Securities Analysis Flashcards
Fundamental analysis
What to buy
Technical analysis
When to buy
Types of risk
Market/systematic, business/nonsystematic, credit, call risk, liquidity, interest rate, reinvestment, inflationary, capital, regulatory, currency, political, prepayment, timing
10k and 10q include:
Balance sheet, income statement, cash flows
Balance sheet equation
Assets = liabilities + stockholders equity
Current assets
Convertible into cash w/in 1 yr, cash, securities, accts rec, prepaid expenses, inventory
Fixed assets
Not easily converted into cash, land, machinery, equipment
Intangible assets
Non physical, reputation, trademarks, goodwill, patents
Current liabilities
Debt obligations owed w/in 1 yr: accts payable, wages, notes payable, taxes, dividends, interest, bonds maturing,
Balance sheet formula
Working capital
Current assets - current liabilities
Balance sheet formula
Current ratio
Current assets/current liabilities
Should be at least 2 to 1 to be liquid
Balance sheet formula
Quick ratio
All current assets (less inventory and prepaid expenses)/current liabilities
Measures liquidity of company w/in 3-5 mos, should be at least 1 to 1 to be liquid
Balance sheet formula
Net worth
Total assets - total liabilities
Same as stock holders equity
Paid in capital
The amount over par value that a company receives for issuing stock
Retained earnings
Amount of money a company has after paying all expenses, interest, taxes, and dividends.
Inventory T/O
Sales compared to value of inventory measured annually
Sales/avg inventory
Bond (debt) ratio
LT liabilities/total capitalization
i.e. Bonds/stocks
Income statement
EPS
Net income - pref divs/# of common shares outstanding
Income statement
PE
Price earnings ratio
Mkt price/eps
Income statement
Div payout ratio
Annual div per common share/ eps
Income statement
Gross profit margin
Net sales - cost of goods sold - operating expenses/ net sales
Income statement
Cash flow
Net income+depreciation +depletion+amortization
Income statement
Depreciation
Tax write off, considered operating expense
Income statement
Current stock yield
Annual div/mkt price
Use the ask
Income statement
Bond interest coverage
EBIT/bond interest
How much money to cover expenses
Income statement
Net profit margin
Net income/net sales
Interest rate indicators 5
- Reserve requirements - can’t be loaned to customers
- Discount rate - fed rate for member banks
- Fed funds rate - Rates btwn banks, b/d’s, institutions, lowest, most volatile
- Call loan rate - rates on margin accounts
- Prime rate - rate for best customers
M1
Currency in circulation, checking accts
M2
M1 + savings deposits, money mkt, short term debt
M3
M2 + jumbo cd’s
Balance of payments
Reflects the amount of money coming into country vs out
Interbank mkt
Unregulated decentralized for foreign currency transactions
Spot mkt
Interbank transactions, 2 parties agree to trade foreign currencies, delivery 1 to 2 days
Forward mkt
Same as spot mkt but longer time frame, usually several months
Floating exchange rate
Values based in supply and demand vs other currencies
Recession
Mild 6 month/2 qtr in biz activity and stock prices
Depression
6 qtr/18 month economic decline
Cpi
Measures changes in the price of goods, in certain cities each month
Stagflation
Inflation increases in a slow economy (particularly w/raw materials)
Gdp
Sum of all goods and services produced, measured in constant dollars (considers inflation)
Disintermediation
Movement of money from savings to money mkt/short term bonds
Occurs during periods of tight money
Fiscal policy
Taxes and govt spending (controlled by congress)
Keynesian
Governments should be active through spending to foster economic growth
Supply side
Belief the government should be passive and economy will grow by itself
Monetarist
Belief money supply needs to be properly controlled for economy to prosper
Moral suasion
Chairman of the fed asks banks to expand or contract lending
Leading indicators
- Money supply M1, M2, M3
- stocks
- fed funds
- discount rate
- reserve req’t
- housing (permits/new starts)
- unemployment
- avg hrs worked
- durable goods orders
- consumer sentiment
- yield curve
Lagging indicators
- prime rate
- industrial/commercial loans
- Corp profits
- consumer credit
- personal income
- duration of unemployment
- unemployment rate
- inventories
- sales
Coincidental indicators
- industrial production
- personal income
- gasp
- retail sales
Breakout
Technical indicator when prices break out of normal trading rang by more than 3% above resistance or below support
Odd lot theory
Small investor is usually wrong, small investor is usually wrong
Random walk
Assumes mkt is perfectly efficient, aka efficient mkt theory
CAPM
Shows relationship btwn expected risk and expected return
T-Bill return + [(s&p 500 expected return - T-Bill) x beta]
Mkt weighted index
Positions in index calculated by mkt cap
Most common
Price weighted index
The higher the price, the greater the weight
Non weighted index
All stocks equally weighted
Value line
Circuit breakers
Level 1 - 7% decline, 15 min halt
Level 2 - 13% decline 15 min halt
Level 3 - 20% decline closed rest of day
The rate controlled directly by the FED?
Discount rate
Most common tool used by the FED to control money supply
Once
