Investments Flashcards
Increase in Money Supply
Buying securities increase money supply and adds liquidity to the economy
Decrease in Money Supply
Selling securities decreases money supply and reduces liquidity in
the economy
Equity Security Definition
A stock (equity) is a form of security that indicates the holder has proportionate ownership in the issuing corporation.
Listed Stock Definition
Stocks are bought and sold predominantly on stock exchange though there can be private sales as well, and they are the foundation of nearly every portfolio.
PE Ratio Definition
- Price/Earnings
• One of the most popular valuation measures is the price/earnings ratio, or P/E.
• The P/E is the price of a stock divided by its earnings per share (EPS) from the trailing four quarters.
• As an example, a stock trading for $15 per share with earnings of $1 per share during the past year has a P/E of 15.
• The P/E ratio gives a rough idea of the price investors are paying for a stock relative to its underlying earnings
• Formula:
•P/E = (Stock Price) / EPS
Business Cycle Stages
• Four Phases
• Peak - GDP reaches its maximum level for cycle
• Recession -GDP is declining
• Trough -GDP reaches its minimum level for cycle
• Expansion -GDP is rising
Peak
Peak -GDP reaches its maximum level for cycle
Recession
Recession -GDP is declining
Trough
Trough -GDP reaches its minimum level for cycle
Expansion
Expansion -GDP is rising
Federal Reserve-Monetary Policy
Monetary Policy - the Federal Reserve alters the money supply and interest rates in an attempt to affect the economy
Federal Reserve Monetary Policy Tools
§ = Tools
\ • Money supply
Buying securities increase money supply and adds liquidity to the economy
Selling securities decreases money supply and reduces liquidity in the economy
> • Interest rates (2-key)
• Discount Rate
Fed Funds Rate
4 • Reserves - percentage of demand deposits that a bank must keer in non-earning assets_either in it’s vault or at its district Federal
Reserve Bank
* Margin Borrowing Rate
• Consumer Credit Rates
• Moral suasion
Federal Reserve Easy Money Policy
Easy/Accommodating - to achieve an easy money policy and stimulate the economy the Fed can:
* Buy securities
• Reduce interest rates
* Reduce reserve requirement
• Reduce margin lending rate
• Lowering rates in U.S. relative to other countries weakens the U.S.$
Federal Reserve Tight Money Policies
Monetary Policy
• Tight/Restrictive - to achieve a tight money policy and slow the economy the Fed can:
• Sell securities
• Increase interest rates
• Increase reserve requirement
* Increase margin lending rate
• Raising rates in U.S. relative to other countries strengthens the
U.S.$
Fiscal Policy Examples
Fiscal Policy -government’s use of taxes and spending to
achieve economic and social goals
• Spending
• Social security
• Defense and homeland security
• Medicare
• Education, roads, welfare, research, etc.
• President & Congress
