Chapter 3: Economic Factors Flashcards
Boom
Period of rapid growth
Recession
Period of economic decline or negative growth
Four Stages of the Economic Cycle
-Expansion
-Peak
-Contraction
-Trough
Expansion
Stage when businesses are prospering
Peak
Stage when businesses have reached the pinnacle of their growth
Contraction
Stage when economic growth is slow
Trough
Stage when economic growth is negative
Economic Indicators
Signs that point to current and future economic performance
Examples of Economic Indicators
-Leading Indicators
-Building Permits
-Manufacturers’ New Orders, Consumer Goods, Non-defense Capital Goods
-S&P 500 Index
-Initial Claims for Unemployment Insurance
-Interest Rate Spreads
Leading Indicators
Predict changes in economic performance before the economy starts to move in a particular direction
Coincident Indicators
Increase and decrease with current economy (coincide)
Examples of Coincident Indicators
-The Index of Industrial Production
-Employees on Nonagricultural Payrolls
-Disposable Personal Income
Lagging Indicators
Factors observed to change after an economic shift in the business cycle
Examples of Lagging Indicators
-Change in Consumer Price Index (CPI)
-Average Prime Rate
-Average Duration of Unemployment
Interest Rate
Represents the extra sum a lender levies on the borrower over and above the primary amount
Prime Rate
Interest rate that banks charge most creditworthy customers
Discount Rate
Interest rate that the central bank charges all other banks
Federal Funds Rate
Interest rate commercial banks charge each other for overnight lending and borrowing their extra reserves
Call Money Rate
Interest rate banks charge brokers, who lend to investors to fund margin accounts
Cyclical Stocks
Move with the economy; perform well when the economy is good, decline when it’s weak
Defensive Stocks
Least affected by the overall stock market; produce stable dividends throughout the year and are more reliable
Growth Stocks
Currently performing well in the stock market and expected to frow faster in the future
Value Stocks
Current share value is less than intrinsic value, get better with time
Nano-cap Stocks
Smallest stock by market cap, <$50 million
Micro-cap Stocks
Market capitalization between $50 million-$300 million
Small-cap Stocks
Market capitalization between $300 million-$2 billion, high growth potential
Mid-cap Stocks
Market capitalization between $2 billion-$10 billion, produce consider profit and have potential to grow
Large-cap Stocks
Market capitalization above $10 billion, long history of success, well established, low risk
Monetary Policy
Measures implemented by the central bank to impact the quantity of credit and money circulating within an economy
Fiscal Policy
Encompasses government’s actions concerning taxation and expenditure
Regulation T
-Tool used to control extensions made by securities brokers and dealers
-Controls the margin requirements for stocks purchased on margin
Discount Rate
Tool used to implement monetary policies by adjusting the interest rates it charges banks
Reserve Requirement
-Regulation about the amount of money commercial banks can hold in their reserves as liquid assets
-Tool enables Fed to manage how much money the banks can lend
Federal Open Market Committee (FOMC)
Committee of the Federal Reserve System to regulate the country’s open market operations
International Economic Factors
-Balance of Payments
-GDP & GNP
-Exchange Rates
Balance of Payments (BOP)
Records all international financial transactions made by a country’s residents, including government, businesses, and individuals
Gross National Product (GNP)
Tracks all economic activity carried out by businesses and citizens of a nation, regardless of location
Gross Domestic Product (GDP)
Measures productivity and economic activities withing a nation’s borders
Exchange Rate
Rate at which one currency is exchanged for another
Foreign Exchange
Trading one currency for another during the trade of goods or services between two countries
Balance Sheet
Provides a snapshot of the company’s financial position at a specific moment
What is the key idea of the balance sheet?
Total value of the assets should equal the combined value of the liabilities and shareholder’s equity
Assets
Possessions of a company
Fixed Asset
Tangible piece of property a company owns for the long term and used to generate wealth
Long-term Liabilities
Debts of a company that are due beyond a year
Intangibles
Non-physical assets
Shareholders’’ Equity
Amount a company’s owners have invested in their business
Income Statement
Financial document that summarizes a company’s revenue and expenses
Income Statement includes:
-Revenue
-Gross Profit
-Operating Income
-Earnings Before Interest and Taxes
-Taxable Income
-Net Income/Loss
Revenue
Money brought in by normal business operations
Gross Profit
Amount obtained by subtracting the cost of production from the revenue
Operating Income
Adjusted revenue of a business after subtracting all operating costs and depreciation
Operating Expenses
Costs paid to maintain the operation of the business
Earnings Before Interest & Taxes (EBIT)
Shows company’s profit and considers all revenues and costs without interest and income tax
EBIT=
Revenue - Cost of Goods Sold (COGS) - Operating Expenses
Taxable Income
Basis on which an income tax system charges tax aka the amount of income the government will tax
Net Income/Loss
Calculated by subtracting all the expenses, interest, and taxes from revenue; if positive, profit! if negative, loss
Consume Price Index (CPI)
Represents the average fluctuation in prices consumers pay for various goods and services
The CPI is a key metric for measuring…
Inflation and evaluating the efficacy of government policies
Inflation
Upward movement of prices for goods and services within a specific time frame, typically a year
Deflation
Decline in the price of goods and services over a specific period
