Ch 11 12 13 1 Rates of return time to double 72 divided by your rate of return 3 Common place aspects to stocks 4 Rights offering 2 Dividend yield compared to other investments The dividend yield of a common stock is less than half of a coupon yield of a bond An issue of rights to a company s existing shareholders that entitles them to buy additional shares directly from the com pany in proportion to their existing holdings within a fixed time period In a rights offering the subscription price at which each share may be purchased in generally at a discount to the current market price Rights are often transferable allowing the holder to sell them on the open market An even number of shares purchased at once Usually lots of 100 less than 100 is an odd lot and the transaction fees for 5 Round lots retail these are much higher 6 Par book market values Par value is the stated of face value of a stock essentially useless in trading Book value is the stockholders equity in a business Assets liabilities preferred stock book value of stockholders equity Book value per share is this divided by the m number of shares outstanding Market values is the prevailing market price of an issue We can find the market value of a firm by dividing this number by the number of outstanding shares AKA market capitalization 7 Calculate dividend yield Dividends yield dividend the price of the stock 8 Processes of securities analysis Consists of gathering information organizing it into a logical framework and then using the information to determine the in trinsic value of common stock Intrinsic value gives a measure of the underlying worth of a share of stock It provides a standard for helping you judge whether a particular stock is undervalued fairly priced or overvalued Intrinsic value depends on several factors 1 Estimates of the stocks future cash flows 2 The discount rate used to translate those future cash flows into a present value 3 The risk associated with future performances which help define the appropriate discount rate 9 Fundamental technical analysis Fundamental analysis looks at the financial conditions and operating results the fundamentals of a specific company Include the company s investment decisions the liquidity of its assets its use of debt its profit margin ad earnings growth 10 Key economic factors to an economy 258 Government fiscal policy o Taxes o Government spending o Debt management Monetary policy o Money supply o Interest rates Other factors o Inflation o Consumer spending o Business investments o Foreign trade and foreign exchange rates 11 Factors contributing to security price increase decrease Stock prices are heavily influenced by the state of the economy and by economic events As a rule stock prices tend to move up when the economy is strong and they retreat when the economy starts to weaken 12 Key aspects of mutual fund industry those funds in a portfolio of securities A mutual fund is a type of financial service organization that receives money from a pool of shareholders and them invests When investors buy shares in a mutual fund they actually become part owners of a portfolio of securities By investing in mutual funds investors delegate some if not all of the security selection decisions to professional money managers 13 Mutual funds as regulated investment companies Mutual funds split their various functions investing record keeping safekeeping and others among two or more com panies o A management company runs the daily operations They are the company that started the fund o An investment advisor buys usually the same as the management company and sells stocks or bonds and other wise oversees the portfolio Usually three parties participate in this phase The money manager The securities analyst Traders o A distributor sells the fund shares o A custodian physically safeguards the securities and other assets of the fund To discourage foul play an indepen dent party usually a bank serves in this capacity o A transfer agent keeps track of purchase and redemption requests from shareholders 14 Characteristics of ETFs Exchange traded funds are a type of open end fund that trades as a listed security on one of the stock exchanges Can be set up three ways 90 are open end funds o Open end fund o Unit investment trusts o Grantor trusts Structured as index funds they do this by owning all or a representative sample of the stock in a targeted market segment or index ties Create by a fund sponsor who picks the investment objective of the etf and one of two tracking methods o Replication a replication index hold every security in the target index o Sampling a sampling index etf provides a manageable solution for tracing a target index with thousands of securi They are like closed end funds because they are traded on listed exchanges but they are open en funds where the num ber of shares outstanding can be increased or decreased in response to market demand The net asset value of etfs are set at a fraction of the underlying index value o If the s p 500 is at 1042 73 the etf on that index with trade for 104 27 o The etf on the dow is set at 1 100 of DJIA so if 9605 41 the etf will be 96 05 Etfs can be sold at any time of the day can also be bought on margin and sold short 15 Opened closed ends funds Open end investment companies o Investors buy their shares from and sell them back to the mutual fund itself o No limit to the number of shares a fund can issue o Transactions in open ended mutual funds are carries out at prices based on the current market value of all securi ties held in the fund s portfolio known as the funs net asset value Nav is found by taking the total market value of all assets held by the fund less any liabilities and dividing Closed end investment companies this amount by the number of fund shares outstanding o Operate with a fixed number of shares outstanding and do not regularly issue new shares of stock o All trading is done between investors in the open market much like regular stocks o Fixed amount of capital to work with 16 12b 1 fees These funds do not directly charge commissions at the time of purchase Instead the annually assess what are known at 12 B 1 charges to make up for any lost commissions Known appropriately as hidden loads they are designed to help funds cover their distribution and marketing costs 17 Types asset categories of mutual funds and key characteristics Growth fund o Capital appreciation Long term growth and capital gains are the
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