Business IX Flashcards
What is indexing?
What is the advantage of indexing?
Indexing is a type of passive investing where you invest in an index fund.
Advantages:
- it cuts down on management expense ratio
- many mutual funds fail to beat broad indexes.
Expense ratio
A measure of what it costs an investment company to operate a mutual fund (legal expenses, taxes, etc).
Marketable security
A very liquid security that can be converted into cash quickly.
ETF
Exchange Traded Fund
A marketable security that tracks an index, a commodity, or bonds like a index fund.
It mirrors the ebb and flow of a small portion of the market.
(Unlike mutual funds they trade like common stocks on the stock exchange: so the ETF price is constantly changing)
What are some things an ETF can track?
- The Russell 2k (small cap index)
- Gold futures
- The Krone (currency
- S and P TSX (transportation index)
Passive investing
(aka “buy and hold strategy”)
- involves limited ongoing buy and sell actions.
- unlike active investors, passive investors don’t attempt to profit from short term price fluctuations.
Big difference between ETF, closed-end fund, and mutual funds?
- ETFs and closed end funds trade like stocks, so their shares trade at market value, which can be:
- a dollar value above (trading at a premium)
or
- a dollar value below (trading at a discount) their NAV.
- A mutual fund’s NAV is calculated only once a day (at the end of the day).
Intraday
Within the day (within the trading day)
Creation unit
A set of shares or securities that make up one unit of the fund held by the trust that underlies an ETF.
- one creation unit is the denomination of underlying assets that can be redeemed for shares.
- one creation unit may equal 25,000 shares in the ETF
Redemption mechanism
Refers to how market makers of exchange traded funds can reconcile the differences between:
- NAV and market value when shares of the ETF are bought and sold.
Inverse ETF
(aka “short ETF”)
An ETF constructed through derivatives that lets you profit from a drop in a benchmark.
Often used in hedging.
They exist and can be purchased.
Leveraged ETF
ETF that uses derivatives to amplify both loss and gain potential.
If you buy a 2:1 leveraged ETF and it was up 1%, you would make 2%.
But if it was down 1%, you would also be down 2%.
Why are ETFs good investments?
They are especially good for:
- diversifying a portfolio
- reducing exposure to potentially risky market sectors.
How do ETFs “beat the market”?
1). ETFs are effective at reducing those factors that diminish returns:
- taxes
- fees
2) . With ETFs the goal is not to “beat the market” but to pick a fund that tracks an index with a good record.
3) . They offer more transparency (you can check its holdings daily) compared to mutual funds (which only put out a quarterly report).
4) they are good for diversifying
5) . They are very liquid
6) . They are passive investment vehicles, so they offer low expense ratios.
What led to the financial crisis of 2008?
(A collapse of the housing bubble that had been expanding for a decade)
- There was a growth of investment capital that large institutions used to tap into the mortgage industry.
- this in turn was fueled by rampant home buying.
- traders on Wall Street packaged mortgaged and sold them to eager buyers who wanted to cash in on rising housing prices.
- supplies ran thin, and then banks began issuing subprime mortgages to keep feeding demand.
- eventually, the market caught up with demand and housing prices (which had been artificially inflated by easy mortgages) dropped.
- banks and investors had no money (they had bought mortgage-backed securities with little money down)
- new investors became skittish
What caused the 2008 financial crisis?
NINJA loans
Loans to people with No Income, No Job, and no Assets
Why does a country need to regulate imports?
Ex: in early NY, 30,000 pairs of new shoes showed up in NY.
The city’s cobblers muscled the people into not buying, as they considered it unfair competition, and so the shoes went onto the market almost for free.
Congress had not given itself the power to regulate imports so local cobblers had no pie.
First way congress cheated?
Our govt was almost immediately in massive debt, and congress failed to give itself the power to collect taxes.
1787
Bankers, businessmen, and lawyers threw out the articles of confederation because it prevented congress from:
- collecting taxes
- regulating commerce
Intermodal
Pertaining to, or suitable for, transportation involving more than one form of carrier.
Example: truck or rail. Or train, truck, and rail.
Bimodal
Pertaining to, or suitable for, transportation involving two forms of carriers.
Example: truck and rail.
Multimodal
Having more than one mode.
Mode
A manner of acting or doing.
A type or form.
Example: two different modes of transportation.
What is “share net”?
Earnings per share (or EPS)
