Exam 2 Flashcards by Bennie Williamson

The graphic relation between YTM and term to maturity

The yield curve

Structure of interest rates

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A downward sloping yield curve

Inverted curve

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A blend of returns from the multiple coupons and principal received at various times

YTM on a coupon bond

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A “pure” annualized return through the maturity date

YTM on a zero-coupon bond

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The implied future one-year interest rate that makes the cumulative return from investing in a pair of Strips, the first bought now and maturing at T-1, and the second bought at T-1 and maturing at T, equal the cumulative return on a strip bought now and maturing at T

One-year forward rate

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States that yields to maturity on long-term bonds are determined solely by market expectations of future short-term interest rates

Expectations Hypothesis

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If investors expect economic growth to accelerate, then they will generally expect short-term rates to rise in the future

Expectations of economic growth

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If investors expect inflation to rise in the future, then they will generally expect short-term rates to rise. To preserve the same pre-tax real interest rate, short-term rates must increase one-for-one inflation

Expectation of inflation

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Postulates that investors demand a yield spread or premium for purchasing long-term bonds rather than short-term bonds, because short-term bonds are inherently more liquid

The liquidity preference theory

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Three risks to think about when investing in Treasury securities:

Price risk, reinvestment risk, and inflation risk

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The risk that the price of a bond will be low at a time you might want to sell it. There is none if you hold until maturity

Price Risk

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The risk that market interest rates will be low when you want to reinvest the principal from a maturing bond, or reinvest bond coupons

Reinvestment risk

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The risk that consumer prices will rise, reducing the purchasing power of the principal and coupons on your bond

Inflation risk

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Stock represents ownership shares in a corporation, shareholders own a part of the company in which they have invested

Common stock

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Oversees all operations of the company

Board of directors

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Staggered election

Classified board

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When a board member is a current or former company executive

Inside director

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Sets the compensation of top executives

Outside directors

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When there are two competing slates of candidates for the board of directors

Proxy fight

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Payments of cash from the company to its shareholders

Cash dividends

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Usually one business day before the record date

Ex-dividend date

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As the ratio of dividends per share to earnings per share over the past 12 months

Payout ratio

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Equal to the current annualized dividend as a percentage of the current stock price

Dividend yield

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When a corporation buys its own stock

Share repurchase or buyback

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Specifying a single price or range of prices they will pay for each share tendered

Tender off

the company is like any other buyer of stock in the market, so individual shareholders get cash only if they sell their shares in the market

Open market repurchases

Each share of stock will be split into more than one share

Stock split

When companies go public, they usually sell stock, and the stock sale is the ___

Initial Public Offering (IPO)

The price that is paid by public investors to the company for the new shares

Offering price

The SEC registration of securities (stocks and/or bonds) for an offering to be made on a continuous or delayed basis in the future

Shelf registration

The latest trade price for the stock

Last Trade

Highest price anyone is bidding to buy the stock from you

Bid Price

The lowest price anyone is asking to sell the stock to you

Ask Price

These figures indicate the range of the stock price over the past year, adjusted for stock splits if any

52-week high and low

The most recent cash dividend paid, usually expressed on an annualized basis

Dividend

The dividend yield, equal to the annual dividend as a percentage of the current stock price

Yield Percentage

Equal to the current stock price dividend by latest 12-month reported EPS

Price-to-earnings ratio

Current price divided by the consensus forecast of next year's earnings per share

Forward P/E

Measures the total market value of all the stock outstanding, equal to share price times the number of shares outstanding

Market capitalization

The number of shares traded

Volume

Change in price from the previous day

Net change

Indexes measure how prices for stocks as a group (or on average) are behaving

Stock market indexes

Investors can earn from investing in stocks rather than investing in (safer) bonds

Risk Premium

The component of a stock's risk that is related to the stock market as a whole

Market risk or systematic risk

Measures the general sensitivity of the return on a stock to the return on the overall stock market

Beta

A beta above 1

Cyclical stock

A beta below 1

Defensive stock

Dividing of investment funds among different securities

Diversification

Publicly traded companies that purchase and typically manage commercial real estate

Real Estate Investment Trusts (REITs)

Difference between bid and ask prices

Bid-ask spread

Number of shares available to buy or sell at that ask or bid price

Depth

Market orders are executed at a price better than the current quote

Price improvement

An order to buy or sell a particular number of shares at a certain price or better

Limit order

An order to sell at the market if the bid price reaches or falls below a particular price

Stop-loss order

Regular brokerage accounts

Cash accounts

You are allowed to borrow a part of your investment from your broker

Margin account

published daily in the Wall Street Journal, is the rate banks charge to brokers to borrow money, and is usually a couple percentage points above the interest rate on Treasury Bills

Call money rate

you first borrow shares from your broker, immediately sell them in the market, and then buy them back at a later date to return to your broker

Short selling

The number of a company's shares that have been sold short

Short interest

Total shares outstanding minus shares held by corporate insiders

Float

Insider trading (legal and illegal)

The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Realized when you sell a stock for more (or less) than you originally paid for it

Capital gain (or loss)

The amount you originally pay for a stock

Cost basis

The higher the expectations for future economic growth and inflation, the more ____ will be the yield curve

Steeply sloped

Long-term bonds are inherently ____ than short-term bonds, and hence longer bonds have a positive liquidity ____ in their yields

Less liquid Premium

Long-term bonds are more subject to the risk of higher ____ than short-term bonds, so long-term bonds have an inflation risk ____ in their yields

Inflation Premium

Since most investors have relatively short time horizons, ___ risk is more important than ___ risk, so long-term bonds have a ___ risk premium in their yields

Price risk Reinvestment risk Price risk premium

Can be redeemed by the issuer prior to the bonds' maturity date, in exchange for the call price

Callable bonds

The call price is ____ than or equal to the __ value, often starting at a ____% premium to par and then declining to par as maturity approaches

Greater than or equal to the par value 3-5% premium

Motivations for calling a bond (3):

- Reducing interest expenses going forward by refinancing - Deploying excess cash - Fear of higher market rates, extend maturity now!

Alternative to calling a bond:

Buy back your company's bonds on the open market

Allows the issuer, at its option, to redeem the bonds. Issuers may exercise after a certain number of years, often ten years

Optional Redemption

Requires the issuer to regularly redeem a fixed portion or all of the bonds in accordance with a fixed schedule

Sinking Fund Redemption

These days, most callable bonds have ___ redemption, and do not have ___ redemption

Optional Sinking fund

Period during the first few years of the bond's life, where calls are prohibited

'Lockout' period

When a callable bond is trading at a premium to the call price, and is thus likely to be called, ____ may be misleading

YTM

Annualized rate of return from purchasing the bond and then holding it until the next likely call date, assuming no default and that the bond will actually be called

Yield to call

Yield to call calculation is the same as the YTM calculation, with the ____ date substituted for the ___ date, and the ____ substituted for the par value

call date substituted for the maturity date Call price

At a specified date, the holder can choose to redeem the bond for par value, or alternatively choose to keep it, effectively extend the life of the bond for a given number of years

Puttable bonds

Allow the holder to convert their bond to common stock in a predetermined ratio

Convertible bonds

Predetermined ratio for convertible bonds is called the

Conversion ratio

Par value of the bond divided by the conversion ratio

Conversion Price

Conversion ratio times the market price per share of the common stock

Conversion Value

Difference between the market price of the convertible bond and the conversion value

Conversion Premium

When issued, the coupon rate on convertibles is set ______ for 'straight' bonds of the same credit rating

Below the market rate

When issued, the convertibility option is "_______" (the conversion value is less than par), so that immediate conversion would not make sense

"Out-of-the-money"

Many convertible bonds are ____

Callable

When a convertible is called at a time when the conversion value exceeds the call price, such a call is said to ____ conversion into stock

"Force"

In general, it is not logical to convert unless the ____ price in the market exceeds the ____ price, and even then, it usually makes sense to defer conversion for as long as possible

Stock price Conversion price

If yields on long-term bonds ___ yields on short-term bonds, the yield curve is said to be upward sloping

Exceeds

If yields on long-term bonds are less than yields on short-term bonds, the yield curve is said to be ____ sloping

Downward

Expectations hypothesis states that yields to maturity on long-term bonds are determined solely by market expectations of ...

Future short-term interest rates

Under the expectations hypothesis theory, if the yield curve slopes upward (downward), that means investors believe future short-term rates will be ____ than current short-term rates

Higher (lower)

In terms of forward rates, the expectations hypothesis states that the one year forward rate is always equal to ____ expected one year actual or 'spot' rate between T-1 and T.

The market's

The slope of the yield curve is a _____ indicator

Leading economic

If investors expect inflation to rise in the future, then they will generally expect short-term rates to...

Rise along with it

Inflation: To preserve the same pre-tax ___ interest rate, short-term ___ rates must increase one-for-one with inflation

Real Nominal

The yield curve will have a ____ slope when investors believe the economy will improve and/or inflation will increase in the future

Steep upward

The yield curve will ___ when a recession, possibly combine with lower inflation, is predicted

Invert

If future economic growth and inflation are expected to be about the same as they are now, the yield curve will be ___

Flat

The liquidity preference theory postulates that investors demand a yield spread or premium for purchasing ____ bonds rather than ____ bonds, because ___ bonds are inherently less liquid

Long-term Short-term Long-term

In practice, long-term treasury bonds are _____ liquid, so it is not clear that any sizable "term" spread can be explained by liquidity differences alone

Highly

Relative risks of investing in short-term versus long-term bonds

- Price risk - Reinvestment risk - Inflation risk

Difference between investing in bonds versus bond mutual funds:

Bond mutual funds never mature!

Treasury bonds and notes have no _____

Risk of default

The dividends paid by treasury bonds and notes are taxable by the _____, but you get a break on your _____

Federal government State income taxes

U.S. government agency funds like GNMA (Government National Mortgage Association) are _____

Mortgage-backed securities (MBS)

MBS bonds are very low ____ and are highly ___, though only GNMA securities are considered perfectly default-free like treasury bonds

Default-risk Rated

MBS funds have ____ risk, because homeowners have the option to ___ their mortgage loans

Prepayment Prepay

Junk bonds promise a ____ than government or corporate investment-grade bond, but with ____ risk

Higher return Higher

If the country were to ever go into a deep recession or depression, ___ bonds could be expected to perform very poorly, right at the same time that stocks would be doing ___

Junk bonds Poorly

Defaults have ____ significantly in past recessions

Risen

One indicator of the potential future return on bond fund investments is the _______ of the fund

Weighted-average yield to maturity

The yield to maturity on a bond is the _____ from holding a bond to maturity if the bond does not ____

Average annual return Default

Do not invest in junk bond funds unless the YTM is ______ the yield on investment-grade corporate or treasury bond funds

Well above

Dividends paid by municipal bond funds are _____ by the federal government

Not taxable

What is the difference between national and single-state municipal bonds?

National municipal funds buy municipal bonds from all around the country while single state municipal funds invest in the municipal bonds of a specific state

For wealthy individuals living in a state with a high income tax rate, like New York or California, single state funds can be ___, because their dividends are exempt from ___ income tax and ___ income tax for ____

Attractive Federal State Residents of that state

Invest in bonds issued by foreign companies and governments as well as domestic bonds

International bond funds

International bonds: Expense ratios are often ___, and your investment is subject to ____

High Currency risk

International bonds: Purchasing these funds often amounts to a bet that the U.S. dollar will ____ against other currencies

Depreciate

Within many of these general fund categories, you can find funds that specialize by their maturity. For example, your can buy ___, ___, or ___, maturity U.S. Treasury Bond funds

Short, intermediate, or long maturity

Historical returns: Look for a fund that earns returns above the average for its fund type over the past ____ years

5-10

Historical returns: Compare returns on a short-term Treasury fund to ______, not to ______

Other short-term Treasury funds, not to corporate or municipal funds

Manager Tenure: If a fund has a good long-term record from active bond investing, check to see if the _____ has changed. If the _____ is gone, past performance has no predictive value

Management team "Star" manager

Default Risk: U.S. Treasury funds are _____. Corporate and municipal bond funds have ____ default risks depending on their ____

Default-free Varying Credit quality

Investors that are very risk averse should generally avoid ___ bond funds

Junk

Interest Rate Risk: Interest rate risk is higher for ____ bond funds than for ____ funds

Long-maturity Short-maturity

If you have a short investment time horizon of only 2-3 years, you probably should avoid ____ funds

Long-maturity

The interest rate risk of bonds and bond funds is measured by ____

(Modified) Duration

The ____ the duration of the bond fun, the ____ the interest rate risk

Longer Higher

Interest Rate Risk: As an approximation, if the fund has an average modified duration of 7 years and interest rates in the market rise by 1%, say from 5% to 6%, the NAV of the fund will fall by about __%. If interest rates fall by __%, the NAV will rise by about 7%

7% 1%

Expense Ratio: Look for a fund that has expenses below ___ of assets per year. The larger, more efficient funds are able to keep their expense that low

0.4%

Turnover: Turnover refers to the fund's _____

Trading frequency

Turnover: A turnover rate of 20% indicates that ____ of the securities held at the beginning of the year are sold and traded for other securities during the year

one-fifth

A turnover of ___ indicates that the average security in the portfolio is held for one year

100%

All else equal, ___ turnover is undesirable, because it indicates that fund incurs high transaction costs and may frequently realize taxable short-term capital gains

High

_____ bonds funds will naturally have higher turnover than ____ funds, because their bonds mature _____

Short-term Long-term Much more frequently

High turnover (more than 100% per year) in a long-term bond fund is a sign that the manager is trying to ___ interest rate movements by ___ bonds

Time Trading

A manager trying to time the market buys longer maturity bonds when they expected interest rates to __, and buyers shorter maturity binds when they expect rates to __

Fall Rise

Dividends from corporate bond funds are subject to ______ income taxes

Federal, state, and local

U.S. Treasury Bond fund dividends are exempt from __ and __ income taxes for the portion of their earnings (usually well over 90%) that comes from Treasury Bonds

State and local

Federal municipal fund dividends are exempt from ____ income taxes, while individual state municipal fund dividends are exempt from __ and __ taxes

Federal Federal and state (if you live in that state)

Historically, most bond mutual funds slightly ___ the overall bond market

Underperform

Choose a bond with no ____, low ____, and low ____. These funds usually generate the best ____

No sales loads Low expenses Low turnover Long-term returns

Net cash flows into bond funds are ___ correlated with the change in bond yields over the past 12 months

Negatively

Low market interest rates imply ____ returns from bond fund investing!

Low FUTURE returns

Represents ownership shares in a corporation

Common stock

A few corporations sell shares directly to the public using _____

Direct stock purchase plans

Public corporations hold annual meetings, and prior to each annual meeting, common stockholders receive a ballot to vote on candidates for the corporate ____

Board of directors

Board with a staggered election, so that (for example) each director has a three-year term and 1/3 of directors come up for election each year

Classified board

When a board member is a current or former company executive, they are called ___

Inside director

The compensation committee, a committee of the board including only ___ directors, sets the compensation of top executives

Outside

Who decides on if a company will pay a dividend and what amount it would be?

The board

Except in unusual circumstances, directors run ___

Unopposed

If a company has _____, election requires a "for" vote majority, versus ____ or ____ votes

Majority "Against" or "withheld"

With majority voting, a director must be replaced if ____ votes exceed ____ votes, with the new director selected by the nominating committee of existing directors

"Against" or "withheld" votes exceed "for"

With ____ voting, if a director runs unopposed, the director is elected with only a single __ vote, so the individual stockholder's vote is basically meaningless

Plurality "For" vote

When there are two competing slates of candidates for the board of directors, this is referred to as a ____

Proxy fight

The annual ballot sent to shareholders also contains various proposals made by ___ and/or ___

Managers and/or outside stockholders

Proposals by management include (3):

- Whether or not to accept a merger with another company (though this usually has a separate special vote) - The adoption of stock option incentive plans for top managers - Hiring a particular account firm to audit the company's financial statements

Proposals by outside stockholders include (3):

- Limits on the pay or bonuses of executives - Disclosure of political contributions - Restrictions on doing business in countries that allegedly violate human rights

The proposals by outside shareholders are just ___ in most cases, not ____, but most CEOs do not want to be seen as totally disregarding the will of the shareholders

Advisory Legally binding

Normally, each share of common stock carries ___ vote, but sometimes there are different ___ of common stock with different privileges or voting rights

One vote Classes

Unlike the holder of a corporate bond, common stockholders are not entitled to _____

Receive any particular income payment from the company

If a company gets into financial difficulties and must liquidate (sell) their assets in a bankruptcy proceeding, ____, other _____, ____, and ____ have first claims on the money

Bondholders, other lenders and creditors, lawyers, and the IRS

Common stockholders have a __ or __ claim in bankruptcy which means common stockholders will be the _____ if the company must liquidate

Junior or residual Last to be paid

On the plus side, common stockholders in a corporation have _____, they are not personally liable for the corporation's debts, so can never lose more than their ___ in the stock

Limited liability Original investment

Hybrid of common stock and a corporate bond

Preferred stock

Preferred stock normally pays ___ dividends, as a fixed percentage of the ____ In this sense, preferred stock is more like a ___ than a ____

Quarterly Par value Bond than a common stock

Failure to pay a scheduled dividend does not trigger _____, like would a failure to pay ___ or ___ on a bond However, missed dividends often provide preferred stockholders collectively with a ______

Bankruptcy Interest or principal Certain number of seats on the board of directors

The dividend on preferred stock can be either ___ or ___ If the former, then all dividends payments that were missed must be made up before...

Cumulative or non-cumulative Any dividends can be paid to common stockholders

Most preferred stock issued by banks is _____, which helps satisfy capital requirements with bank regulators

Non-cumulative

Most preferred stock is ____, like common stock. Many preferred stocks have a maturity or mandatory redemption date, like a bond. Many preferred stocks are ____ at their ___ value after a certain number of years

Perpetual Callable at their par value

In the case of bankruptcy, preferred stock is ___ to common stock, but ___ to all liabilities

Senior to common stock but junior to all liabilities

Sometimes preferred stock is ____ into common shares

Convertible

Convertible preferred is often used in _____, where the company is not yet profitable and hence cannot take advantage of the tax-deductibility of convertible bond interest payments

Venture capital situations

A stock has real value only to the extent that the company can...

Distribute cash to stockholders at some point in the future

The ___ the present value of the expected cash flows paid from the company to stockholders, the ____ is the stock

Higher More valuable is the stock

Cash distributions primarily take the form of ____, but can also come through ____. You can also receive cash if another company buys your stock for cash in a _____

Cash dividends Share repurchases Corporate takeover

Earnings can be... (4):

- Paid out to stockholders as dividends - Used to pay off debt or repurchase stock - Used to buy another company - Reinvested into the business

Most dividends are so-called ____ dividends, paid on a regular basis, typically _____. Companies can also pay special ____ extra dividends if they choose

Regular Quarterly "One-time"

Dividends are always announced in the _____ prior to their ____

Financial press prior to their actual payment

Date that is usually one business day before the record date

Ex-dividend

Example: A company announces on March 15th that it will pay a $0.30 dividend on April 20th, to shareholders of record at the close of business on Friday, April 1st, with an ex-dividend date of March 31st. What date is the deadline of owning a stock to get the dividend?

March 30th, the day before the ex-dividend date If you buy a stock on the ex-dividend date of March 31st or later, you do not receive the dividend

Stock prices usually fall by approximately the ______ at the open of trading on the ex-dividend date, so there are no easy profits to be made by buying the stock the day before the ex-dividend date and selling it on the ex-dividend date

Amount of the dividend (or a little less)

By paying a dividend, the company is basically saying that stockholders should be able to invest ____ other than have the ____

Extra cash themselves rather than have the company do it for them

The payout ratio is defined as the ratio of ____ per share to ____ per share over the past 12 months

Dividends per share to earnings per share

Payout ratio example: If the company earned $2.00 per share and paid $0.60 in dividends over the past year, the payout ratio is ___

30%

The higher the payout ratio, the larger is the percentage of ___ that are ____

Earnings that are paid out as dividends

Dividend yield is equal to the current _____ / current ____

Current annualized dividend/Current stock price

Dividend yield example: If the company last paid a regular quarterly dividend of $0.22/share, and paid no extra dividends in the past year, then the annualized dividend is ___. If the current stock price is $31, the dividend yield is __/__ = __

$0.88 $0.88/$31 = .0284 or 2.84%

The dividend yield measures the ____ produced by the stock per dollar of investment, and is somewhat analogous to the yield on the bond

Current income

All else equal, a stock with a ____ ratio and a ___ dividend yield is more attractive to buy than a stock with a ____ ratio and a ___ dividend yield

Low payout ratio and a high dividend yield is more attractive to buy than a stock with a high payout ratio and a low dividend yield

The former stock pays ____ as a percentage of the stock price, and reinvests a _____ of it profits back into its business for the future The latter stock pays _____ as a percentage of the stock price, and ____ of its profits for the future

Current income High percentage Little current income Does not invest much of its profits for the future

"All else" may or may not be equal, but be wary of stocks with high ____ and low ____

High payout ratios and low dividend yields

There is no iron-clad rule on whether paying dividends is "good" or "bad" for the investor. Dividend payments are good if the company does not have _____ available

Profitable investment opportunities

Stocks in industries like ____ tend to pay high dividends, while ______ companies often do not pay a dividend, reinvesting all of their profits

Utilities, banks, real estate, and insurance Technology and smaller, startups

Some companies prefer to distribute cash through ___ rather than ____

Share repurchases rather than dividends

When dividends are cut, that is a sign that the company might be ____, so the stock price usually ___

Short of cash Falls

A dividend serves as a signal that ____ are likely to be relatively stable

Future cash flows

Higher pay (and prestige) for bigger size companies can lead some CEOs to reinvest _____, or buy other companies, just to ____

Too much back into the business Make the company larger

A policy of paying regular dividends provides some useful restraint on the ____ of the company. The company may ave to choose between maintaining ___ and ____

Capital expenditure plans Maintaining dividends and higher capital expenditures

To maintain the dividend, the company may have to limit itself to only the ____ and forego more ____ plans

Best opportunities Questionable or risky expansion plans

When a corporation buys its own stock, it is called a ___ or ___

Share repurchases or buyback

On some occasions, companies will make a formal _____ to shareholders specifying a single price of range of prices they will pay for ____

Tender offer Each share tendered

Tender offers are relatively ___. Companies, will announce that they will be buying their own stock in the ____ using a stockbroker

Rare Open market

With ______, the company is like any other buyer of stock in the market, so individual shareholders get cash only if they sell their shares in ____. Those shareholders that do not sell end up with a ______, because the repurchase shares are _____.

Open market repurchases The market Larger ownership share of the company because the repurchase shares are no longer outstanding

Companies are not required to buy all or even any of the authorized number of shares in open market repurchase program as long as they have a ______

Reasonable justification for their behavior

Any company that ____, ____, and ____ will lose credibility with the market

Announces a repurchase, sees their stock price languish or fall, and does not actually buy many shares

Each quarterly balance sheet reports ____, so investors can keep track of whether management is ____

Shares outstanding Actually following through

Often shares are repurchased simply to ____ issued to employees through ___ and ___

Offset shares Stock options and stock grants

Announcements of share repurchases are usually _____ for stockholders because it may indicate or signal that management feels that their own stock is ___ in the market

Good news Undervalued

After shares are repurchased, there is less ___ on the company's books and fewer ______. Each remaining share represents a ____ fraction of the company's underlying business operations than before. If the company has debt on its balance sheet, the company is now more _____. If the company's business performs well in the future, remaining shareholders will ____ from owning a larger piece of the pie

Cash Shares outstanding Larger Highly leveraged Profit

When the board of directors announces a ____, each share of stock will be split into ____ share

Stock split More than one

When a stock split takes effect, the price of each share ___ roughly in proportion to the ___

Falls Split

A 2-for-1 split will cause the price of each share to fall approximately..

In half

At the time of a stock split announcement, the stock price usually ____

Goes up a bit

Few investors would really be prevented from buying as long as the stock price did not exceed ____, but many companies split before the stock exceeds ____

$500-$1000 $100 or $150

A tiny stock split

Stock dividend

Stock dividend example: A 10% stock dividend means that for every 100 shares you now own, you end up with ___

110 shares

Do not confuse a stock dividend with a cash dividend paid on your stock, a stock dividend gives you ___

No cash

The stock of a privately owned company does not ____

Trade on a stock exchange

Why do companies 'go public'?

It allows the firm's stock to trade on an exchange and be bought and sold by anyone

When companies go public, they usually sell stock, and the stock sale is called an _____. Some of the stock offered is brand new stock that goes ____, and some of the stock is existing stock held by ____

Initial public offering (IPO) Into the business for future expansion Private shareholders

The price that is paid by public investors to the company for the new shares

Offering price

Frequently, the demand for initial public offering ___ supply, and the shares must be rationed among the _____

Exceeds Different brokerage firms underwriting the offering

Customers that trade frequently with the broker, and thus generate considerable commission revenue, are most likely to ____ in an IPO

Receive an allocation

Who is a broker's best customer?

Institutional investors, such as mutual funs, pension funds, and hedge funds

Underwriting brokerages earn a spread between the ___ and the ___ to the company for their efforts, and the (small) risk that the _________

Offering price and the proceeds Market will collapse overnight and they will not be able to sell all of the shares to the public

Those investors fortunate enough to be allocated shares in a "hot" IPO often ___ their shares. Underwriters do not always appreciate this as it places ____ on the price of the stock

Flip Downward pressure

Investors that are able to buy an IPO at the offering price usually do ___ in the short run, but purchasing IPOs in the secondary market on or soon after the offering date has _____

Pretty well Not proven to be a profitable strategy

Most IPOs perform relatively poorly over the __ years subsequent to the ____

3-5 years subsequent to the offering day

A potential investor should be particularly careful when the original private shareholders sell a large percentage of their own shares in the IPO. This is a clear case of (legal) _____.

Insider trading

Often, ____ is cited as a reason for selling stock, but remember that the original shareholders are _____ than the general public about the _____.

Diversification Far better informed about the true health of the company

Companies that already trade on a stock exchange can issue more stock to the public through a ____. Most of these are sold through an ___ just like the typical IPO. The offering price usually _____ the stock price at the close of trade on the previous day

Seasoned issue Underwriting syndicate Close to but a little below

Sometimes new stock is sold through a ___ rather than through an underwriter. This means the company simply grants rights to buy new shares, at a ____, to _____ in proportion to their ____

Rights offering Significant discount to existing stockholders in proportion to their ownership stakes

Rights offering example: Someone that now owns 5% of the stock is granted the right to buy ___ of the new shares offered. Since the shares are offered at a ____, it is likely that virtually all the new shares will be sold. If a particular shareholder does not want to buy more shares, they can ____

5% Big discount Sell their rights to someone else

SEC registration of securities (stocks and/or bonds) for an offering to be made on a continuous or delayed basis in the future

Shelf registration

Each stock has a ticker ___ for identification when trading stocks. Tickers are between __ and __ characters long

Symbol 1-5

The latest trade price for the stock

Last Trade

The highest price anyone else is bidding to buy the stock from you

Bid Price

The lowest price anyone else is asking to sell the stock to you

Ask Price

52-week range indicates the range of the ___ over the past year, adjusted for ___ if any

Stock price Stock splits

Dividend is the most recent ____ paid, usually expressed on an ___ basis

Cash dividend Annualized

Yield Percentage is the dividend yield equal to the ___ as a percentage of the _____

Annual dividend as a percentage of the current stock price

The price-to-earnings ratio is equal to the ____ by latest 12-month reporting ____

Current stock price dividend Earnings per share

The forward P/E is the _____ divided by the ___ of next year's ____ by Wall Street analysis

Current price divided by the consensus forecast of next year's earnings per share

Market capitalization measures the ________, equal to ____ times the ____

Total market value of all the stock outstanding, equal to share price times the number of shares outstanding

The trading volume for the day is the _____ traded

Number of shares

When investing, think about whether a stock is reasonably priced based on its ____ fundamentals, such as expected _____ and ____, not whether the share price is $10 or $100

per-share Future earnings per share and book value per share

Measures how prices for stocks as a group (or on average) are behaving

Stock market indexes

The Dow Jones Industrial Average (DJIA) first published in ____ in the Wall Street Journal, includes __ mature, well-established companies

1896 30

The DJIA average is calculated by adding up the _____ and then dividing by a number called the ____

Prices of all 30 stocks divided by the divisor

The divisor changes only when there are ____ or changes in the ____

Stock splits or changes in the composition of the index

Since the DJIA includes only 30 stocks, and uses a ____ rather than a ____ weighting scheme, it is rarely if ever used to evaluate the performance of professional investors

Price-based rather than market value-based

Standard and Poor's 500 (S&P 500) is an index that includes 500 of the ______. The average is weighted by market capitalization, or the ___________

Largest company stocks in the U.S. market Total market value of the company's stock (stock price times number of shares outstanding)

The S&P 500 is often used as a benchmark for ______ for both ___ and ___ investors; if your investment return exceeds the return on the S&P 500, you are said to have ____

Investment performance for both professional and individual investors "Beaten the market"

NASDAQ Composite is a ____ of stocks there are listed on the NASDAQ system. It is weighted more toward ___ stocks than the DJIA or S&P 500

Value-weighted index Technology

Russell 2000 is the _____ index of 2000 ____ company stocks

Value-weighted Relatively small

Over the past 90 years in the United States, _____ investments earned higher returns than ____ investments, which in turn earned higher returns than _____

Common stock investments Long-term Treasury Bond Short-term Treasury Bills

Over 1928-2017, the ____ average total return on the S&P 500 stock index, including both dividends and capital gains and losses, was ___%. The highest annual return was ____ in ___ and the lowest annual return was ____ in ___

Arithmetic 11.53% Highest: 52.56% in 1954 Lowest: -43.84% in 1931

Stock valuation is based upon the concept of ____ which depends on (1) ____ and (2) ____

Present value Depends on (1) the future cash flows from the investment and (2) the discount (interest) rate

Present value formula for a single expected cash flow to be received in T years at a discount rate of R is

PV = E(Ct)/(1+r)^T

The value of the stock today is equal to the _____ of the ____ that the investor receives from owning the stock

Present value of the cash flows

If ___ goes up, ___ goes up. If __ goes up, __ goes down

Ct goes up, PV goes up R goes up, PV goes down

Equity discount rate = r = _____ + _____

Treasury Bond Interest Rate + Stock Market Risk Premium

_____ cash flows increase PV, and a ____ reduces PV

Higher future expected Higher discount rate

Investors receive cash flows from stocks primarily in the form of ___ and ___. The ability of companies to pay dividends and buy back stock in the future largely depends on ____. If the market expects improved ____, this suggest companies will be able to distribute more ____ through ____ now, and/or have more money available to ____, producing more ___ down the road. So, expectations of ______ lead to higher ____

Cash dividends and share repurchases Corporate profits Earnings growth More cash to stockholders through higher dividends now More money available to reinvest in their business, producing more dividends down the road So, expectations of higher earnings growth lead to higher stock prices

We need a discount rate for stock market investments. Stock market investing is risky, so the _____ will be higher than for a relatively safe investment like a Treasury Bill or Treasury Bond. The equity discount rate can be expressed the the sum of the risk-free Treasury Bill ___ and a ___ for bearing the risk off tock investing

Equity discount rate Interest rate and a premium

Equity discount rate = r = ______ + ______

Treasury Bill Interest Rate + Stock Market Risk Premium

What causes the stock market to go up or down which causes investors to revise their expectations of future corporate profits and the equity discount rate? (4 Factors):

- Expectations of future economic growth - Interest Rates - Inflation - Risk Perception

Rational, risk-averse investors will always demand a higher return on ___ than on ___, because the ____ is a riskier investment than ____. So the risk premium will be ___. From stock market history, a reasonable value for the risk premium is ____ per year

Stocks than on Treasury Bills, because the stock market is a riskier investment than Treasury Bills Risk premium will be positive 6-7% per year

The precise value of the risk premium is ____, and presumably changes over time with ____

Unobservable Economic conditions

From our present value equation, all else equal, if the discount rate r goes up, the _______ falls

Value of the stock

Most economists estimate that the long-term growth potential for U.S. GDP, adjusted for inflation, is about ___ per year. Long term economic growth comes from _____ and _____. Of course, the economy is subject to cycles of ___ and ___ over time

2-3% Improving productivity and increasing population Cycles of expansion and contraction (recession)

Corporate profits are highly ____, ____ faster than GDP in an expansion and ___ faster than GDP in a recession

Cyclical Rising Falling

The best time to invest in stocks has been when the economy is in ___, but starts to show signs of ____

Recession Recovery

Interest rates are generally ___ during recessions, and often ____ during the beginning of a recovery

Low Stay low

GDP measures ___, which includes both ____ and the costs of ____

Total output Business profits and the costs of production

_____ increases stock prices but _____ do not

Higher profits Higher production costs

If the economy is already doing well, and unemployment is ___, a further increase in GDP can lead to ______, which is not so good for ___

Low Sharply higher wages Stocks

_____ may rise if there is low _____ and workers are forced to put in a lot of overtime

Labor costs Unemployment

If unemployment is very low, additional ____ in GDP often lead to higher _____, which is ___ for stocks

Increases Interest Rates Bad

If the economy is very ___ and unemployment is already very ___, a somewhat weaker economy is ___ for stocks

Strong Low Often good

A weaker economy can lead to ___ interest rates, and less ____ on wages and raw material prices

Lower Upward pressure

Keep in mind that stock prices depend on ____ and ____, not just on how the economy is doing overall

Corporate profits and interest rates

In summary, an indication that the economy is _____ is good for stocks. But if unemployment is already ___ and the economy is running close to ____, further ___ in GDP are ___ for stocks, because they lead to ___ and ___

Coming out of a recession Low Full Capacity Increases Less positive Upward wage pressure and higher interest rates

Interest rates affect the _____

Equity discount rate

___ interest rates lead investors to demand a higher _____, since bond and stocks each compete for _____

Higher Equity discount rate Investment (investors) dollars

Higher interest rates also directly reduce ___ and ___ for many corporations

Sales and profits

Suppose the interest rate on Treasury Bills is 4% and the stock market risk premium is 5%, so r = If the T-Bill rate jumps to 7%, will investors still be happy with the above (r) return on stocks? ___ because there is ___ that risk has ____ Assuming that risk and risk premium stay relatively constant, a 3% higher Treasury Bill rate increases r by __, from __ to __ in this example

4% + 5% = 9% 9% It is highly unlikely investors will now accept only a 2% stock market risk premium if there is no indication that risk has declined Increases by 3%, from 9% to 12%

Holding all else constant, a higher r ___ stock prices, because stock prices are ____ values

Reduces Present

With interest rates up, investors ___ stocks in order to ____ to ___ paying the ____, and this selling pressure ___ stock prices

Sell stocks Get cash to buy bonds paying the higher interest rates Reduces stock prices

Stock prices ___ far enough so that the market regards ___ and ___ as ___ attractive investments once again From this example, we expect ____ relation between interest rates and stock prices

Fall Stocks and bonds as equally attractive Inverse

Historically there is ___ relation between stock ____ and Treasury ____, though the relationship has broken down over the past decade

Inverse relation between stock valuations and Treasury interest rates

Higher interest rates also directly ___ for many corporations. For companies that borrow from banks or from the bond market, higher interest rates increase the cost of ___. Also, companies that sell "big ticket" items such as houses, cars, and business equipment are ___, because their customers often need to ___ their purchases by ____. To the extent that higher interest rates reduce ___, stock prices ___ as a result

Reduce profits New borrowings Hurt Finance their purchases by borrowing Higher interest rates reduce EARNINGS, stock prices SUFFER as a result

Higher expected inflation has been ____ for stocks historically. In general, when inflation is high, ____ and ____ ratios are low. Investors appear to place relatively ____ on stocks, relative to earnings and dividends, when inflation is ___. So, if expected inflation rises, stock values typically ___

Bad news Price-earnings and Price-Dividend ratios are low LOW VALUATIONS when inflation is HIGH If expected inflation rises, stock values typically FALL

Higher inflation produces higher ____. Higher inflation reduces ____ from lending money, so to prevent a loss in purchasing power, individual savers demand ____ as inflation increases

Interest rates Real returns Higher interest rates

Higher inflation increases the odds of ____, ____, and ____

Political instability, government regulation, and price controls

Higher inflation often induces the Fed to tighten ___, increasing ____

Tighten CREDIT, increasing REAL INTEREST RATES

Company X sells cat litter and has $500 million of short-term debt. Company Y sells recreational boats and has no debt. If interest rates unexpectedly increase, which stock would be expected to be hurt the most, or can you tell? Explain.

Company Y stock would hurt the most because recreational boats are more expensive so they are investments and not necessities whereas cat owners need cat litter

Higher inflation increases personal ____ on ____ returns

Taxes on real investment returns

If inflation gets too high, the Federal Reserve Board can be expected to ___ credit to ___ the economy and reduce _____, raising interest rates by ____ the increase in ____

TIGHTEN credit to SLOW DOWN the economy and reduce INFLATIONARY PRESSURES, raising interest rates BY EVEN MORE THAN the increase in INFLATION

If the Fed attempts to ___ inflation, you end up with an economy with ___ interest rates and ___ growth for a while

Restrain HIGH interest rates and LOW growth

Until inflation is finally ___, or at least until investors believe inflation is _____, you have a __ economic environment for stocks

Reduced Under control Bad

If interest rates rise by the same amount as the increase in inflation, ____ after taxes ____

REAL RETURN after taxes DECLINE

If consumer prices double over a decade, and the value of your stock portfolio also doubles, you might think you are no better or worse off than before, but the tax on the _____ makes you ___ off

Capital gain Worse

The more inflation, the more investors get taxed on ____, and that doesn't make investors happy

"Phantom" inflation profits

People are not willing to pay a high price for ___ if taxes take away much of their ____ power. They might just spend their money on ____ or ____ rather than ____, placing ____ on stock prices

Stocks Purchasing power A new car or vacation rather than invest in stocks, placing DOWNWARD PRESSURE on stock prices

Investor perceptions of stock market risk affect the ____, and hence the ____

STOCK MARKET PREMIUM and hence the DISCOUNT RATE

If stocks are perceived to be ___ than before, perhaps because of wars around the world, or economic or political instability, r will ___, ___ stock prices

Riskier R will INCREASE, REDUCING stock prices

If the market feels that economy is very solid, with little risk of wars or recession, r will ___, ___ stock prices

r will FALL, INCREASING stock prices

An increase in stock prices despite higher interest rates means either the outlook for ____ has improved, or stocks are perceived to be ___ than they were before

Future earnings Less risky

Stocks perform best in a "____" economy (not too ___, not too ___), where growth is ____, inflation is ___, and the U.S. dollar is ___ or ___ against other currencies

"Goldilocks" economy (not too HOT, not too COLD) Growth is MODERATE, inflation is LOW, and the U.S. dollar is STRONG or STABLE

Often the highest stock returns are achieved when the economy is ____, and many companies are _____, but there is signs of a _____

Still in a recession Suffering losses Recovery

Stocks have also done well when inflation is ___ but starts to ___

HIGH but starts to DECLINE

Stock prices are susceptible to a ___ or "___" when the economy is currently doing well but there are signs of ____ or a possible ____

Fall or "correction" Signs of HIGHER INFLATION or a possible RECESSION

What does Warren Buffet Wisdom "If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?" mean? In regards to the stock market.

You want lower prices of course, but in regards to the stock market think of CATTLE as STOCK, as ranchers do. If you plan to buy stock throughout your life, but don't own any now, you might want stock prices to FALL, because you can buy at cheaper prices than before. If you already own stocks, but don't plan to buy any more, perhaps because you are retied, you are more like the cattle producer slowly reducing the size of the hear. You are selling off stock over time to support yourself. You definitely want to see stock high prices, because you are selling and not buying Most of us are somewhere in the middle, owning some stocks but also planning to buy more over time. Younger investors with relatively little stock wealth benefit more from lower stock prices than older investors with big stock portfolios

If stock prices fall because of things that reduce _______, like wars, higher foreign oil prices, higher taxes, and natural disasters, that is ___ for any stock investor. But other causes of _____^ prices, things that increase the equity discount rate, can be ___ for potential stock buyers. These include higher ____, higher ___, and higher investor ____.

Stock prices Bad Reducing stock prices Good Higher interest rates, higher inflation, and higher investor risk aversion

With a (higher or lower?) equity discount rate, you can expect (higher or lower?) stock market returns in the future

Higher Higher

Generally, it is unwise to attempt to _____, which means making ___ bets on which way ___ prices are heading

"Time the market" Short term Stock

The following indicators have been used to predict stock market ____ with at least some success (3):

Returns 1. Price/Earnings ratio 2. CAPE 3. Dividend Yield

When the P/E on the overall stock market has been unusually ___, future stock returns have tended to be ___ average

High Below average

The 90-year historical average P/E on the market is around ___. As of November 30, 2018, the P/E on the S&P 500 index was around ___. So, perhaps it is more likely that the market P/E will __ than __ in the future

17 21.7 More likely to FALL than RISE

CAPE is calculated by dividing the ___ of the S&P 500 index by the trailing ____ of ____ on the index Each annual earnings figure over the past 10 years is converted to current dollars using the ___, and then ___.

CURRENT PRICE of the S&P 500 index by the trailing trailing 10-YEAR AVERAGE of REAL (INFLATION-ADJUSTED) EARNINGS on the index Consumer Price Index (CPI), and then AVERAGED

The CAPE is less subject to temporary earnings fluctuations than the ____, and has been shown to be ___ related to future stock market returns

"Regular" P/E Inversely related

When the dividend yield on the market is ___, future ___ have tended to be ____

High Future stock returns Above average

The average dividend yield over December 1928 through December 2016 inclusive is ___%, while the average over December 1990 through December 2016 incisive is ____

3. 83% | 2. 08%

The price of the stock (or stock index) is in the ___ of the equation for the dividend yield, so if stock prices fall dramatically relative to the dividends paid, the dividend yield ____, and stock prices can be thought of as being "____" However, this indicator has not worked well lately, as more companies ____ rather than ____ when they have extra cash. So, the dividend yield indicator may not work so well in the future

Denominator Increases "Undervalued" REPURCHASE STOCK rather than PAY DIVIDENDS

None of the stock market valuation indicators are ____. All they can do is provide a hint of whether the stock market is ____ or ____. If you read the newspaper and notice that the P/E ratio on the S&P 500 index is 30, and the dividend yield on the S&P 500 is reaching historic lows, be very cautious about throwing all your money into the market right away. These are signs that you might be buying at a ____. That said, if you have a _____ until spending the fruits of your investments, don't wait forever to start buying stocks, always hoping that prices will fall. Just invest ___ and ___ into the market if stock prices appear very ___ relative to fundamentals

Foolproof Undervalued or Overvalued Market peak Long time horizon Gradually and Cautiously High

Stocks are ___ investments. Neither dividends nor capital gains are at all ____. Investing in _____, rather than investing in ____ that track the overall stock market, can be particularly ____

Risky Certain INDIVIDUAL STOCKS, rather than investing in WELL-DIVERSIFIED MUTUAL FUNDS Risky

When investing in an individual stock, both the risk of the stock in ____ and the risk of the stock in the ___ of a ___ are important to know about

Isolation Context of a Portfolio

The total risk of a stock can be divided into two components, _____ risk and _____ risk

Market Risk and Firm-Specific Risk

Market risk or ____ risk is the component of a stock's risk that is related to the stock market as ___

Systematic As a Whole

Market risk is the risk associated with _____, including __ and __ in GDP, ____, ____, and ____

General economic conditions Including Ups and Downs in GDP, interest rates, inflation, and exchange rates

The market risk of an individual stock is measured by its ___. ___ measures the general sensitivity of the ___ on a stock to the ____ on the overall ____ The (value-weighted) average stock has a __^ of ___

Beta Beta RETURN on a stock to the RETURN on the overall STOCK MARKET Beta of ONE (1)

If a stock market has a beta of 1, it tends to move __ and __ ____ with the market in percentage terms A beta above 1 indicates a ____, which tends to go __ by more than ___% when the market goes ___ by 1%

UP and DOWN, one-for-one Cyclical stock UP by more than 1%, when the market goes UP by 1%

Stocks with high betas have ___ market risk, and are ____ to stock market fluctuations

High market risk Very sensitive

High beta companies often produce things where purchase can be ___ if economic times are ___, like manufacturers of ______

POSTPONED if economic times are BAD Airplanes, semiconductor equipment, autos, or houses

A beta below 1 indicates a _____ stock, which tends to go __ by less than 1% when the market goes __ by 1% Defensive companies produce things considered _____, like electric power, food, toothpaste, and drugs and beverages

Defensive stock Up Up Day-to-day necessities

It is very rare to have a stock with a ___ beta, a stock which tends to go __ when the overall market falls

Negative Up

Diversifying or dividing your investment among many individual stocks does not ___ beta (market risk): the beta of a portfolio is just the ____ of individual betas So, if you have 2/3 of your money in a stock with a beta of 0.75, and 1/3 of your money in a stock with a beta of 1.5, then the beta for the portfolio is ___

Reduce Weighted-Average 1 (Average of 0.75 at 2/3 and 0.75 at 1/3)

It is important to remember that beta only measures a ____, not an ______. A stock with a beta of 2 will tend to fall by about 4% if the S&P 500 falls by __, but the actual return on the stock could be much higher or lower on any given day

TENDENCY, not an EXACT RELATIONSHIP 2%

Why is beta important for investors (2)?

1. Portfolios concentrated in high beta stocks tend to be riskier than portfolios concentrated in low beta stocks 2. Depending on your market forecast, you may want to tilt your portfolio toward either cyclical (high beta) or defense (low beta) stocks

Portfolios concentrated in ___ beta stocks tend to be riskier than portfolios concentrated in ___ beta stocks Depending on your market forecast, you may want to tilt your portfolio toward either ___ or ___ stocks

High Low Cyclical (high beta) or Defensive (low beta)

Suppose the economy is currently in bad shape with high unemployment. If you expect a major economic recovery, and thus a rally in the stock market, investing in an electric utility stock will not provide much "bang for your buck", because electric utility stocks have ___ betas. Intuitively, the demand for emetic power will not ___ all that much when the economy expands The profits of a hotel company or an airplane, appliance or auto manufacturer will be much more ___ to economic conditions, and hence the stock price of Boeing will tend to ___ more rapidly if the economy and stock market recover

Low Increase Sensitive Rise

Firm-specific risk is the performance of firm's _____, ___ or ___ in research and development (R&D), technological evolution, and changing consumer tastes for specific products

Management Success or Failure

Diversification does ___ the impact of ____ risk on the risk of the overall portfolio

Reduce Firm-specific

Firm-specific risk is there six associated with ___ events, rather than the risk associated with the ____

Firm-Specific events rather than Stock Market as a whole

Diversification reduces ___ without sacrificing expected ___, providing a better tradeoff between ___ and ___

Total risk Return Risk and expected return

With diversification, investors can hold stocks with _____, but still have a low-risk portfolio, because the individual ____ risks largely ___ each other

Substantial firm-specific risks Firm-Specific risks Offset

Individuals probably need at least __ stocks for adequate diversification within the U.S. stock market. It is best to hold more than ___ different stocks. If you diversify among ___ or more stocks, you will be able to reduce _____ to a very low level

30 50 50 or more Firm-specific risk

While brokerage ____ make it very costly for someone with $10,000 to invest to hold 30 or 50 different individual stocks, individuals can obtain a ____ diversified portfolio by investing in ____

Commissions Highly Mutual funds

To stay well diversified, individuals should not keep more than ____ of their portfolio in any one industry. Without special expertise, do not invest too much in stocks in the ___ or the ___ Also, do not limit a portfolio to _____ stocks For additional diversification benefits, include a mix of __ stocks, __ stocks, and ___ stocks, as well as __ and __ in a portfolio

10-15% Industry you work in or region you live in "Famous-name" U.S. stocks Small, large, and international stocks, as well as bonds and real estate

To evaluate the attractiveness of a particular investment, think about how returns from that investment interact with returns from _________. In other words, think about how returns from a __ investment will __ returns from the __ investments you have. Think of your ____, or the present value of future labor income, as on of your ____ investments

Other investments already in the portfolio NEW investment will BALANCE returns from the EXISTING investments Think of your HUMAN CAPITAL, as one of your EXISTING investments

Diversification Example: My current portfolio includes Alphabet, Microsoft, and Apple. If I have enough money to buy another stock, should I purchase Facebook or ExxonMobil? Why?

Probably ExxonMobil Your portfolio is heavily concentrated in technology stocks, so spread your money out across different industries

Diversification Example: Suppose you work for the local electric utility company, and are thinking of buying your company's stock. The company has a good earnings history, and fluctuations in the stock price have been relatively small over time. Is this a good investment? Why?

Probably not If there is a major catastrophe at the company, such as a new invention making solar energy much cheaper than it is now, you will likely both lose money on your investment and lose your job. Your most valuable investment is often your own human capital.

All else equal, choose investments that tend to go __ in situations when your _____ goes down in value

Up in value Human capital goes down in value

Diversifying internationally can provide the same benefits as ___ diversification, lowering ___ without sacrificing ____

Domestic Lowering RISK without sacrificing EXPECTED RETURNS

Historically, international stock returns have been comparable with domestic returns, though have ______ over the ____

Fared well over the past decade

____ markets like South Africa and Brazil are generally more risky than ___ markets like Germany

Emerging Established

Over the ten years ending 6/30/2017, FTSE Developed Asia Pacific index earned ___/year, FTSE Europe earned ___/year, and the FTSE Emerging Markets Index earned ___/year. The S&P 500 earned ____/year over the same period

Asia Pacific: 2.21% Europe: 0.81% Emerging markets: 1.58% S&P 500: 7.18%

For individual countries, returns have been highly ____, with many returns over ___ or below ___ in a single year

Favorable Over 100% or below -50%

Political risk includes outright ____ and ____ of foreign investors

Outright nationalizations and discriminatory treatment

Dollar returns from international investments depend both on the local _____ and the movement of the ____

Currency return and movement of the exchange rate

If the U.S. dollar depreciates against the currency in which you have invested, your dollar return is ____ than the local currency system

Higher

American Depository Receipts (ADRs) represent a certificate of ownership in a _____ that is held in a ___ All dividends are paid in ___ and prices are quoted in ___ The cost of administering the ADR are borne by the shareholder through ________

Foreign firm that is held in a foreign bank Dollars Dollars Slightly-reduced dividend payments

Numerous ADRs trade on the ___ and on ___ ADRs that are listed on the ___, ___, or ___ must meet the listing requirements of their ____, and must provide _____ that are consistent with Generally Accepted Account Principles (GAAP) in the U.S.

NYSE and NASDAQ NYSE, AMEX, or NASDAQ Exchange Financial statements

Many U.S. multinational corporations derive a large percentage of their revenues and earnings from ___ or ___ operations. Thus, these companies participate directly in the performance of _____ economics. Prominent examples include Microsoft, Coca-Cola, Caterpillar, Alphabet, and Boeing

Exports or Overseas operations Overseas

Which countries or regions should you invest in? Factors to consider include the ____ of the country, ____ trends, ____ achievement, ___ and ___ stability, and ___ levels

- LONG-TERM GROWTH RATE of the country - DEMOGRAPHIC trends - EDUCATIONAL achievement - POLITICAL and CURRENCY stability - VALUATION levels

Many countries levy income taxes on ___ and ___ paid to ___ investors. The withholding rate is often __% or __%. The amount of foreign taxes paid is recorded on the annual ____ fro your broker or mutual fund company. Investors receive a tax credit for foreign taxes paid on their _____. If the amount of the credit is less than ___ for single taxpayers, no additional forms (Form 1116) need to be filled out. If you invest in international stocks or bonds in a tax-deferred retirement account, like a 401(k) or IRA, you ______ credit for those foreign taxes paid

DIVIDENDS and INTEREST paid to FOREIGN Investors 10% or 15% 1099 tax form 1040 Tax return $300 You NEVER receive credit

Real Estate Investment Trusts (REITs) are publicly traded companies that ____ and typically ____ commercial real estate. They trade on stock exchanges like regular common stocks. There are also ___ that buy REITS. REITS generally ____ in _____ of the commercial real estate market, like shopping center, apartments, industrial, office, hotels, and health care

BUY and typically MANAGE Mutual funds SPECIALIZE in PARTICULAR SECTOR

REITs must distribute at least ____ of their earnings as ___ to ___, but then can deduct their _____ paid from their ______ in computing corporate income taxes All earnings (or even more) paid as ____ = no ____

90% of their earnings as DIVIDENDS to SHAREHOLDERS Deduct their DIVIDENDS paid from their INCOME All earnings paid as DIVIDENDS = NO CORPORATE INCOME TAXES

REIT dividends do not qualify for the ____ rates that apply to dividends on regular ______, but starting in 2018, REIT investors can deduct ___ of REITs dividends from their ____ income, like other "pass-through" businesses that don't pay ___

Low personal tax rates Common stocks 20% Taxable Corporate tax

REITs tend to have ___ betas and standard deviations, and as such have ___ risk than the average stock Over the past 30 years, REITs have earned solid ____ returns, and provide _____ benefits when combined with a _____. A key indicator for REITs is their ______, if the ____^ is now well below its historical average, it may be a time to ___

Low Lower Risk-adjusted Diversification Stock portfolio Dividend yield Dividend yield Sell

Disadvantages of investing in gold: Gold provides ____, it is not used to ____ while you are ____. Also, gold must be ___ and possibly ____. It isn't free to store gold safely, unlike storage for a __ or __ or a ___ On the plus side, gold provides an _______

Gold provides NO INCOME, it is not used to MAKE OTHER THINGS while you are HOLDING IT Gold must be STORED and possibly INSURED It isn't free to store gold safely, unlike storage for a STOCK or BOND or a BANK ACCOUNT Gold provides an INFLATION HEDGE

Since gold is a ___ asset, as opposed to a ___ asset like a corporate bond, its value will tend to ___ with inflation Often, its price will ____ in anticipation of higher inflation. Since bond and stock prices both tend to ___ when there is anticipation of higher inflation, gold can provide ____ within a portfolio

Real Nominal Increase Increase Fall Diversification benefits

Gold protects against ____. If the U.S. financial system were to fall into a complete panic, with hyperinflation, bankruptcies, and government takeovers of industries, stocks and bonds would ___ sharply in price. In such a scenario, a ___ asset like gold that is easy to conceal and transport (a high value per unit weight and volume) would be a good investment to have. Gold is perhaps the ___ investment of all if your country is invaded, ruled by a totalitarian government, or falls into anarchy

Gold protects against POLITICAL RISK Fall "Real" Gold is perhaps the BEST investment

It is reasonable to expect that the price of gold is ____ by the demands of dictators abroad and their unfortunate subjects. In countries with low ___ and relatively low ___ risk, gold should be a relatively ___ component of your portfolio

Inflated Political Inflation Small

Trading stocks generally requires a _____. For retail investors, there are two informal categories of brokers, ____ brokers, such as Merrill Lynch, Raymond James, or Morgan Stanley, or ____ brokers, such as Charles Schwab, TD Ameritrade, E*Trad, or Fidelity. Their costs and services can differ dramatically

Stockbroker Full-service brokers Discount brokers

Full-Service brokers provide _____ and _____. Some full-service brokers have designations such as Certified Financial Planner (CFP). Full service brokers also often have ___ and ___ specialists on staff to assist clients when needed Full service brokerages have research departments that employ financial analysts. These analysts recommend ___ and __ of specific stocks to the firms' clients based on their ___. For active traders, brokers will notify clients when one for their analysts _____ on a stock, before making the changed recommendation public

Provide GENERAL INVESTMENT ADVICE and SPECIFIC STOCK RECOMMENDATIONS

Sell mutual funds usually load in ____ accounts. Many mutual funds are available directly through the ____ company, but others are sold only through ______ like full-service brokers

Commission-based Mutual fund Investment advisors

_____ brokers charge much higher trading commissions than ____ brokers. Full service commissions are not _____ and are _____ between the customer and broker, but can exceed __% of the dollar value for trades under ____. A trade of 500 shares at $20 per share could easily cost more than $200 at a ___ broker

TRADITIONAL FULL-SERVICE brokers charge much higher trading commissions than DISCOUNT brokers Full service commissions are not PUBLICIZED and are NEGOTIABLE between the customer and broker, but can EXCEED 2% of the dollar value for trades UNDER $10,000 Full-service

Many people are reluctant to pay for investing advice on a "____" basis, so as an alternative, full service brokers that provide advice must get compensated in other ways. Unfortunately, compensating brokers solely through commissions creates an incentive to recommend ____. The more you trade, the more that full-service brokers earn in ____, if if buying and holding is a _____

"By the hour" Active trading Commissions Better long-term strategy

As a response to potential "churning" problems, there is an industry trend toward ______ accounts that do not charge any ____ to trade, or charge much ____ But with an asset management account, the customer pays an ________ of __% or ___. There is a _____ fee on these accounts, usually over ___ per year

There is an industry trend toward ASSET MANAGEMENT accounts that DO NOT charge any COMMISSIONS to trade, or charge much LOWER COMMISSIONS The customer pays an ANNUAL MANAGEMENT FEE of 1% or MORE There is a HEFTY MINIMUM fee on these accounts, usually OVER $1000 per year

Features of Discount Brokers (3):

- Little or no personal investment advice - No propriety research - Commissions

Some discount brokers have websites and/or newsletters that provide ____, but they do not get ____

Provide GENERAL INVESTMENT ADVICE, but why do not get PERSONAL

Discount brokers do not have _____. Some offer ____ from the Wall Street analysis, with ____ available for a fee

Research staffs Summary research reports Detailed reports

For internet trading, commissions for discount brokers range from about $_-_ online per trade, and typically the commission is good for up to __-__ shares at any ____. The commission is higher for orders by ___

$5-$10 1000-5000 shares at any PRICE PER SHARE Commission is higher for orders by PHONE

In summary, only rather ____ individuals should consider using a full-service broker. Full service brokers can provide access to attractive ____ that may not be available to customers of ____. Full service brokers provide ____ updates to their best customers in a timely manner, allowing them to ___ stocks that have been ___ before the stock price fully adjusts to a _____. Realistically, you need to have a significant amount of money available to invest in a single stock, like ____ or more, to make such short-term trading pay off. Finally, full service brokers provide more services to the sophisticated, high net worth investor, like ____ and _____

Wealthy Initial Public Offerings (IPOs) Discount brokers Stock research updates Buy Upgraded Higher level $25,000 Personalized Tax and Estate Planning

Stock exchanges allow investors to trade stocks ____. By providing a forum and standardized mechanisms for trading, trading is more ____. ____ trading makes investments more ____ in the first place, so corporations and government scan raise money on more ___ terms. If an investor knows that there is a functioning financial market with willing buyers and sellers for a particular stock, that stock is a more ___ investment. Without financial markets, it is difficult for corporations to find willing ___, because it is difficult for ___ to __ their positions

Among themselves Convenient Convenient trading Desirable Favorable Desirable Buyers of their stocks Buyers to LIQUIDATE

Another important function of stock exchanges is to _____. Without an actively traded market for a security, it is difficult to establish its ____. Investors unsure of the ____ of their stock are ___ likely to want to trade, for the fear of ____

Establish prices Fair value Value Less Getting ripped off

Financial market prices represent a ____ of the investing public

Consensus opinion

New York Stock Exchange (NYSE) lists most of the __, ___ companies in the U.S. including GE, Exxon, Ford, and JPMorgan Chase. On the NYSE, the vast majority of stock holders are handled ______, but there is also a designated ____ firm that stands ready to buy and sell shares from the public and maintain an ____ market. A stock listed on the NYSE can trade ____, not just on the NYSE

Largest, well-established Electronically Market maker (DMM) Orderly Anywhere

National Association of Securities Dealers Automated Quotation (NASDAQ) trade is handled _____, where multiple ___ in the stock submit and continually update prices at which they are willing to buy and sell. NASDAQ stocks include Microsoft, Intel, and Apple. A stock listed on the NASDAQ can trade ____, not just trade on the NASDAQ

Electronically Dealers Anywhere

CBOE is a leading ______ operator, handling a considerable percentage of trading in both ___ and ___ listed stocks

Electronic exchange NYSE and NASDAQ

Brokers have a fiduciary duty to obtain the best ___ for their customer's ____. Brokers will thus search ______ (and other venues that are not exchanges, such as dark pools) to find the ____ for their clients

Execution Orders Across exchanges Best execution

Over-The-Counter (OTC) are ____, ____ stocks that do not qualify for being listed on the ____ or on ___ and are traded ____ among ___ around the country These stocks are often not very ____, or easy to sell on ____. Some are in bankruptcy and have been delisted from major exchanges. There are some completely legitimate foreign companies that only trade over-the-counter here, because they do not want to bear the ______ for trading on the NYSE or NASDAQ.

Small, obscure NYSE or on NASDAQ Over-the-Counter Dealers Liquid Short notice Costs and disclosure requirements

Regular trading hours are between ___ and ___ eastern time ___ through Friday. Stocks are traded using a unique ____

9:30 a.m. and 4:00 p.m. Monday through Friday Ticker symbol

When you connect online to your broker, you will be quoted a ___ and a ___. The ___ price is the highest price that anyone is bidding to buy your shares. In other words, the bid is the most anyone is willing to pay to ______. The ___ price is the lowest price that anyone is asking to sell shares. In other worse, the ask price is the lowest price anyone is charging to _____. The ___ price is always higher than the ___ price. The difference between the two is known as the ____

Bid price and an Ask price Bid price Buy shares from you Ask price Sell shares to you Ask price is always higher than the Bid price Difference between the two is known as the BID-ASK SPREAD

You will also be quoted a ___ at the ask and ___ at the bid, which is the number of _____ to __ or __ at that ask or bid price. Except for extremely high-priced stocks, ___ is usually at least ____ shares.

Depth Depth Shares available to buy or sell Depth is usually at least 100 shares

As an investor, you can submit orders to buy or sell in multiples of __ shares or _____, in odd lots of fewer than __ shares, or in __ lots of 150 or 236 shares. At most all brokers, commissions on odd or mixed lots are ____ on round lots, so you do not need to restrict yourself to suit a round lot order

100 shares or ROUND LOTS 200 shares or MIXED LOTS Mixed and Round lots are the SAME

In general, large company stocks with high trading volume, low volatility, and a low degree of information asymmetry between insiders and outside investors will have ___ percentage bid-ask spreads and ___ depths. Small, infrequently traded stocks that are not closely followed by Wall Street are ___ liquid

LOW percentage spreads and HIGH depths Less

A market order is an order to buy or sell _____ at the best _____. Most small market buy orders are executed at the quoted __ price. Most market sell orders are executed at the quoted __ price. Sometimes market orders are executed at a price better than the current quote, called ______.

Immediately Available price Ask Bid Price improvement

Suppose Kroger stock has a bid price of 20, and an ask price of 20.07. Depth is 500 shares at the ask, and 800 at the bid. If you buy up to 500 shares at the market, you will pay ____ per share. If you sell up to 800 shares at the market, you will get ___ per share. If you want to buy more than 500 shares, you will probably pay more than ____ for the additional shares above ___

$20.07 per share $20 per share $20.07 500

A large market order can have a big "____", because it signals the trader has ___ and is ___ to trade

"Price impact" Information Eager

A limit order is an order to buy or sell a ____ of shares at a certain _____, known as the _____

Particular number Price or better Limit price

Limit orders are either _____ or ____, sometimes called ___ or ___, or displayed

Immediate or Cancel Fill or Kill

Immediate or Cancel (IOC) orders are either _____, at least in part, or immediately ____.

Immediately filled or immediately cancelled

Displayed orders that are not immediately filled remain ____ for ____. Displayed limit orders have __ and __ priority; they are executed before any other _______ to the other side of the trade, and are executed before any other _____ but that was submitted later

On the books for future execution Price and Time priority Order offering an inferior price Order offering the same price

There are two types of displayed limit orders, a __ order, which is active for only the ____, and a _____ order, which lasts around ____, depending on the broker

Day order Day the order is place Good-till-cancelled order 60 days

The most important disadvantage to limit orders is that you may never _____ A second disadvantage is that if someone submits a market buy order for less than the number of shares you specify, the order is ____

Get your order filled Only partially filled

You only have to pay one commission if your order is ____ within the same ____, but a second commission is charged if a ____ order is filled on a ___ day

FILLED within the same TRADING DAY Good-Until-Canceled order is filled on a SUBSEQUENT day

To avoid partially filled limited orders, you can submit an ____ order, requiring that the order must be ____ or ____ However, ____ orders have "____" on the exchange, so might not be executed even if the stock falls below the ____ or goes above the ____

All-or-None order Filled in total or not at all All-or-None orders have "No standing" Below the specified limit buy price or goes above the limit sell price

Brokers charge commissions on limit orders if the order is ______. If a trade never takes place, there is ____

At least partially filled No commission

During the trading day, if an investor submits a limit buyer order at a price ___ the current ask price, then at least ___ of the order (the ask depth) will be filled ___ at the __ price. With a limit order to sell ___ the current bid price, at least some of the order (the bid depth) will be filled immediately at the ___ price These types of orders are sometimes called _____ order

Above Some Immediately at the ask price Below Bid Marketable limit

With a market order, execution is ____, so you are sure that purchase or sale will ______ while market is open

Immediate Be made within seconds

With a limit order, you can often get a ____ than with a market order, but have the uncertainty that ______, or you can't buy as much as your wanted at the ___ price and end up paying extra ____

Better price Your order may never get filled Limit Commissions

Submit a ___ order when you really want to buy or sell a small quantity in a hurry, when you think the price will go up quickly (if you are buying) or down quickly (if your are selling). Submit a ___ order when you are not as anxious to buy or sell, or when the spread is very wide

Market Limit

As a practical matter, if you are eager to buy a stock that has a very wide spread, try submitting a ____ order at a price a little bit ___ the ask price

Limit buy Below

The discount broker receives a "_____" to send the order to a particular dealer, and the dealer executes the order at a price that is _____ than available available on an exchange

"Payment for order flow" Good or often slightly better

Why is the dealer willing to give a slightly better price to the retail investor, and also pay the discount broker for the order flow?

Dealers make money from buying at the bid and then selling at the higher ask price. But dealers lose money when they buy at the bid, and then the stock price drops, so the new ask falls below what they just paid. Similarly, dealers lose money when they sell at the risk, and then the stock price rises to the new bid is above what they just received

The vast majority of retail investors using discount brokers are "____" investors, people that really do not have ____ about the true value of the stock. So dealers will give a slightly tigehter bid ask spread, and pay for order flow, to trade with (probably) ______

"Uninformed" Information Uniformed investors

A stop-loss order is an order to sell at the market if the ___ price reaches or falls below a particular ____ price. It is an order to "____" of the stock before your losses get too high, or your paper profit _____. Unless and until the _____ price of the stock reaches the ____ price, nothing happens and no ____ is paid to the ___

Bid Stop-loss "Bail out" Disappears Market Stop-loss Commission is paid to the broker

A stop-loss price is not a ____ price, but acts only as a ___ to ___ if the stock hits that price

Guaranteed Trigger to sell

If you really can't afford to have the price of a particular stock ______, put in a stop-loss order. Otherwise, don't bother with them. You may end up selling a stock ____ that you really like for the _____. If you sell and then buy back the same stock later, you have paid ____ and ____. Selling stocks after a drop in price is usually a bad strategy for the ____ investor, unless fundamentals have taken a major turn for the worse. Placing stop-loss orders "____" the questionable strategy of selling after a price ___

Fall below a specific level Prematurely Long-term Two extra commissions and bid-ask spreads Long-term "Automates" Decline

If you place a market order when the stock exchange is closed, your trade will be executed at the __ price shortly after ___ eastern time. However, you are not guaranteed ____.

Open 9:30 a.m. Any particular price

All orders submitted before ___ eastern time stocks should receive the ____ price if executed. The ___ price is a result of an auction process, and is the same for buyers and sellers; there is no ____ when trading at the open

9:15 a.m. Opening Opening Bid-ask spread

Both the NYSE and NASDAQ have auctions at the close of trading each day, similar to the auction at the open of trading each day. Investors can specify that their order must be place in the ___ auction, either ____ or ____. Trades at the close do not pay a ____, as both buyers and sellers transact at the same ___ price

Closing Market-on-close or Limit-on-close (MOC or LOC) Bid-ask spread Closing

Some brokers allow _____ trading for ___ investors. Individuals should be cautious about ____ trading, because liquidity is ___ for all but the ___ company stocks. Do not submit ___ orders for execution during extended-hours trading, only us ___ orders.

Extended-hours Individual Extended-hours Poor Largest Limit

A limit order that is not displayed to market participants. These orders have time priority at same price

Hidden orders

A limit order that is partially displayed and partially hidden. The displayed portion is replenished when the displayed portion is executed. Also called an '___' order

Reserve order 'Iceberg' order

An order that has a displayed limit price and a hidden ____ range (above for a buy order, below for a sell order)

Discretionary order Discretionary

Regular brokerage accounts are often call _____, because all stock purchase must be paid for in ____

Cash accounts Full with cash

If you have a specific kind of brokerage account called a ______, you are allowed to borrow a part of your investment from your broker

Margin account

Margin Account: The Federal Reserve Board sets a maximum of ___% of the purchase price of a stock that can be borrowed, called the ____ requirement Many brokers will set stricter limits than this, especially for "___" accounts, where the investor has only a few stocks in the account and as such is poorly ____

50% Initial margin "Concentrated" Diversified

Investors must have at least $____ in account equity to buy on margin. Stocks selling for less than $__ per share cannot be bought on margin at most broekrs

$2000 $3

The ___ in your ___ account serve as collateral for a margin loan. Margin loans have no specified ____. The loan can be kept as long as maintenance margin requirements are ___

Securities Margin Maturity date Satisfied

For large traders, the interest rate on a margin loan is usually a small markup of __% to __% over the ____ rate

1/2% to 2% over the CALL MONEY rate

The call money rate, published daily in the WSJ, is the rate banks charge to brokers to ____, and is usually a couple percentage points ___ the interest rate on Treasury Bills

Borrow money Above

Margin interest rates vary from broker to broker, and usually varies based on the _____, with ____ getting lower rates Small retail borrowers usually pay ____ the call money rate If you want to buy stocks on margin frequently, find a broker that offers a ____

Size of the loan Larger loans Several points above Low interest rate

For tax-payers that _____, margin loan interest is tax-deductible up to ____ for the year, where ____ is defined as interest, REIT ____, ___ income, and short-term _____

Itemize deductions Investment income Dividends Annuity Capital gains

Rate of return = ( _____ + ____ - ( ___ + ___) - _____ )/ ____

Rate of return = ( Ending value of stock + dividends - (Loan + Interest) - Intitial Equity Investment ) / Initial Equity Investment

_____ of stock = ending value of all ____

Ending value Shares held

Initial Equity Investment =

Amount of your own money initially invested

According to FINRA industry regulations, the amount of equity in margin accounts must be at least __% of the current __ value of all stocks that are '___' (owned) in the account but are usually at least ___% or ___%

25% Market 'Long' 30% or 35%

A maintenance margin requirement of __% is violated if the loan balance including ___ exceeds __% of the value of the ___ assets in the account The first thing that most brokers will do is give the customer a ____, asking the customer to _____ into the account immediately to _____

35% Interest 65% Long Margin call Deposit more money Pay back part of the loan

If a customer ignores a margin call, what happens?

The broker will sell stock and use the proceeds to repay the loan plus interest They are permitted to sell any stock in your account without notification and might decide to sell a stock you would have rather kept and keep on your would have sold

Short selling is an investment strategy that earns a profit if the ___ price goes ___, not __. In order to be allowed to short sell a stock, you must have a ___ with your broker. To short sell, you first ____ shares from your broker, immediately ____ in the market, and then ____ at a later date to return ____ If the stock price goes ___, you can make a profit. If the price goes ___, you still must _____, and you ____.

Stock Down Up Margin account Borrow Sell them Buy them back If the stock price goes DOWN, you can make a profit. If the price goes UP, you still must BUY BACK THE SHARES YOU BORROWED, and you LOSE MONEY

Short Sales: Now (3): Later (3):

Now: - Borrow stock form your broker - Sell it immediately - Collect cash, which must stay with broker Later: - Buy stock in the market - Pay cash to do so - Return stock to your broker

Where does the broker get the stock to lend out in Short Sales? (4):

- Margin accounts of other investors at the broker - Mutual funds - Pension funds - Other institutional investors

Brokers require an initial margin deposit of __% of the value of the ____ (set by the Federal Reserve). After that, FINRA requires that you must maintain account equity of at least __% of the value of the ____. This means that the amount of cash in the account must remain at least ___% of the value of the ___

50% Stock shorted 30% Stock shorted 130% Shorted stock

What happens if there is a shareholder vote and two different people think they own the same 100 shares?

If there is a close vote on a merger or a proxy fight, the investor buying the shares from the short seller will get the vote. The stock lender will have to "call in" the short sale to get their shares back if they want to vote

Suppose you short sell 200 shares at $50/share, yielding $10,000. What is your profit or loss if the stock (a) declines to $25, or (b) increases to $75? Suppose the stock doesn't pay dividends If the stock falls to $25, you can buy ___ shares back for $____ and return them to your broker. Ignoring commissions, you have ____. If the stock rises to $75, you can buy back ___ shares for $___ and return them to your broke. Ignoring commissions, you have ___

200 shares $5,000 $5,000 profit 200 shares $15,000 $5,000 loss

Suppose you short 300 shares at $30 each, and deposit $4500 cash in initial margin. If the broker requires 30% maintenance margin, if the stock rises to $35, will you get a margin call? Liability is now ___ Total cash in account __ Equity ___ Ratio ____ Margin call? If so, how much?

Liability = $35(300) = $10500 Total cash in account = 13500 Equity = 13500 - 10500 = $3000 Ratio = 3000/10500 = 28.6% Margin call of $150 to get cash in account up to 130% of liability

For short sales of stock, FINRA industry rules require that account equity must always be maintained at $__ per share or more for stocks trading below $___ per share, at least ___% of current market value for stocks trading between $___ and $___ per share, and at least ___% of the current market value for stocks trading for more than $___ per share

$2.50 Below $2.50 per share 100% $2.50-$5.00 per share 30% More than $5.00 per share

Stop orders can be entered to provide some ____ for ___ sellers. A buy stop order directs the broker to buy the stock at the ___ if the __ price equal or exceeds the __ price

Loss protection Market Ask Stop

Short interest is the number of a company's ___ that have been sold ___. Short interested can be compared across stocks by calculating ____ divided by ____, or short interest divided by ___

Shares Short Short interest rates divided by shares outstanding Float

Float is ____ minus ____

Total shares outstanding minus shares held by corporate insiders

Since shorting a stock is __ and __, sophisticated investors won't do it unless they strongly believe that the stock will ___.

Costly and risky Fall

Stocks with relatively ____ interest tend to underperform stocks with relatively ___ interest in ___ months

High short Low short Subsequent

Historically, stocks tend to go __, so on average, short sellers probably will ___ money. Retail investors do not earn __ on the __ of short sales. Spend your time searching for ____ stocks to buy, not searching for ___ stocks to ___

Up Lose Interest Proceeds Undervalued Overvalued Short sell

When you buy a stock with cash , your maximum loss is limited to your ___. When you short sell a stock, there is _____. If the stock price keeps going up, and you continue to put more money in to your account to _____, you lose more and more money

Initial investment No limit on potential loss Satisfy margin calls

Insider Trading: Legal: When corporate insiders buy and sell stock in ____. When corporate insiders trade in their own securities, they must ____. Illegal: Buying or selling a security in ____ of a ____ or other relationship of trust and confidence, while in possession of _____. Insider trading violations may also include "___" such information, securities trading by the person "___" and securities trading by those who misappropriate such information

Legal: Their own companies Report their trades to the SEC within two business days Illegal: Breach of a Fiduciary While in possession of material, nonpublic information about the security "Tipping" "Tipped"