Fundamentals of Investments Flashcards
Forms of underwriting
Best efforts
Firm Comittment
Best efforts underwriting - what does the underwriter agree to do and who takes on the risk
underwriter agrees tzio sell as much of the offering as possible.
risk of the issue not selling resides with the firm because any shares not sold to the public are returned to the company.
Firm Comittment underwriting - what does the underwriter agree to do and who takes on the risk
underwriter agrees to buy the entire issuance of stock from the company. They make their money on the spread between the price they buy the stock from the company and the price they take the company public
risk that an issuance may not sell resides with the underwriter.
What are the key documents & what do they mean
Prospectus - outlines risk, mgt team, operations, fees, and expenses. May be issued to by an investment company prior to selling shares
Red Herring - Preliminary prospectus issued before the SEC approves of the investment to determine investor interest
10k & 10q - Financial statements filed with the SEC. 10-k is annual & audited, 10-q is quarterly and not audited
Annual Report - message from chairmen of the board on progress of last year and outlook of next year. Sent directly to shareholders
Types of Orders
Market order
Limit order
Stop order
stop loss limit order
Market order - when to use
Timing and speed of execution are more important than price
appropriate for stocks that aren’t thinly traded
limit order
price at which the trade is executed is more important than the timing
appropriate for stocks that are very volatile and non frequently traded
Stop Order & Stop order to sell & risk associated
Price hits certain level and turns to a market order
Stop order to sell - once stop order price is reached the stock is sold at that price or possibly less because it has become a market order
Risk - investor may receive significantly less than anticipated if the market is moving too quickly
Stop-loss limit order - Risk & When to use
investor sets two prices
1. stop loss price, once price is reached the order turns into a market order
2. limit price, an investor will not sell below this price
Risk - market moves quickly the order may not fill and the investor will be left with the stock at a significantly lower price
When to use - investors with significant gain built into the stock, but many not want to sell the stock during a period of significant volatility based on short term news
what is the initial margin
amount of equity an investor must contribute to enter into a margin transaction
what is the initial margin established by the fed and what regulation is it
initial margin at 50%
Regulation T
maintenance margin definition
min amount of equity required before a margin call
Margin position formula
Margin position= Equity / FMV
Equity = FMV / Loan
Loan = (1-initial margin)
Margin Call Definition & Formula
Price at which an investor will receive and margin call
Loan / (1 - Maintenance Margin)
Types of research reports
Value Line
Morningstar
