FUNDAMENTALS Flashcards
SECURITY REGULATIONS
1933 — regulate issuance of new securities
—requires prospectus delivery
1934 — Regulates secondary market and trading
— Created SEC for compliance
1940 — SEC must regulate investment companies
— companies: open, closed, UIT
1940 — Investment advisors must register with SEC or state
1970 — SIPC to protect investors from firm failures
1988 — Defines and prohibits Insider Trading
INVESTMENT ORDERS
Market — timing and speed more important than price, appropriate for NOT thinly traded
Limit — Price more important than timing, appropriate for extremely volatile
Stop — price hits point and turns into Market Order, could be sold for less because of market order
Stop Limit or Stop Loss — Investor sets 2 prices: 1. Stop loss, after reached, then limit order
2. Limit price—investor won’t sell below
INVESTING TECHNIQUES
Short-Selling — selling first at higher price in hopes of buying back at lower price
Sell High, Buy Low; must have a margin account; no time limit; dividends covered by short seller—-Investor can borrow shares from another, sell at a high price, buy back at a lower price, then return to original owner.
Margin — Initial Margin is the amount of equity an investor must contribute, normal = 50%
Maintenance Margin — minimum amount of equity required before margin call
Margin Position — current equity position of investor
Margin Call = Loan/1 - Maintenance Margin
RESEARCH REPORTS:
VALUE LINE: Ranks stocks 1 - 5 (1 is high, means buy)
MORNINGSTAR: Ranks Mutual Funds 1 - 5 (5 is high)
DIVIDEND DATES
EX-Dividend Date — The date on which the stock trades WITHOUT dividend
If you buy on XDiv date, you get no dividend—must buy it at least one day before
DATE of RECORD — Date on which you must be registered shareholder to receive dividend
One business day AFTER XDiv date
KINDS OF DIVIDENDS
CASH — taxed as capital gains
STOCK — taxed at sale
STOCK SPLITS — 2 for 1, 3 for 2, 4 for 1 like Apple is currently doing!
MONEY MARKET SECURITIES
Treasury Bills (up to 52 weeks; $100 denom, direct up to $5mil
Commercial Paper — short term loans between corps, maturities of 270 days or fewer
No registration with SEC; denom of $100k, sold at discount
Bankers Acceptance — facilitates imports/exports; 9 months or less maturities; held or traded
Eurodollars — Deposits in foreign banks denominated in US dollarsINVESTMENT POLICY STATEMENT
RR TT LLU
Risk, Return, Taxes, Time-line, Liquidity, Legal and Unique Circumstances
MARKETS!!
DJIA — simple price-weighted average (does not incorporate market capitalization)
S&P 500 — value-weighted index (DOES incorporate market cap)
RUSSELL 2000 — value-weighted of the smallest market cap stocks in the Russell 3000
WILSHIRE 5000 — broadest value-weighted index, measures performance of 3000+ stocks
EAFE — value-weighted index that tracks stocks in Europe, Australasia and Far East
TRADITIONAL vs BEHAVIORAL FINANCE
TRADITIONAL: 1. Investors are Rational. 2. Markets are Efficient. 3. Mean-Variance Portfolio Theory Governs (investors choose by evaluating mean returns and variance for entire portfolios). 4. Returns are determined by Risk (CAPM-theory that links return and risk
BEHAVIORAL: 1. Investors are Normal. 2. Markets are NOT efficient. 3. Behavioral Portfolio Theory Governs (investors segregate money into various mental accounting layers). 4. Risk alone does NOT determine Returns (Behavioral Asset Pricing Model determines expected returns using Beta, Book to Market Ratios, Market Cap Ratios, Stock Momentum, Investors’ likes and dislikes, social responsibility, status, and more
BEHAVIORAL FINANCE BIASES and HEURISTICS
Affect Heuristic — tendency to judge something good or bad
Anchoring — attaching thoughts to a reference point (even if it is not pertinent)
Availability Heuristic — rely on knowledge readily available in memory
Bounded Rationality — rationality is limited to available info, cognitive limitations, time available
Confirmation Bias — tendency to filter info and concentrate on finding proof of beliefs
Cognitive Dissonance — to misinterpret info that is contrary to existing opinion, or ignore other info
Disposition Effect — Regret Avoidance—hold on to purchase prices to mark value
Familiarity Bias — overestimate risk of unfamiliar (and reverse)
Gambler’s Fallacy — Guessing that a stock’s success will stop based on hunch
Herding — follow the (Buy High, Sell Low)
Hindsight Bias — the belief that future can be predicted because past can be explained
Illusion of Control Bias — overestimate ability to control events
Overconfidence Bias — investor listens mostly to himself
Overreaction —
Prospect Theory — people value NOT losing MORE than gaining
Recency — too much weight to recent observations
Similarity Heuristic — decisions based on similar situations that may not be related
Naïve diversification — invest a little bit in EVERYTHING
Representativeness — good company = good investment
Familiarity — familiar company = good company (Enron, ugh)
