finance terms and concepts
TRANSCRIPT
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Finance Terms and Concepts
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Stocks – Ownership in Company• Prices – Determinants
– What people think it will be worth/profit in
future
– Expectations of Future Earnings
– Cheap/Expensive – not based on price
• Earnings
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“Blue Chip” Stocks
• Giant companies with solid reputations.
• General Electric, Intel, Visa, Wal-Mart and
Walt Disney
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“Penny” Stocks
• Common stock valued at less than one
dollar, and therefore highly speculative
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Types of Investing
• Investor
– Long Term Growth
– Dividends
– Buy and Hold (2-3 yrs)
– Diversify
• Speculator
– Quick Profit
– Day Traders
– High Risk - High Reward
– Penny Stocks
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Analysis
• Fundamentals
– Earnings
– Annual Reports
– Management Team
– Conference calls
• Technical
– Charts
– Formulas
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Historical Returns
• Gamble but best place for your investment
dollars when young
• 1990-1999 = 15.3% average return per
year
• 1926-2002 = 10.2% average return
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Exchanges
• Buy/Sell Meeting Places
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New York Stock Exchange
• "Big Board“
• American stock exchange located at 11 Wall
Street, NYC
• World's largest equities-based stock exchange
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Indices (Indexes)
• List of stocks – Give snapshot of market
– NASDAQ – 3,200 Tech Heavy
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Dow-Jones Industrial Average
• Price-weighted average of 30 significant
stocks traded on the New York Stock
Exchange and the Nasdaq.
• Invented by Charles Dow back in 1896.
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Standard & Poor’s 500
(S&P 500)• American stock market index based on the
market capitalizations of 500 large
companies having common stock listed on
the NYSE or NASDAQ.
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Securities and Exchange
Commission (SEC)• Government commission created by
Congress to regulate the securities
markets and protect investors.
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Stocks
• Stock Categories
– Size (Large Cap vs Small Cap)
– Sector – Part of Economy
• Stock Types – Best Returns over long term
– Value (On sale at discount) vs Growth
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Dividends
• Profits – Payout to owners of corp
(Stockholers)
• DRiPs – Dividend Reinvestment Plan
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Mutual Funds• Individuals invest money together (pool)
• Professional Money Managers
– Benefit: Manage Portfolio
• Fee - 0.5% to 2%
– Financial institution
– 1000’s of different types
• Diversified portfolios of securities
– Investment objectives different – Safe vs Aggressive
• Most Retirement Accounts (401K)
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Selling Short
• Expecting price of stock
to decrease
• Betting against
– Very Risky
• Sale of security that is
not owned by seller, or
that seller has borrowed
• Hoping to buy back at a
lower price to make a
profit.
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Buying Long
• Buying of a security such as a stock,
commodity or currency, with the
expectation that the asset will rise in value.
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“Bubbles”
• Big price increase in technology/housing/stocks
• Over inflated prices -> crash
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Diversification
• Spread risk of stock failures
– Minimizes profits/losses
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Risk vs. Return
• Higher Risk = Bigger Return on investment/money
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Efficient Market Hypothesis
• Investment theory
• It is impossible to "beat
the market" because
stock market efficiency
causes existing share
prices to always
incorporate and reflect all
relevant information.
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Bull Market
• A market in which share prices are rising,
encouraging buying.
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Bear Market
• A market in which prices are falling,
encouraging selling
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Market Crashes
• 1929 – Great Depression follows
• Oct 19th 1987 – Worst one day drop –
22.6%
• Financial Crisis of 2007-2008
– Sub prime housing market crash
– Banks collapse
– Bailouts from government
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Stock Splits
• 2 for 1 Doubles # of Shares
– ½ price for shares
– Makes shares more tradeable
– Reverse split – Not good
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Bonds
• Debt investment -investor loans money to a
corporate or governmental group
• Borrows funds for defined period of time at a
variable or fixed interest rate.
– Long Term Bond – More Risk – Higher Return
– Shorter Term Bond – Less Risk – Lower Return
• Used by companies, municipalities, states and
sovereign governments to finance a variety of
projects and activities.
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Junk Bonds• Bonds with low ratings
• High risk
• Offer high interest rates in
exchange for high risk
• Pay between 3-5% higher
interest rates than the
regular bonds
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Corporate Bonds• Debt obligations, or IOUs, issued by
private and public corporations.
• Typically issued in multiples of $1,000
and/or $5,000.
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Municipal Bonds• Debt obligations issued by
governmental entities
• Raise money to do projects for the public good
• You are lending money to an issuer who promises to pay you back a specified amount of interest and return the principal
• MUNIS
– bonds that are free of federal taxes
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Silicon Valley
• California
– Where all the technology companies are located
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IPO
• Initial Public Offering
• First time a company is offered to the public.
• Investors make the big money
– Venture Capital guys
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“Pink Slip” Party
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Monopoly
• Exclusive control of a commodity or
service in a particular market, or a control
that makes possible the manipulation of
prices
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Sub-Prime Mortgages
• Type of loan granted to individuals with
poor credit histories (often below 600)
• Result of deficient credit ratings, not be
able to qualify for conventional mortgages.
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One company absorbs another.
In a merger, absorbed
company often is forced to abandon
its identity