FIN3244 FINAL EXAM NOTES STUDY FOR TEST EXAM ON CHAPTER 9 Investment Info Securities Transactions Market Averages and Indexes o Market average or index a group of pre selected securities usually chosen for some shared characteristic s No Costs No info about individual components No consideration given for any interest or dividends paid Closing Index Change Current Price Price Close of previous day Index Amount of previous day o Practical uses observe general market movement Track price volume through time Serve as benchmarks Something to measure against o How to use Choose the appropriate index Compare things over the same time period When making comparisons use percentages Forecast the future based on the past through patterns trends and behaviors Dow Jones Averages o Tracks general behavior of component firms o Equally weighted average Percentage changes in higher priced components have a divisor Divisor maintains comparative relationship over time allows time series comparisons o Multiple Dow Jones Averages DJ Composite Average 65 total stocks composed of DJIA 30 Stocks DJ Transportation 20 Stocks DJ Utilities 15 Stocks S P 500 Index o Value Weighted o Standard Poor s firm that selects index components 500 major firms across industries Broader than the DJIA All U S firms but with global exposure If you want to invest globally S P would be an option o Considers the market value of constituent firms Price x of shares Value weighted MV Recall DJIA is equally weighted Page 1 of 14 All Types of Indexes o Indexes continually revised throughout the day Standard cite is the closing price Relative to previous days closing price o Nasdaq Composite Index 3000 U S and international companies Highly concentrated in technical and growth firms o The Market o Mixed market The DOW S P 500 and NASDAQ Some of the markets are up and some are down o Most asset types tend to move in the same direction Market sensitivity stock The more sensitive it is the more risky o Bond Indexes o MSCI Morgan Stanley Country Indexes Stockbrokers o Principal Goal Execute clients buy and sell orders at the best possible price o Usually paid by commissions Churning When a broker illegally buys sells stock simply to generate commissions Liscenses SEC Exchanges Street Name Makes short selling and high speed trades possible Stockbroker provides a detailed transaction statement In different amounts movements How much something moves relative to the market in this case it would be a company s Page 2 of 14 Investing Tips o Not everything online is true o Double check tickers and transactions for accuracy AAPL and APL are very different o Studies show the more frequently you trade The less likely you are to Higher transaction costs o People trading on emotions Are too quick to realize gains Are too slow to realize losses o Even with data correctly forecasting the future is hard Order Types o Basic Order Types Market order Limit order Stop order a k a stop loss order Trade off Price vs Execution Certainty o Market Orders Least complicated An order to buy or sell regardless of price Advantages Fastest order it goes through the quickest Definite Execution Disadvantages Warning Does not always work o Limit Orders Purpose To get the best price within a trading range In very fast moving markets the price can be significantly different than what you expect Price Uncertainty Page 3 of 14 Conditions When Buying When Selling o To buy a specific price or better less o Sets the maximum buy price o To sell a specific price or better more o Sets the minimum sell price Process Order goes into an order book Orders at the same price execute chronologically o Order Precedence ALL MARKET ORDERS EXECUTE FIRST Advantages Guarantee Price Never pay more than anticipated Never sell for less than anticipated Disadvantages Order may not execute Execution Uncertainty even over a penny difference o Missing the Market o Stop Stop Loss Orders Suspended Market Order If a stock price goes through a certain point the order executes immediately at whatever the market price is Main Use o Most often used to stop a loss o Miscellaneous Time Limits on Orders Market Orders Limit or Stop Orders o Day Order Ended terminated at the end of the business day o Good till Canceled GTC Usually active for 6 months If you place a GTC order do not forget about it If an order has not executed yet you can cancel the order o You do not get charged for cancelling an order as of right now Day Trading Transaction Costs o You are in no position at the end of the day o You have cancelled exited all orders by the end of the day o Fixed Costs on small trades o Commissions can be negotiated if you are a big institutional investor Recall Holding stock in street name Securities Investor Protection Corporation SIPC Page 4 of 14 o Guarantees ownership of your shares if for example an investment bank fails o Does not guarantee broker fraud stock prices profits bad broker advice etc CHAPTER 10 11 COMMON STOCKS Quick Refresher o Total Stock Returns come from Capital Gains Difference in purchase price and price you sell the stock for Current income Dividends are a partial return of residual profits to the owners of the firm Dividends are periodic payments made by some firms to shareholders When companies begin to return dividends we generally think of the as a larger more Some people buy stocks simply because they pay dividends established more stable company o Stock investing is risky Volatile Market Behavior o Investment money must go work somewhere When economy is doing well or recovering Money usually goes to stock market When things get scary Money goes to bond debt market o Least to most risky generally 1 Debt short term 2 Debt long term 3 Stock Dividends 4 Stock No Dividends o Over long run stocks usually have positive returns Refers to averages not individual companies Gains between capital returns and dividends averaged around 11 Total return is higher than sum of the dividend return and the capital gain return because we assume dividends are reinvested when received Stock Ownership Advantages o Likely to have higher returns than most other asset classes o Inflation hedge Since firms can raise their prices as costs go up they can keep up with inflation so you as a stock holder can still get returns proportional to this o Liquidity Refers to listed stocks You can sell when you want to sell and buy when you want to buy because the SEC requires a certain amount of stock to be
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