PART 4 ECONOMICS Flashcards
Measured by gdp growth and track by the different phases of the business cycle
Economic growth
This is also influenced by economic growth
Corporate earnings growth
Quantity of money or money supply is the major determinant of price levels
Well controlled slowly increasing money supply will have the most positive impact on the health of the economy
Monetarist economic theory
Maintain economic stability by controlling money supply
Avoid overheating and depression
Central bank
Currency in the circulation and demand deposits
M1
Narrow money
M1 + savings accounts and time deposits
M2 broad money
M2 + assets and liabilities of financial institutions
M3 domestic liquidity
What business cycle:
Overheating of investment and production
Very low unemployment
Over expansion and overproduction funded by debts
Peaks
What business cycle phase:
Investment and production flatten
High unemployment
Minimal debts
Trough
Economy can sometimes operate below potential output
Takes place when demand for good is insufficient
Sometimes no strong automatic mechanism moves output and employment towards full employment levels
Keynesian theory
What theory is the example below
Government policies could be used to increase demand
- cut interest rates
- pump priming of the economy
- investment in infrastructure
Economy to avoid depression
Keynesian theory
Economic growth by lowering barriers for people to produce goods and services
Reduce taxes reduce regulation
Supply side economic theory
Analysis of past market data to estimate future price
Believes that prices are affected by numerous factors
Aside from fundamental factors prices are affected by psychology and sentiment of investors
Technical analysis
Rising volumes
More advancers than declineers
Shares are trending higher above the moving average
The reverse would indicate a bearish market
Characteristics of bullish market
Theories against technical analysis
Efficient market hypothesis
Market is information efficient
Market reflects all available information
No one can consistently achieve excess returns above market average
Prices follow a “random walk”
Study of past price action is useless
Efficient market hypothesis
New issues of bonds preferred stock or common stock are sold by government municipalities and companies to acquire new capital
Example
T bills
Municipal bond issues
IPOs
Primary market
Permit reading in outstanding issues
Provide liquidity for security issued in the primary market
Usually conducted in an exchange or a centralized market for secondary trading of stocks bond and other securities
Example
PSE
NYSE
HK stock exchange
Secondary market
Involves dealers and brokers who trade shares that are listed on an exchange away from the exchange
Also referred to as over the counter or otc trading
Third market
Direct trading of securities without broker intermediation
Fourth market
Action or order driven
Centralized: orders match by a facilitating agent
Execution at one price
Use for the opening or during resumption after trading is suspended
Call market
Dealer or quote driven
Decentralized: numerous dealers provide liquidity
Trades occur at any time market is open
Continuous market
Order driven auction markets
Tokyo stock exchange
Paris boures
Quote driven dealer markets
Nasdaq
London stock exchange
Combination ordered driven action market and quote driven dealer market
Frankfurt stock exchange
Buys and sell securities for account of others
Brokers
Buys and sells securities for his own account
Dealer
Also called specialist
Provides liquidity to the market by posting both bid and as prices for certain issues
Acts as both brokers and dealer
Market maker
Used to measure the average performance of a group of securities
Index
Judge the performance of investment managers
Benchmark
Perform research on effect of macroeconomic factors on security prices and to compare risk adjusted performance of alternative asset classes
Index
Perform technical and fundamental analysis of the entire class of assets
Index
Serve as the market portfolio for measuring beta and systematic risk
Index
Types of indices
Price (weighted averages)
Market value (weighted indices)
Equal weighted indices
Influence on small capitalization = large capitalizations
Appropriate benchmark for portfolio with equal dollar amount invested in each of several stocks
Employed by many individual investors
Unlike the others, cannot be used for buy and hold strategy
Equal weighted indices
Indices in the same country are
Highly correlated
Correlation of indices
Indices in the same country are highly correlated
There may be some difference in performance between large and small companies
Less correlation between indexes of different national indexes
Arithmetic mean of current prices
Price - weighted averages
Sum of the market value of all stocks
Market value - weighted indices
Compute day to day percentage price change for each security in the index and then averaging the results
Equal weighted indices
Risk of global investing
Currency risk
Country risk
Geographic risk
Regional risk
Measures how much a company earns on top of cost to produce goods
Gross profit margin
Gross profit margin is equals to
Gross profit/ Net Sales
Measures how much a company earns on top of cost to produce goods and cost to conduct day to day operations
Operating profit margin
Operating profit margin is equal to
Operating profit/ net sales
Measures how much a company earns on top of all costs
Net profit margin
Net profit margin is equal to
Net profit/ net sales
Measures how much return the company generated on the capital of common shareholders
Return on common equity
Return on common equity is equal to
Net income - preferred dividends/
Average common equity
What are the profitable ratios
Gross profit margin
Operating profit margin
Net profit margin
Return on common equity
What are the activity ratios
Inventory turnover
Days inventory
Receivable turnover
Average collection period
Inventory turnover is equal to
Cost of goods sold/ average inventory
Days inventory is equal to
365 days/ inventory turnover
Receivables turnover is equal to
Sales/ average receivable
Average collection period is equal to
365/ receivable turnover
Measures ability to meet short term obligations
Liquidity ratios
Networking capital is equal to
Current asset - current liabilities
Current ratio is equal to
Current assets/ current liabilities
Quick ratio is equal to
Caution equivalents + receivables/
Current liabilities
Cash ratio is equal to
Cash & equivalents/ current liabilities
What are the liquidity ratios
Networking capital
Current ratio
Quick ratio
Cash ratio
Measures a company’s financial leverage and risk
Coverage ratio
Depth to equity ratio is equal to
Total liabilities/ total equity
Times interest earned is equal to
Earnings before interest and tax/ interest
What are the coverage ratios
Debt to equity ratio
Times interest earned
What coverage ratio ratio is the lower the less risky
Debt to equity ratio
What coverage ratio is the higher the better
Times interest earned
Factors affecting the portfolio of individual investors
Dependence
Age
Financial resources
Risk tolerance
Types of investments
Income characteristics
Temperament
Taxation
Ability to supervise investment
Understanding the institutional investor
High liquidity requirement
Invest insecurities that offers lightly higher turns that saving account t bills time deposit
Corporation
Understanding the institutional investor
Generally have long time horizon
Invested in a wider array of investment products
Pension or retirement fund
Understanding the institutional investors
France available for investment have cost example, interest and deposits, reserve requirements
Invest on the basis of spreads
High liquidity requirements
Banks
Understand the institutional investor
Classic lt investor
Minimal liquidity requirements
Invest in a diversified pool of investments
Insurance companies
Understanding the institutional investor
Investment objectives and policies dictate return expectations, liquidity requirements and diversity of investment
Investment companies
Understanding the institutional investors
Reduce risk
Much financial goals with appropriate investment product
Rationale
Types of diversification
By asset class
By industry
By tenor
Biogeography
When supply and demand are equal
Equilibrium
What are the economic indicators
Gross domestic products
Gross national products
Indicator of general level of prices by measuring changes in the prices, using a specified year as the base year
Cpi or consumer price index
Economic condition characterized by a continuing rise in the general level of prices of goods and services
Inflation
Opposite of inflation and is therefore a period of declining prices of goods and services
Deflation
Explains how individuals and economies aim to gain optimal satisfaction in dealing with scarcity
Utility
Total volume of currency in circulation at a particular point in time
Money supply
Represents the output of goods and services produced within the geographic borders of the philippines in any given year
Gross domestic product
Represents the total value of goods and services produced by philippine nationals in a given year
Gross national products
The additional satisfaction or amount of utility gained from each extra unit of consumption
Marginal utility
All the total utility usually increases as more of a good is consumed, marginal utility usually decreases with each additional increase in the consumption of a good
Law of diminishing marginal utility
The degree to which a demand or supply curve reacts to a change in price is the curves?
Elasticity
If the elasticity is greater or equal to one
Elastic
If the elasticity is less than or equal to 1
Inelastic
Inverse relationship between the price of good and the amount demanded
Higher price other things constant quantity demanded will decrease
Law of demand
How much quantity of a product or service is desired by buyers at a certain price
Demand
The relationship between the price of a good and the amount of it offered for sale
Higher price other things constant will increase the producers incentive to supply the good
Law of supply
How much the market can offer when receiving a certain price
Supply
The act of committing money or capital to endeavor with expectation of obtaining additional income or profit
Investing
