Economic Factors and Business Information Flashcards
What is the Gross Domestic Product (GDP)?
the total national output of goods and services
= consumer spending + government spending + investments + exports - imports
What is the Consumer Price Index (CPI)?
measures the cost of a weighted basket of selected consumer goods
tracked on a monthly basis
What is Fiscal Policy?
involves the president and Congress passing bills that influence the economic activity
Federal taxation & spending are the primary tools
What is Keynesian Theory?
economic theory that advocates for using Fiscal Policy to jump-start the economy to full employment
it’s the government’s responsibility to stimulate the economy by increasing spending
What is supply-side economics?
theory that says that as long as the government does NOT meddle with the economy, business will take care of itself
uses monetary policy & tax cuts and deregulation to increase growth
What is Monetary Policy?
controlled by the Federal Reserve Board
an attempt to control the supply of money and credit in the economy
What is the discount rate?
the rate the central Federal Reserve Bank in NY charges member banks for loans to meet their overnight reserve requirement
the lowest interest rate
What does borrowing at the discount window by a member bank indicate?
Indicates that the borrower is experiencing financial trouble
What is the federal funds rate?
the interest rate assessed when member banks loan to each other
not set by the Federal Reserve Board but by the member banks themselves
the most volatile interest rate in the US economy
can change overnight
What is the Federal Open Market Operations (FOMO)?
the FRB tool used the most often
refers to when a central bank buys or sells short-term Treasuries & other securities in the open market in order to influence money supply
How does buying securities in the Federal Open Market Operations impact the economy?
buying securities adds money to the system, making loans easier to obtain and interest rates decline
How does selling securities in the Federal Open Market Operations (FOMO) impact the economy?
selling securities from the central bank’s balance sheet removes money from the system, making loans more expensive and increasing rates
What is M1?
the money supply that is composed of currency, demand deposits, other liquid deposits
includes the most liquid portions of the money supply
What is M1?
the money supply that is composed of currency, demand deposits, other liquid deposits
includes the most liquid portions of the money supply
What are the types of money market instruments?
Repurchase Agreements
Commercial Paper
Bankers’ Acceptances
Negotiable or Jumbo CDs
What are repurchase agreements (or repos)?
created when a bank dealer sells collateralized securities with a promise to buy them back
What is a commercial paper?
an unsecured corporate note with a maturity ranging from 30 to 270 days
What are bankers’ acceptances?
a form of payment that is guaranteed by a bank rather than an individual account holder
guarantees payment at a later time
used most frequently in international trade to finalize transactions with little risk to either party
What is currency valuation?
the process of determining exchange rates between currencies
What does it mean when a currency is “appreciating”?
if the currency value rises on the foreign exchange market
it buys more units of foreign currency
What does it mean when a currency “depreciates”?
a currency falls in value on the foreign exchange market
it will buy fewer units of foreign currencies
What is the interbank system?
an international, decentralized, and unregulated market
a high risk market
What is a trade deficit?
when you are buying more from an outside country than you are selling
occurs when a country imports more goods than it exports
What is a trade surplus?
when exports exceed imports
What is disintermediation?
large-scale investor movement into long term debt instruments
often happens when there is an inverted yield curve
What happens to bonds when interest rates rise?
bond yields rise
bond prices fall
What is a credit spread?
the difference in the returns of two bonds with the same maturity but different credit ratings
What is a basis point?
equal to $0.10 of a yield
equal to 1% of par ($1000)
How do corporations raise capital?
Issuing two types of securities - stocks and bonds
What is the balance sheet equation? (also Net Worth)
Net Worth = assets - liabilities
What is a dividend?
the part of a corporations earnings that are distributed regularly to shareholders - typically paid quarterly
What is cash flow?
actual money leftover after all expenses are paid
to calculate, only money that was actually paid out is deducted from revenues
What is the cash accounting system?
a system where revenue is not booked until cash is received, and expenses are not booked until paid
What is an accrual accounting system?
accounting system where revenue is booked when billed and expenses are booked when received
What is form 10k?
the form filed by publicly traded companies 1x a year
annual report about the company’s financial performance - contains more detail than the annual report sent to shareholders
required by the SEC
Filing deadlines for the 10-K vary based on the size of the company
What is form 10Q?
a comprehensive report of financial performance that must be submitted quarterly by all public companies to the SEC
contains financial statements, management discussion and analysis, disclosures, and internal controls for the previous quarter
Companies must file their 10-Qs 40 or 45 days after the end of their quarters, depending on the size of their public float
Form 10-Q is not an audited statement, unlike the annual Form 10-K companies are also required to file
What is Schedule 13D?
long form used to report beneficial ownership changes
filed when a person or a group acquires 5% or more of a company’s voting shares
Schedule 13D must be filed within 10 days of the filer reaching a 5% stake
What is Schedule 13G?
short form used to report beneficial ownership changes
used to report a party’s ownership of stock which exceeds 5% of a company’s total stock issue
Schedule 13G can be filed in lieu of the SEC Schedule 13D form as long as the filer meets one of several exemptions
may be filed within 45 days of the end of the calendar year in which the beneficial ownership of a security met the guidelines
What is Form 13F?
a form used to disclose the holding of discretionary accounts
a form that must be submitted to the SEC within 45 days after the end of each calendar quarter
every institutional investment manager who maintains investment discretion over accounts holding equity of a nationally traded security have a fair market value of at least $100 million must file
What are the financial ratios that fundamental analysts use to examine issues like solvency, debt levels, and share value?
Net Working Capital Current Ratio Quick Ratio Current Yield Cash Flow Debt to Equity Ratio
What is form 8k?
a form that reports any information changes with a company- like a change of name, 10% ownership, or home office address
required to be filed within 4 business days from the reportable event
What is EDGAR or Electronic Data Gathering Analysis and Retrieval System?
the SEC’s online system that is accessible to the public to provide free, immediate access to issuer information and to enhance market transparency
What is the trading spread?
the difference between the bid price and the offer price
a narrower (smaller) spread indicates active trading & a wider (larger) spread indicates sluggish or thin trading
What is a market order?
an order to immediately buy or sell a specified amount of a security at the most advantageous price possible
What is a limit order?
an order to trade a security at a given price or better
it means to buy at or below a specified price, or to self a stock at or above a specified price
order is only executed if the market reaches or betters that limit price
What is a stop order?
a frozen or suspended order that become live orders when triggered
becomes a live market order when triggered
What is a stop limit order?
an order that becomes a live limit order when triggered
Where is a sell stop order placed?
below the market price
the investor only wants to sell if the market price starts falling, therefore the order is a frozen stop order waiting to be triggered by the falling market price
Where is a buy stop order placed?
above the current market price
the investor only wants to buy the stock if it begins to rise, therefore the order is entered as a frozen buy stop
often used to protect a short position
Where is a sell stop limit placed?
below the current market price
triggered when the stock price trades at or below the stop price, then becomes a live limit order
Where is a buy stop limit order placed?
above the current market value
triggered at or above the stop price, then becomes a live limit order to be executed at or below the limit price
What happens to the market price of a stock when a dividend is paid?
the stock’s price is adjusted downward to reflect payment
this adjustment might result in unintentional execution of special orders that are entered below current market value - therefore orders placed below market value are also administratively adjusted downward along with the stock’s price
What is a not held order?
a market order that gives the floor trader time and price flexibility
they may fill the order at any time throughout the day that they think is best, but it is NOT a discretionary order
What is shorting (short selling)?
when you borrow and sell a security that the seller does not own but is committed to repurchasing eventually
used to take advantage of an expected decline in the security’s price AKA Bearish Outlook
investor has unlimited risk
What is a cash account?
traditional brokerage account
the investor must pay in full for all purchases by the settlement date
What is a margin account?
an account that allows investors to purchase securities on credit and/or take out loans against securities that they own in the account
all short sales must occur in a margin account
What is the hypothecation?
the pledging of full-paid securities as collateral for a loan
What is the agreement investors must sign to open a margin account?
the hypothecation agreement
What is a dark pool of liquidity?
where the public cannot see the number of shares traded, nor can they see the price per share
lack transparency
Where do options on listed securities trade?
Chicago Board Options Exchange as well as other exchanges
What are the hours of the New York Stock Exchange?
9:30am to 4pm EST
What are the hours of the Chicago Board Options Exchange?
9:30am to 4pm EST
mirror the NYSE hours
What is the OTC/Unlisted/Second Market?
a decentralized, global, 24-hour market that takes place over the telephone and the internet
What is a market maker?
an individual participant or member firm of an exchange that buys and sells securities for its own account
provide the market with liquidity and depth while profiting from the difference in the bid-ask spread
What is a specialist?
this is the old term used by the NYSE to refer to a member of the exchange who acted as the market maker to facilitate the trading of a given stock
now referred to as designated market makers
What is a designated market maker?
used to be called specialists on the NYSE
individual that has been selected by the exchange as the primary market maker for a given security
responsible for maintaining quotes and facilitating buy and sell transactions
What is a floor broker?
executes orders for his clients out of his firm or for the firm’s own account
What is the ex-dividend date?
the date in which a stock trades without the right to receive a dividend
What is a reverse stock split?
a stock split that reduces the number of shares and raises the price per share proportionately
What is a markup/markdown?
the firm’s compensation in a principal trade - trading from its inventory
What is a commission?
the fee charged by the broker/dealer for acting on behalf of others in executing buy or sell orders
What is systematic risk?
known as market risk
the risk that the entire market declines at once, causing investors to sustain losses
diversification does NOT protect against market risk
What is interest rate risk?
the threat of suffering a loss due to a change in the interest rate
longer maturities have greater risk that shorter maturities
the lower the bond’s stated interest rate, the more volatile
What is inflation risk?
known as purchasing power risk or constant dollar risk
created by too many dollars chasing too few goods, which causes the cost of goods to rise
the risk that an investment’s value is negatively affected by inflation
What is business risk?
also known as credit risk or default risk
the risk that the issuer may become unable to meet interest or principal payments on its bonds
What is regulatory risk?
also known as legislative risk
the risk that changes in laws will negatively impact the value of a security
What is liquidity risk?
the risk that an asset cannot be sold quickly, or that selling quickly will result in a substantial loss
