FIN3140 Final Exam Study Guide Friday December 12th at 7 30 am in HCB 103 normal classroom Investing Most new investors either go too conservatively or too risky You must balance risk and return in your decision making The older you are the shorter your investment term is so invest early The higher risk means there will be a higher rate of return This makes sense logically if you know there s a big chance you will lose your money you will demand a higher return to compensate the risk In investing there doesn t have to be a loser for there to be winners everyone can do well in theory Test Question You will not have learned sufficient knowledge to be prepared to invest as a result of this class Stock market return on average is 10 per year CD s These are very safe specific dollar amount for a specific amount of time Ex You deposit 1 000 into a 2 year CD the bank will pay you higher than normal interest for those 2 years and then return your principal to you There s 2 kinds Fixed rate constant rate over the security s life Variable rate interest rate you earn changes with the interest rate in the economy There is an early withdrawal penalty illiquid Interest rates depend on cost of money market rate size of investment maturity length default risk risk of not being paid back Bond types Corporate Bonds There is a face price and this is what the firm issuer initially borrows and what you are repaid at maturity This is not necessarily the price you pay for the bond if you buy it in the secondary market It can be bought and sold at a discount or premium among investors US Treasury Securities These are U S government issued bonds notes bills Bonds have longest maturity then notes and bills are the shortest US Treasury Securities have zero default risk These securities are backed by the full faith of the government Having zero default risk is a function of comparing risk and return Zero default reduces your risk but also means it will pay less interest since it is safer These are also more liquid that corporate bonds US Savings Bonds These are not the same as treasury securities These bonds are in your name and cannot be traded Again face price does not equal purchase price At some specified point these stop paying interest Capital Markets Anything 1 year Stocks are considered perpetual therefore part of capital markets Money Market Deposit Accounts These are short term 1 year Debts are considered money market deposit accounts Highly liquid Lower risk therefore lower return Insured by FDIC Interest rates will vary with economic conditions A minimum balance is usually required Consider the opportunity cost sacrificing some degree of return for the assurance that the money will be there when I need it liquidity May have limited check writing Could face a penalty if your balance falls below the minimum amount Money market mutual funds and money market deposit accounts are different Index A group of specified securities typically diversified around some set of characteristics Indices help look at overall trends and benchmarks Investing in equity securities means you have partial ownership in whatever you are investing in Your income from the investment is dividends and capital gains Investing in debt means you are lending your money and your income from the investment is interest and capital gains Capital gains is the difference between the price you paid to acquire the security and the price you sell it for A key difference between investing in equities and debt securities is your claim to the money invested A bond holder has a primary claim to the money whereas equity holders have a residual claim This means that if the company goes under bond holders will be paid back first and stockholders will only be repaid with what is left over after that if anything is left over Dow Jones Industrial Average Composed of 30 stocks and is the oldest average Gives overall picture of the US economy S P 500 Composed of 500 stocks Also gives overall picture of the US economy Nasdaq This is an actual exchange 3 000 companies are listed on it and it is weighted towards tech firms and new firms The change in a stock price is measured from the close of the previous day It is important to look at the change and not the change Since all stocks are different prices comparing dollar changes is comparing apples to oranges If a 20 stock moves 5 that s much more significant that a 500 stock moving 5 Transaction costs reduce the return on your investment Transaction costs per share decrease as the number of shares traded increases If only trading a few shares it will be hard to earn high enough return to cover the transaction costs Indices do not provide any specific detail of individual stocks because they are all lumped together The just help investors gauge general market conditions Investors can also use them as a benchmark to compare their own returns Am I doing as well as the overall market There are also other indices such as CPI which measures inflation The Fed likes to see inflation around 2 3 annually There are also indices for bonds Performance is not only about returns the amount of risk undertaken is significant What is the chance I will retain my return One of the most important things is to have a diversified portfolio This means to have no more than 20 of your portfolio within 1 sector It is also important to not try to hold and manage 50 different stocks Holding stocks requires research and staying on top of your investments Keep 5 10 stocks and keep up with them follow the company read the Q s and K s listen to earnings calls ect If you hold stocks you can collect dividends The Board of Directors chooses if they want to pay out dividends and how much Growing companies will want to hold onto their earnings so they are less likely to pay dividends than older companies A bull market is a rising market with positive sentiment A bear market is a falling market and negative speculation The market value of the stock is the price of the market The price is constantly changing throughout the day and can be followed online The market cap of a company is the number of shares outstanding times the market price Fundamental analysis Examining the margins financials and earnings of the company Earnings are the key component of fundamental analysis Technical Analysis short term traders do this Typically examine moving averages usually doesn t work Fundamental Analysis is much more effective than technical analysis