Unit 12 Flashcards
An investment strategy where money is spread to many assets to reduce risk
Diversification
Deciding proportion of portfolio to invest each asset class
Asset Allocation
Comparing performance portfolio against established benchmark/index
Evaluating against a benchmark
Indicator shows average price movements for group of securities; tracks performance particular market segment
Index
30 very large company stocks
Dow Jones Industrial Average
500 largest US companies
S&P 500
Over the counter stocks, includes more small companies
NASDAQ
Identify investments and asset classes undervalued short run; make returns buying underpriced and selling overpriced
Active Investors/ Day Trading
Long term stock investing
Passive Investing
Prices adjust reflect publicly available info/ theory
Market Efficiency
Purchase proven stock and hold; for long term profit
Buy and hold
Funds mimic indexes
Indexing
Investors receive dividends as additional stock
Dividend reinvestment plan (DRIP)
Investor selects investments have cash flows
Maturity Matching
Business org exists legal entity separate 4rm owners
Corporation
Sell ownership 2 gain funds
Why issue stocks?
Common shareholders right: share firms assets and income after all other claim holders are paid
Residual Claim
Right vote members to board of directors
Voting Rights
Right corporate shareholders limits potential losses value of shares
Limited Liability
Right; shareholders maintain proportionate ownership when company issues additional shares of stock
Preemptive right
Shareholder gets # shared proportion number shares already held
Stock splits
Pays investors regular dividend
Income stock
Compensates investors through increased value 4 shares over time
Growth Stock
Large, stable, mature company stock
Blue Chip Stock
Stock has above-average sensitivity 2 business cycle
Cyclical Stocks
Relatively insensitive to business cycle
Defensive Stocks
Measure risk of company’s stock
Beta
Value stock current market prices; calculated current market price times the number of sheared outstanding
Market Capitalization
Company profitability equal after-tax net income/ number of shares outstanding
Earnings Per Share (EPS)
Future earnings potential: market price/ (EPS)
Price to earnings (P/E) ratio
Long-term, interest bearing debt securities: help finance long-term assets/operations
Corporate Bonds
Interest exempt state local income tax.
U.S. Treasury Bonds
Interest exempt from federal tax
Municipal Bonds (Muni)
Interest principal backed by assets/future cash flows as collateral
Secured Bond
Interest payments adjusted according to current market
Floating-rate bond
Interest rate tied to market index
Indexed bond
U.S. government bonds w/ face value adjusted annually for inflation: investors earn inflation-adjusted rate of return
Treasury Inflation-Protected Securities
Medium-or-high-grade bond low risk default
Investment-grade bonds
Bond pays higher rate of return; has high risk default and lower liquidity
High yield/junk bond
Document summarizes financial information about stock or bond and the issuing company for potential investors
Prospectus
Person/entity manages assets on behalf of another
Trustee
Dollar amount bondholder receive at bonds maturity date
Face value
Date when bond comes due
Maturity Date
Annual rate of interest on bond: quoted as percentage of face value
Coupon Rate
Annual dollar amount paid in interest on bond, equal to coupon rate times face value
Coupon Payment
Term allows bond issuer buy back bond before maturity date
Call provision
Annualized return bond, held to maturity and all interest payments are reinvested at the same rates
Yield to maturity
Initial value assigned shares of preferred stock issuance used calculate dividend payment
Preferred stock per value
Constant cash flow
Perpetuity
Issuer has right to buy back shares. Company pay higher dividend rate
Callability
Holder receive past unpaid dividends before dividends paid common stock
Cumulative Preferred Stock
Dividend tied market interest rate
Adjustable-rate preferred stock
Convert preferred shares common shares under certain conditions
Convertibility
Stocks and bonds sold public for first time
Primary Market
Stocks bonds traded between investors
Secondary Market
First stock offering to the public
Initial Public Offering (IPO)
Physical place where securities traded
Securities Exchange
Electronic trading securities through securities dealers
Over-the-counter (OTC) market
Security approved bought or sold on particular exchange
Listed security
Price offered potential buyer
Bid price
Price requested seller
Ask price
Last price stock sold
Close price
Request buy stock price up to given maximum or sell stock at any price above a given minimum
Limit Order
Buy stock at market price
Market order
Buy sell shares of stock when market price reaches certain level
Stop order
Investor borrows stock from broker, sell stock, and later byes stock on the market to replace borrowed stock
Selling short
Borrowed funds from broker to purchase stock
Buying on margin
Brokerage firm holder of margin account add money to account to maintain required minimum
Margin call
Trading based on company information not available to public.
Insider trading
