Business V

Question 1

What is the principal small cap index?

Answer 1

The Russell 2000.

Question 2

The “red”

Answer 2

A state of financial loss or indebtedness.

“In the red” means the red column of a ledger.

Question 3

Disinflation

Answer 3

A slowing in the rate of inflation

Question 4

M and A

Answer 4

Mergers and Acquisitions

(A term used to describe the consolidation of companies)

• A merger is a combination of two companies to form a new company.
• An acquisition is the purchase of one company by another in which no new company is formed.

Question 5

Organic sales

Answer 5

Revenue generated from within a company.

Organic sales are the product of internal processes of a firm and are generated solely within the firm.

Revenue streams resulting from mergers, acquisitions, takeovers, and borrowing do not count towards organic sales since they are tied to activity outside the firm’s internal finances.

Question 6

Regression

Answer 6

A statistical analysis that attempts to predict the effects of one or more variables on another variable.

Regression analysis is used to attempt to predict the effect of an input on an output.

Example: an analyst may try to predict the effect the price of steel has on car sales.

The variable being influenced (car sales) is called the dependent variable.

The other variable (price of steel) is called the independent variable.

A linear regression has one independent variable. When there are multiple independent variables it’s called a multiple regression.

Question 7

Bottom-line

Answer 7

Refers to a company’s net earnings, net income, or EPS.

A company that is growing its net earnings or reducing its costs is said to be “improving its bottom-line”.

This is the last number at the bottom of the page (when all expenses have been taken out of revenues and there is nothing left to subtract).

Question 8

Top-line

Answer 8

Total revenue (profit before deductions) of a company.

The “top” refers to the fact that on a company’s income statement the first line at the top of the page is reserved for revenue.

A company that increases it’s revenues is said to be “growing its top-line” or “generating top-line growth”.

Question 9

Two basic business cycle phases

Answer 9

Expansion

Contraction

Question 10

Expansion

Answer 10

aka “economic recovery”

The phase of the business cycle when the economy moves from a trough to a peak.

A period when business activity surges and GDP expands until it reaches a peak.

During an expansion there are increases in employment, sales, and personal income.

Lasts 3 to 4 years.

Question 11

Contraction

Answer 11

aka “recession”

Phase when the economy as a whole is in decline.

• Occurs after the business cycle peaks, but before it becomes a trough.

Characterized by decreases in employment, sales, and personal income.

Question 12

When do most economists say contractions (recessions) occur?

Answer 12

When a country’s real GDP has declined for two or more consecutive quarters.

Question 13

What is the transition from expansion to contraction called?

Answer 13

A peak.

Question 14

What is the changeover from contraction to expansion called?

Answer 14

A trough.

Question 15

How are expansions measured?

Answer 15

From the trough (or bottom) of the previous business cycle to the peak of the current cycle.

Question 16

How are contractions measured?

Answer 16

From the peak to the trough.

Question 17

Who determines the official dates for business cycles?

Answer 17

In the US, the national bureau of economic research (NBER).

Question 18

How long do expansions usually last?

Answer 18

In the US, around 4 years.

Question 19

How long do contractions last?

Answer 19

In the US, around a year.

Question 20

What is the default mode of the US economy?

Answer 20

Expansion.

Contractions are much shorter and less common.

Question 21

Margin

Answer 21

In a general business context this is the difference between a product or service’s selling price and the cost of production.

Question 22

What is the difference between nominal GDP and real GDP?

Answer 22

Nominal GDP is GDP (total economic output of a country) not adjusted for inflation.

Real GDP is GDP adjusted for inflation.

Question 23

Closed end fund

Answer 23

A publicly traded investment vehicle that invests in various stocks (like a mutual fund).

They have an IPO, after which no additional shares are issued.

It is listed on the exchange at a price that may be different from its NAV (unlike a mutual fund where you can always buy shares at its NAV).

Question 24

Annuity

Answer 24

A contractual financial product.

It accepts and grows funds front an individual and then, upon annuitization, pays out a stream of payments.

The period when an annuity is being funded (before payouts begin) is called the “accumulation phase”.

Once payouts begin the contract is in the “annuitization phase”.

Question 25

Resistance level

Answer 25

A price level that a stock or index is finding it difficult to break through (rise above) and may head lower in the near future.

The more times the stock has tried unsuccessfully to break through the resistance level, the more formidable that area of resistance becomes.

Resistance levels can turn into support areas once they have broken through.

In a strong uptrend, traders will embark on a buying spree once a stock conclusively breaks through resistance, sending it sharply higher.

If a stock is approaching a strong resistance level a trader may close the position rather than risk a serious loss if the uptrend reverses.

Question 26

Support level

Answer 26

The price level which, historically, a streak has had difficulty falling below. This is the level at which many buyers enter the stock.

If the price of a stock falls toward a support level it is a test for the stock: the level will either be reconfirmed (a lot of buyers move into the stock, causing it to rise away from the support level)

• or it will be wiped out if buyers don’t enter the stock and the stock falls below the support.

Question 27

Breakdown

Answer 27

A price movement through an identified level of support, which is usually followed by heavy volume and sharp declines.

Technical traders will short sell the underlying asset when there is a breakdown because it means the bears are in control and additional selling pressure is likely to follow.

Question 28

Why does the Fed lower interest rates during recessions?

Answer 28

To stimulate the economy by offering cheap rates at which people can borrow money.

Question 29

Base

Answer 29

A lengthy period of consolidation in technical analysis.

Question 30

Breakout

Answer 30

A price movement through an identified level of resistance, which is usually followed by heavy volume and increased volatility.

Traders will buy the underlying asset when the price breaks above a level of resistance.

This is the bullish counterpart to a “breakdown”.