Investments Class Flashcards
Return
buy an asset of any type, your gain (or loss) from that investment
2 components of return
First, you may receive
some cash directly while you own the investment. Second, the value of the asset you purchase
may change. In this case, you have a capital gain or capital loss on your investment
Total Dollar Return
sum of the dividend income and the capital gain (or loss): Total dollar return = Dividend income + Capital gain (or loss)
dividend yield
The annual stock dividend as a percentage of the initial stock price.
Dividend yield = Dt / Pt
Capital Gains Yield
change in the price during the year (the capital gain) divided by the beginning
price.
effective annual return (EAR)
The return on an investment
expressed on a per-year, or
“annualized,” basis.
1 + EAR = (1 + holding period percentage return) ^m
total market capitalization (or market
“cap” for short)
its stock price multiplied by the number of shares of stock.
risk-free rate
The rate of return on a riskless
investment.
risk premium
The extra return on a risky asset
over the risk-free rate; the reward
for bearing risk.
investment policy statement, or IPS,
divided into two sections: objectives
and constraints. In thinking about investor objectives, the most fundamental question is: Why
invest at all?
investment horizon
planned life of the investment
liquidity
high degree of liquidity is one that can be
sold quickly without a significant price concession. One part of liquidity is the ease with which an asset can be
sold. The other part is how much you have to lower the price to sell the asset quickly.
market timing
Buying and selling in anticipation of the overall direction of a market. you might move money into the stock market when you think stock prices will rise. Or you might move money out of the stock market when you think stock prices will fall.
asset allocation
The distribution of investment funds among broad classes of assets.
thumb of rule in asset allocation
one of the simplest being to split the portfolio into 60 percent stocks and 40 percent bonds.
Equity precentage is your age minus 100 or 120
security selection
Selection of specifi c securities within a particular class.
Active
You actively vary your holding per class. You keep changing partiular stocks.
Passive
seldom change asset allocations and you might just acquire a diverse group of small
stocks, perhaps by buying a mutual fund
deep-discount broker
only services provided are account maintenance
and order execution—that is, buying and selling.
full-service broker
investment advice regarding the
types of securities and investment strategies that might be appropriate for you to consider
brokerage fi rms do extensive research on individual companies and securities
and maintain lists of recommended
Discount brokers
offering more investment counseling than the deep-discounters and lower commissions
or fees than the full-service brokers
Federal Deposit Insurance Corporation, or FDIC
protects money deposited into bank accounts during bank failure
Securities Investor Protection Corporation (SIPC)
Insurance fund covering investors’ brokerage accounts with member firms. restore funds to investors who have securities in the hands of bankrupt or
financially troubled brokerage firms.
cash accounts
A brokerage account in which all
transactions are made on a strictly
cash basis.
margin accounts
subject to limits, purchase securities on credit using
money loaned to you by your broker.
call money rate
The interest rate brokers pay to
borrow bank funds for lending to
customer margin accounts
spread
additional interest you pay depending on your broker and the size of the loan
margin
The portion of the value of an
investment that is not borrowed.
initial margin
The minimum margin that must be
supplied on a securities purchase.
own cash amt = im * total order
maintenance margin or house margin
The minimum margin that must
be present at all times in a margin account.
margin call
A demand for more funds that
occurs when the margin in
an account drops below the
maintenance margin.
critical price
the lowest price before you get a margin call
hypothecation
Pledging securities as collateral
against a loan.
street name
An arrangement under which a broker is the registered owner of a security.
Roth individual retirement account (Roth IRA)
With the first type, you pay taxes today on money you earn. If you then invest these aftertax dollars in a retirement savings account, you pay no taxes at all when you take the money out later. This means that
dividends, interest, and capital gains are not taxed, which is a big break.
long position
An investor who buys and owns shares of stock
An investor with a long position will make money if the price of the stock increases and lose money if it goes down. In other words, a long investor hopes that the price
will increase.
short sale
A sale in which the seller does
not actually own the security that is sold
short position
selling stock and hoping price will drop
What happens to margin when stock price drops?
Margin = total order - loan/ ( #shares * price)
So high price means margin will drop
Classification of Financial Assets
interest-bearing, equities, derivatives
money market
instruments
- They are essentially IOUs sold by large corporations or governments to borrow money.
- They mature in less than one year from the time they are sold, meaning that the loan
must be repaid within one year.
fi xed-income securities
lives that exceed 12 months at the time they are issued.
PREFERRED STOCK
the dividend on a preferred share is usually fi xed at some amount
primary asset
Security originally sold by a
business or government to
raise money. Thus, stocks and
bonds are primary fi nancial assets.
derivative asset
A fi nancial asset that is derived from an existing traded asset rather than issued by a business or government to raise capital. More generally, any fi nancial asset that is not a primary asset.
futures contract
An agreement made today
regarding the terms of a trade
that will take place later.
option contract
An agreement that gives the owner
the right, but not the obligation, to
buy or sell a specific asset at a specified price for a set period of time.
call option
An option that gives the owner the
right, but not the obligation, to buy
an asset.
put option
An option that gives the owner the
right, but not the obligation, to sell
an asset.
option premium
The price you pay to buy an option.
strike price
The price specifi ed in an option contract at which the underlying asset can be bought (for a call option) or sold (for a put option). Also called the striking price or exercise price.
bid price
The bid price is the price you will receive if you want to sell an option at the prevailing market price;
ask price
the ask price is the price you will pay if you
want to buy an option at the prevailing market price.
In bond quote, bond prices are
Percentage of face value
If ytm > coupon then bond is selling at
At discount
If ytm < coupon then bond is selling at
Premium
Ytm =coupon rate then bond is selling at
Par
For bonds spread is the difference
And it is measured in
Yield and risk less yield
Measured in basis points
Basis points
1/100 of 1%
Or .0001
10 bps is what percentage
.10%
150 bps is what percentage?
1.50%
Current yield
Annual coupon / current price
From bond quote how to calculate dividend yield
Annualized div / closed price
Or last qrt price *4 / closed price
Annualized PE
Price / Sum of the last 4 EPS
EPS
NI / #shares outstanding
3.57%
Convert bps
357 bps
9.73%
Convert bps
973 bps
Variance
Sum of Return minus avg return then square it
Then divide all by n-1
Standard deviation
Measure of variability
Coefficient of variance
Standard deviation
What do u do when u get a margin call
Sell securities or add money
