Chapter 19- Securities Analysis Flashcards
Customers who want to minimize risk in securities can
have the largest portion of securities in their portfolio will act differently under different economic conditions
the largest percentage of the portfolio consist of leading common stocks
Suitable portfolio of a pension fund looking for income
would include government securities, corporate bonds and covered option writing
Not municipal bonds since they are already tax free
Capital Asset Pricing Model (CAPM)
a model of the relationship between the expected risk and expected return
Asset Allocation
The diversification of investments in a customers account determining the percentage of assets that should be in stocks, bonds, real estate, or other asset classes
Dynamic Asset Allocation
involves frequent changes to the asset allocation based on economic conditions
Tactical Asset Allocation
Redistributes the percentages of assets based on the portfolio and the current market performance of each sector
Strategic Asset Allocation
Generally keeps the assets in a portfolio at an assigned balance
Dollar cost averaging (Constant Dollar investment plans)
Purchasing regular dollar amounts at pre-established time intervals
average cost per share will always be lower then the average price per share over time
Average cost (breakeven price) for dollar cost averaging is figured by
total dollars invested/total shares purchased
Duration
The degree to sensitivity in a bond’s price to small changes in interest rates and the length of maturity of the bond
Higher duration, more volatility
Small Cap Companies have a greater
Liquidity risk
Efficient Market Hypothesis summary
Does not think fundamental or technical analysis would be able to produce better than average returns
Fundamental Analysis
Concerned with a specific company and its factors
Managment of the company
Earnings
Company outlook
company’s annual report
price/earnings ratio
Technical Analysis
Concerns with supply and demand of securities
Trading volume
moving averages
advances and declines
odd lot purchases and sales
timing of purchases and sales
Support and resistance levels
Odd lot theory
Odd lot investors are always wrong
Advance decline theory
Compares the number of stocks that have advanced to the number of stocks that have declined
Market sentiment
describes the bullish or bearish sentiment of investors
Breadth of the Market
The percentage of stocks participating in a market move
Market Momentum
The measure of the rate of acceleration of a price movement
Short Interest Theory
Short sellers will eventually become buyers. This slows declining markets and accelerates rising ones
Random Walk Theory
Past performance can not be used to predict future movements
Market reacts instantly to new information
It is futile to try and out preform the market
Head and shoulders top formation is
a reversal of an upward trend
Head and shoulders bottom formation
a breakout to the upward move
Support level is
the price where downward trends tend to level off
Resistance level is
the price where an upward trend tends to level off
Selling Climax
Occurs at the end of a bear market
it is a sharp drop in stock prices accompanied by increasing volume
Dow Jones industrial average is the only index that is not
Capitalization weighted
It is price weighted
Alpha
The amount a stock will change to particular news about a particular company (change in Managment, change in earnings etc)
Beta
A measure of volatility of a particular stock’s price when compared to the market as a whole
Beta .8 - move less then the market
Beta 1.0 - the same as the market
Beta 1.3 - more than the market
Consolidataing
The market is moving sideways
Program trading
Computer driven trading
Does not EVER consider fundamental analysis
Company’s balance sheet shows
The assets and liabilities of a corporation on a particular date (typically the end of the year)
Total Assets = Total liabilities + net worth
At the bottom you will also have the total number of stocks outstanding
preferred
common
convertible
treasury
Three assets categories on a balance sheet
Current - Cash or will be converted into cash in the next 12 months. Listed in order of liquidity (cash is first; inventory is last)
Fixed - Items that a company has or needs to produce it’s product, Include building, equipment, and land etc.
Other - intangible items - copyrights, patents, good will
Liabilities are in two catagories
Current Liabilities - Must be paid in the upcoming 12 month period (2/1 for current assets to current liabilities)
Long term debt - Bonds
These two added together create your total liabilities
Shareholders Equity has 4 groupings
Preferred stocks
Common Stocks
Paid in Surplus (Paid in Capital) - excess over par when the stock as sold to the public)
Retained earnings
All of these added together gives up total shareholder equity
Total liabilities + total shareholders equity gives you total liabilities and outstanding equity of the company
Income Statment
Also called a P&L or a Profit and loss statement
Shows the revenue, Expenses and earnings over a period of time (typically a year)
P&L sales
You take sales and subtract the cost of goods sold, Selling and administrative costs and depreciation
This leaves the operating profit (EBIT- earnings before interest and taxes)
What to do with Operating profit
You take operating profit and deduct bond interest to get Total income (EBT- earnings before taxes)
What to do with Total income
Subtract taxes from total income and we are left with Net income (EAT - Earning after tax)
What to do with net income
Subtract preffered dividends on common stock from net income to get Net earnings
What to do with net earnings
Subtract dividends paid to common stocks and you are left with retained earnings
Earnings per share you use Net Earnings/common shares outstanding
Capital structure and leverage
If the company has a large amount of capitalization from selling stock then they are conservative
If the company has a large capitulation from selling bonds then they have a speculative structure
Using FIFO and valuation of inventory
When prices are sharply rising the effect of using FIFO on valuation will result in increasing the reportable income to the company
Dilution of stock
decreased earnings per share through a conversion of convertible securities exercise of options or warrants or additional share being issues
A common stock holders interest would not be diluted by stock splits or stock dividends
Corporate expense ratio is determined using the
income statement
NOT the balance sheet
On the date a corporation declares a cash dividend
It becomes a current liability on the balance sheet
Earnings per share ratio (formula)
Net earnings/outstanding shares
Earnings per share can be increased by (or changed by)
Increased by
tax loss carried forward
Reduction of corporate income taxes
retirement of outstanding bonds
Changed by
Change in companies inventory valuation
acquisitions and dispositions of other companies and subsidiaries
Fully diluted earnings per share considers
This is calculated assuming that all dilution from all available sources occurs
Current Ratio (formula)
Current assets / current liabilities
standard minimum is 2:1
most accurately describes liquidity (NOT profitability, coverage or debt)
Price to earnings (P/E) Ratio (formula)
Market price/Earnings per share
sometimes referred to as the multiple at which the stock is selling
P/E ratio does not change when a stock split occurs
Very high P/E ratios show over valued stocks
Total Return (Formula)
Growth + Income
Profit Ratio (formula)
Net income/Revenue
Measures how much of each revenue dollar is net income
