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Real estateSocial securityCompany pensionsLarge holdingsYour own businessAnticipated inheritancePrecious metals and collectablesAnnuitiesRisk and investmentDollar cost averaging: systematic investing of equal sums of money at regular intervals regardless of price fluctuations in an investmentDividend Investment Plans (DRIPs)Automatic reinvestment of shareholder dividends to buy additional stockDirect investment plansInvestors buy stock directly from a corporationEmployee stock ownership plansProgram in which employees can buy stock in the company they work for at a reduced price or with matching funds for employersIssuers of Common stock:Ex: The Buckle, Inc.The Value of Common StockDollar appreciation of stock valueStocks do not have a specific cash flows, however. The value of a share can be seen as the present value of the dividends paid by the stockStock splitsIncreases the number of shares in the public company. The price is adjusted such that before and after market capitalization of the company remains the same and dilution does not occur.Dividends:CashCompany productsPREFFERED STOCKFour main types:1. Cumulative:if a dividend on a cumulative preferred is missed, it is not forgotten. Instead it accumulated and must be paid off before any dividend payments are made to the common stock holders2. Participating preferred stocks:this offers investors the opportunity to receive extra dividends if the company achieves some predetermined financial goals.3. Adjustable rate preferred:this is where the dividends issued will vary with a benchmark, most often a T-bill rate.4. Convertible preferred:This is a preferred stock that the stockholder can exchange for a predetermined number of the company’s common stock.STOCK REPORTS IN THE NEWSPAPERStock Classifications (Definitions can be found in the beginning of the book)Blue Chip stocksCyclical stocksDefensive stocksGrowth stocksIncome stocksSpeculative stocksDow Jones Industrial Average (DJIA)Made up of 30 high quality stocks selected for total marker and broad public ownership and believed to reflect overall market activity.Standard and poor’s index (S&P 500)True indexes that measure the current price of a group of stocks relative to a baseNASDAQ IndexRussell 2000 small stock indexWilshire 5000 equity indexBull and Bear MarketsBull Market:Characterized by optimism, investor confidence and expectations that strong results will continueWhen a bull charges at you it will toss you upBear Marker:A marker where the prices of securities are falling; characterized by pessimism. Rarely provides great entry points, as timing the bottom is very difficult to do.When a bear comes at you with it’s claws it will push you down.1. Book valueNet worth of company determined by deducting all liabilities from the corporation assets and dividing the remainder by the number of outstanding shares of common stock.2. Beta CoefficientMeasure of volatility3. Earnings per share4. Price earnings (P.E. or PE) ratioi. Ex: Buckle – jean company1. Efficient market theoryState that it is impossible to bear the marker because stock market efficient causes existing share prices always incorporate and reflect all relevant information2. Fundamental theoryA method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors3. Technical theoryA method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.Primary marketA marker that issued new securities on an exchangeSecondary marketA market where investors purchase securities or assets from other investors. Rather than from issuing companies themselvesSecurities exchangesA marketplace where member brokers who represent investors meet to buy and sell securitiesOver the counter marketNetwork of sealer who buy and sell the stocks of companies not listed on a securities exchange.Long term strategies:Buy and hold: buy good stocks and hold on to themDollar cost averaging: put in the same amount of money every timeDividend reinvestment (DRIPs): make some extra money and keep buying more shares of the same stock.Short term strategies:Don’t do the short term strategies until you have the long ones going. This isn’t normal for people to do. Just know that all these terms are risky.Buying stock on margin: borrowing some money to buy a stockThat works if the stock goes upSelling short: Also borrowing money to buyCommodities or stocksOption (right to buy/sell): you would be judging with a option if the stock will go up or downEx: Corn, crude oil, foreign currency rate, etcCall (right to purchase): right to purchase at a fixed pricePut (right to sell)Strike price (agreed)Option PremiumCovered optionsSelect two or three to study and followGet familiar with their ups and downsCheck how the stock is ratedBonds and BondholdersBondholder: you’re a lender of moneyThe Role of Bonds in an Investment PlanRate of returnCoupon rateMarket valueDetermining the market value: which is the priceYield and yield calculationsWhat the bond will give in the end and calculate what the bond will yield in the endLiquidity: buy them and hold on to them to get the full worth out of themLow on liquidityEasily turned into cash but you wont get what you wantDEFINITIONS & EXPLANATIONS OF CORPORATE BONDSCorporate bonds: loaning money to a company to expandTypes of Corporate Bonds:Debenture: agreementAnother word for bondYou know exactly when your checks are going to come in because you signed an agreementSecured bonds: backedSubordinated debentures: unsecuredMore risksConvertible bonds: you can change it into stocksCallable bonds: its in the contract that a company can call it back and they are going to buy you back. Usually almost always a good thing.How investors purchase corporate bondsSpread: different buying/sellingReasons for purchasing corporate bondsInterest incomeRegistered bonds: to a personZero-coupon bonds: more volatile, tax-sheltered, held for a long time.Potential capital gainsFor the bond repayment of maturityTax consequences of corporate bonds: how it affects your taxes in the long runTypes of government bondsTreasury bills: from the US governmentAgency bonds: for one area of the governmentMunicipal bonds: city, county levelsBridges, roads, schools, etcFederalTender form: application, usually filled out onlineTreasury bills: minimum of $1000Treasury notes: $1000 to $1


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FSU COA 4131 - FUNDAMENTALS OF INVESTING

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