate of return = ((ENDING VALUE - BEGINNING VALUE) + INCOME
RETURN)/ BEGINNING VALUE * 1/(AMOUNT OF YEARS HELD)

You can also use the rule of 72 or 70 to calculate the rate of return. Do 72 / amount of
years the stock has taken to double.

Total return - Refers to without 1/N


Rate of return - Refers to with the 1/N
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BOOK
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Investment - Asset that generates a value of return
Income return - Investment return directly received from the company in which you
invested, comes in the form of dividends or interest payments

Speculation - Buying an asset whose value depends solely on supply and demand
Derivative securities - Securities whose values derive from the value of other assets
Option - A security that gives its owner the right to buy or sell an asset at a specified
price. Call option is to ask to buy before or on date, put option is to sell it.

Wealth is more a function of how you save, not buy. Don’t forget taxes, marginal tax rate
is how much of the dollar you pay on taxes.

Lending investment - Savings accounts and bonds, issued by corporations and


government
Ownership investment - Preferred stocks and common stocks which represent an
ownership position in the company. (Income-earning real estate as well)

Lending investment:
- Maturity date is when the bond expires and the person you gave money will pay
you back
- Par value or principal - How much money is received when the bond expires
- Coupon interest rate - The actual interest rate the bond pays
- Most have fixed, other have variable, but can have hard time keeping up with
inflation

Ownership investment:
- Real estate includes owning property such as rental apartments and
income-producing property. Quite illiquid.
- Stock is a fractional ownership in a corporation
- Dividend is a payment by a corporation to its shareholders
- For preferred, the dividend is fixed and they receive it annually
- They receive dividends before the common shareholders

Capital gain or loss - The gain or loss received from the sale of a capital asset
Income return refers to any income received from the company you invested in

If you want the average annual rate of return, here is the formula where N is the number
of years you invested in the stock for

Nominal rate of return - Rate of return you earned on an investment without adjustment
for inflation
Real = Nominal - inflation rate

Sources of risk in risk-return trade-off:


- Interest rate risk is the change in interest rate which can make things become
invaluable
- Inflation risk is that rising prices will eat away the purchasing power of your
money, which is closely related to interest rate risk
- Business risk is fluctuations in the stock market that are caused by good or bad
management in the company and how well or poor they are performing
- Financial risk is risk associated with a firm’s debt
- Liquidity risk is the inability to liquidate a security at a fair market value quickly
- Market risk is risk associated with market movements (bull when they go up, bear
when they go down)
- Political and regulatory risk is unanticipated change in tax or legal environment
that has been imposed by the government
- Exchange rate risk refers to the variability in earnings due to changes in exchange
rates
- Call bond risk is the risk that the bond will be called before they reach maturity
Diversification - Don’t put all your eggs in one basket.
Portfolio is a group of investments held by an individual.
Systematic risk is risk that can’t be eliminated through diversifying. Unsystematic can.
Risk capacity refers to the strength of your safety net

Being invested in a diversified portfolio and staying invested in that portfolio allows you
to participate in those unexpected “big outliers,” those stocks like Overstock.com, Zoom,
and Tesla. They can allow you not to miss out on big opportunities
Build your portfolio with diversification and make sure your investment strategy matches
your investment time horizon

You should be well diversified in stocks and bonds, however consider these three factors
when making an asset allocation decision:
● Time horizon: The more time you have until you need the money, the more risk
you can take
● Risk capacity: How much risk can you handle depending on your savings and
security of job
● Risk tolerance: Different people have different tolerances for risk

Asset allocation - Deals with how your money should be divided among bonds, stocks,
and other investments.

Efficient markets - All relevant info about a stock is in its price


Half of people outperform, half of people underperform by chance.
Stock bubble - The price of a stock or group of stocks rise above rises dramatically over
a period of time, whether that is its true value or higher than its intrinsic value

Securities market - A place where you can buy or sell securities. Primary is when newly
issued securities, as opposed to previous ones, are traded. Initial public offering is the
first time a company’s stock is traded publicly.
Seasoned new issues is a stock offering by a company that already has common stock
traded in the marketplace.
Investment banker is the intermediary between firms issuing securities and public.
Underwriter is someone who purchases a security and subsequently resells it.

Prospectus - A legal document featuring a security’s issue


Secondary market - The market where previously issued stocks are bought. Can be
organized exchange at a physical location, or over-the-counter where transactions occur
electronically.
The New York Stock Exchange is the major organized exchange in the United States.

Bid price - The highest someone is willing to pay for a security.


Ask or offer price - The lowest price the seller will sell for a security.
American Depository Receipts - A marketable document that certifies a bank holds
shares of a foreign firm’s stock that back the receipt

Securities market regulation is aimed at protecting the investor and providing a level
playing field so that all investors have a fair chance of making money.

Round lots - A group of 100 shares of common stock. Odd lot is 1-99 shares of stock.
Fractional share - Less than 100% of one common stock.

Day order - An order that cancels at the end of a day


Open or good-till-canceled order - You have to cancel it to receive the money
Fill-or-kill order - The order must be filled immediately or canceled

Discretionary account - Broker can make investments for you

Market order - Sell it immediately at the best price


Limit order - Sells it at a certain price or better
Stop or stop-loss order - State when to sell if it goes below a certain price and buy when
it goes above

Short selling - Borrowing stock from broker and selling it with an obligation to pay its
value back later, if price drops you make money if price goes up you earn money
Margin requirement is the percentage collateral an investor has to deposit with the
broker when short selling

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