Chapter 11: Investment Planning Flashcards
long-term process of purchasing securities wherein stability of value and the level of return are somewhat predictable.
investing
short-term buying/selling of securities in which future value and expected return are highly uncertain.
speculating
you should establish and build up an emergency fund and buy insurance coverage before building up an investment portfolio.
true
money that is accumulated beyond basic emergency savings.
investment capital
in order to successfully invest:
1. determine amount to earn
2. determine time you have to earn
3. determine the expected rate of return
true
future amount of money desired / future value of annuity factor =
yearly savings
a set amount of periodic savings built into a budget.
systematic savings plan
a written statement explaining how to accumulated investment capital will be invested to reach a targeted goal.
investment plan
- enhance current income
- save for major expenditures
- retirement funds
- shelter from taxes
These are the 4 main objectives of…
investing.
- common stock
- bonds
- preferred securities
- convertible securities
- mutual fund
- exchange traded funds (ETFs)
- exchange traded notes (ETNs)
- real estate
These are all forms of…
investment vehicles.
investment vehicle where each share represents a fractional ownership position in a corporation of equity.
common stock
investment vehicle that is a liability of the issuer and has interest.
bonds
a stated return is also referred to as…
interest.
investment vehicle that is issued as stock, has a fixed dividend rate, and is purchased for the current dividends they pay.
preferred securities
investment vehicle that has a fixed-income obligation that carries conversion feature permitting investor to convert it into a specified number of shares of common stock.
convertible securities
investment vehicle where shares are sold to investors who become part-owners of the fund’s securities portfolio.
mutual fund
investment vehicle that represents a portfolio of securities and are set up to track a basket/index of securities of a sector.
exchange traded funds (ETFs)
investment vehicle where senior, unsecured, unsubordinated debt securities are issued by an underwriting bank.
exchange traded notes (ETNs)
investment vehicle that involves speculating in raw land to limited partnership shares in commercial property.
real estate
arena where stocks, bonds, and other financial instruments are traded.
securities markets
securities market where long-term securities are traded.
capital markets
securities market where short-term, low-risk credit instruments w/ maturities of 1 year or less are sold.
money markets
what are the 2 main types of securities markets?
- primary markets
- secondary markets
primary markets are used from newly issued investments.
true
type of firm that specializes in selling new security issues.
investment banking firm
a selling group is made up of several brokerage firms.
true
spreads risks associated with selling new securities.
underwriting syndicate
a document that describes a firm and an issue.
prospectus
secondary markets permit investors to execute transactions among themselves.
true
when buyers and sellers group together to trade securities, these are called…
securities exchanges
What does NASDAQ stand for?
National Association of Securities Dealers Automated Quotation System
What does OTC market deals stand for?
over-the-counter
what 2 types of markets constitute secondary markets?
- broker markets
- dealer markets
act that requires security issuer must file registration statement w/ the securities and exchange commission (SEC).
securities act of 1933
what is the name of the agency of the U.S. government that enforces federal securities laws?
Securities and Exchange Commission (SEC)
what act gives the SEC power to regulate organized securities exchanges and the OTC market?
Securities Exchange Act of 1934
what act protects those purchasing mutual funds?
Investment Company Act of 1940
what acts eliminates corporate fraud related to accounting and other info released to investors?
Sarbanes-Oxley Act of 2002
what act improves accountability and transparency in U.S. financial system, discontinues the “too big to fail” regulatory approach, protects taxpayers from costly government bailouts, and protects consumers from exploitative financial services practices?
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
what act provides trade associations for self-regulation within the securities industry?
Maloney Act of 1938
what act created the Securities Investor Protection Corporation (SIPC)?
Securities Investor Protection Act of 1970
what are the 2 different types of market conditions?
- bull markets
- bear markets
do Bull or Bear markets have prices that go up?
bull markets
doe bull or bear markets have prices that go down?
bear markets
someone who buys and sell securities for their customers.
stockbrokers (account executives)
what are the 3 types of stockbrokers?
- full-service broker
- discount broker
- online broker
stockbroker that offers investment advice/information, trades, safekeeping for securities, online services, and margin loans.
full-service broker
stockbrokers that have low-overhead operations, has fewer services, and initiates transactions over a call or online.
discount brokers
stockbrokers who execute trades electronically.
online broker
what are the 2 types of securities transactions?
- round lot
- odd lot
odd lot securities transactions have less than 100 shares of stock.
true
round lot securities transactions have 100 shares of stock of multiples thereof.
true
what is the fee called when a transactions involves both an odd and round lot?
odd-lot differential
what insurance covers up to $500,000 in a brokerage firm?
SIPC insurance
the process whereby you and your banker present the 2 sides of the argument before a panel, which decides how the case is to be resolved.
arbitration
what are the 3 types of securities orders?
- market order
- limit order
- stop-loss order
securities order to buy or sell a security at the best price available at the time it’s placed.
market order
securities order to buy or sell at a specified price.
limit order
securities order to sell stock when the market price reaches or drops below a specified level.
stop-loss order
the increase or decrease of the price of an investment and any income received over the investment period affect the rate of…
return.
(ending value - beginning value + income) / beginning value =
rate of return on investment
documents on information of the publicly traded company, like balance sheets, income statements, business activities, developments, future plans/outlooks, financial ratios, statistics.
annual stockholders’ reports
averages and indexes that describe the general behavior of the securities markets and are based on price movements of select groups of securities over an extended period.
market data
industry average, transportation average, utility average, and composite average all included to capture the overall market performance; also uses a price-weighted average.
Dow Jones Industrial Averages (DJIA)
captures overall market performance, more stocks/representation, market value-weighted index.
Standard & Poor’s indexes (S&P)
includes all stocks on the “big board” as well as a measure of the performance in that market.
NYSE index
used as a benchmark in assessing the price behavior of high-tech stocks.
NASDAQ Composite
reflects total market value of 98-99% of all publicly traded stocks in the U.S..
Dow Jones Wilshire 5000 Index
tracks the performance of 2,000 small companies and is a fairly accurate measure of the small-cap segment of the market.
Russell 2000
newspapers and magazines that include data, descriptions, statistics, indexes of industry performance, and price levels.
industry data
stock price quotes exists.
true
services that provide information and recommendations on various industries and specific securities.
subscription advisory services
the basic rules for smart investing is to:
1. know what you’re buying
2. from whom
3. at what level of risk
true
- investor education sites
- investment tools
- investment planning
- investment research and screening
- portfolio tracking tools
These are?
investment services
a collection of investments assembled to meet a common investment goal.
portfolio
combining securities w/ dissimilar risk-return characteristics can produce a portfolio of reduced risk and more predictable levels of return. This is called…
diversification.
an investor’s exposure to risk shouldn’t exceed the capacity to bear that risk.
true
a plan of how to divide a portfolio among different types of securities.
asset allocation strategy
monitor a portfolio by keeping track of investment holdings, their performance, and whether they’ve lived up to expectations.
true
the owner of a bond would expect to receive a steady annual income.
true
instructing your broker to buy/sell a stock at a particular price is a limit order.
true
you have been offered an opportunity to buy shares of a collection of diversified securities. This is an investment in a mutual…
fund.
discount brokers will charge low commissions.
true
a bull market is characterized by investor optimism.
true
an annual stockholders’ report provides financial and descriptive information about a firm’s operations in the recent past to the internal and external interested parties.
true
the first thing you need to determine in order to reach an investment goal after accumulating the capital is the rate…
of return.
who handles the sales of new securities in primary markets?
investment bankers
Standard & Poor’s index is based on how many stocks?
500
is Clara’s portfolio is worth $200,000 and she has $56,000 worth of common stocks, the equity constitutes how much of her portfolio?
28% (56,000/200,000)
