Exam 1 Review 1 26 12 25 multiple choice questions Bring 2 pencil Bullet Points 1 Risk levels of short term securities i Generally carry little or no risk ii Provide liquidity iii Primary risk results from inflation risk iv Risk of default is virtually nonexistent v Exposure to capital loss is low 2 Investment securities i Stocks i Common stock CS 1 Equity investment that represents ownership in a corporation each share represents a fractional ownership in the firm 2 Most popular investment vehicle ii Preferred stock PS 1 Ownership interest in a corporation similar to common stock but has a stated dividend rate payment of which is given preference over CS ii Bonds i Long term debt instruments issued by corporations and governments that offer a known interest return plus return of the bond s face value at maturity iii Convertible securities i A fixed income obligation with a feature permitting the investor to convert it into a specified number of shares of CS ii Provide the fixed income benefit of a bond interest while offering the price appreciation capital gain potential of CS iv Mutual funds i A company that raises money from sale of its shares and invest in and professionally manages a diversified portfolio of securities ii Money Market Mutual Funds 1 Mutual funds that invest solely in short term investment vehicles v Derivative securities i Derive their value from an underlying security or asset ii Typically possess high levels of risk because they usually have uncertain returns or unstable market values iii High levels of expected return iv Futures 1 Legally binding obligations stipulating that the seller of the futures contract will make delivery and the buyer of the contract will take delivery of an asset at some specific date at a price agreed on at the time the contract is sold 2 Highly specialized high risk 3 Used primarily to trade commodities v Options 1 Securities that give the investor an opportunity to sell or buy another security at a specified price over a given period of time 2 Used to take advantage of an anticipated change in the price of CS 3 Purchaser is not guaranteed a return and could even lose the entire amount invested if the option does not become attractive enough to use 4 Two common types of options are puts and calls 3 Types of income i Active Income i Made up of income earned on the job as well as most other forms of noninvestment income ii Portfolio Income i Earnings generated from various types of investments ii Consists of interest dividends and capital gains iii Passive Income i Composed chiefly of income derived from real estate limited partnerships and other forms of tax advantaged investments 4 Financial markets forum s i Money Market i Market in which short term securities with maturities less than one year are bought and sold ii Capital Market i Market in which long term securities with maturities of over one year such as stocks and bonds are bought and sold ii Primary Market 1 Market in which new issues of securities are sold to the 2 The issuer of the equity or debt securities receives the public proceeds of sales 3 Investment banker underwrites the security and sells it to the selling group iii Secondary Market 1 Market in which securities are traded after they have been issued 2 Gives securities purchasers liquidity 3 Securities Exchanges a Forums where the buyers and sellers of securities are brought together to trade a Broker Market 1 The securities exchanges on which the two sides of a transaction the buyer and the seller are brought together to trade securities 2 National Exchanges i NYSE ii AMEX 3 Regional Exchanges i Midwest Pacific Philadelphia Boston ii Exchanges deal primarily in securities with local and regional appeal iii Linked by the Intermarket Trading System ITS which links 9 markets b Dealer Market 1 The market in which the buyer and seller are not brought together directly but instead have their orders executed by dealers that make markets in the given security 2 Nasdaq i A major segement of the secondary market that employs an all electronic trading platform to execute trades 3 Over the Counter OTC ii A segment of the secondary market that involves trading in smaller unlisted securities iv Third Market 1 OTC transactions typically handled by market makers and made in securities listed on the NYSE the AMEX or one of the other exchanges 1 Transactions made directly between large institutional buyers and sellers of securities v Fourth Market 5 Monitoring of investments i Review your portfolio regularly to check your progress against your goals ii Weed out poor performers 6 Institutional investors characteristics i Investment professionals whoa re paid to manage other people s money ii Trade large volumes of securities for individuals businesses and governments iii Include financial institutions such as banks life insurance companies mutual funds and pension funds 7 Aspects of ADR s i American Depository Receipts ii Dollar denominated receipts for the stocks of foreign companies that are held in the vaults of banks in the companies home countries Serve as backing for American Depository Shares 8 Portfolio Risk Determinants i The broader the range of possible values or returns associated with an investment the greater its risk ii Each type of investment vehicle has a basic risk characteristic iii Low risk investments are those considered safe with regard to a iv High risk investments are considered speculative their levels of positive return return are highly uncertain v Short or Long term i Short term are typically less risky and more liquid ii Long term range from low risk to high risk depending on the investment vehicle vi Domestic or Foreign i Risk is based on several factors noted above and more importantly the currency exchange rates during time of investment vii Economic environment i The economic standing recession or boom greatly influences the market prices of securities ii Prices generally go up and risk generally goes down in a boom or bull market iii Prices generally go down and risk generally goes up in a recession or bear market 9 Capital Gain Calculation i Results from the selling of stock or any asset at a price that exceeds its original purchase price ii Sale price dividends purchase price capital gains i Transaction costs if applicable also need to be factored into the sale price and purchase price 10 Short term investment characteristics i Primary function is to provide a pool of reserves that can be
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