Market and Risks Flashcards

Question

Diversification through - Investing in stocks from different sectors

Answer 1

Investing in multiple different sectors can help mitigate risk by ensuring that the performance of one does not affect your entire portfolio. Different industries include finance, tech, utilities, energy, healthcare, industrials, etc

Answer 2

Investing in different types of bonds, stocks, DPPs, mutual funds, options, ETFs, can mitigate risk. □ Note - Smaller investors are the primary demographic for mutual and ETFs because those vehicles are diversified already in most cases

Answer 3

Depending on an investors age and overall appetite for risk, having a balance of equity and debt securities is essential to manage risk. Asset allocation refers to what percentage of equity is in each asset type for example, having 50% in stocks and 50% in bonds. Typically, as investors age, portfolios go from higher risk equity securities to conservative debt securities like bonds.

Answer 4

Portfolios equity can change through appreciation or depreciation. When that happens, investors can re-balance by selling off and buying in to the security they wish to maintain a certain percentage in.

Answer 5

hedging is the act of protecting your investment (mitigating risk). This can be done in multiple ways, buying different types of securities, purchasing into different types of markets (sectors)

Answer 6

§ Buy short and long term bonds § Invest in different sectors § Invest in different equity securities (value, growth, income, etc) § Invest in high credit (the best) bonds from the US Gov, T-bill, Notes, Bonds § To protect against inflation invest in high quality stock, REITs, commodities, or TIPS

Answer 7

Fundamental analysis - Decides WHAT to buy Technical analysis - Decides WHEN to buy

Answer 8

By analyzing the company management and its financials (balance sheets, income statements, the industry, earnings, etc) and compare with competitors. Past financials are also reviewed to ensure the company is heading in the right direction The overall economy and industry conditions are taken into consideration

Answer 9

A balance sheet gives financial status of a company at a given point of time. □ Note - SIE tests how the company making moves (IE buying equipment, paying off debt, getting a loan, etc) affect the balance sheet. Assets must balance out the liabilities and shareholder equity.

Answer 10

Current assets - Owned items easily converted to cash within the next 12 months, includes cash, marketable securities, inventory, accounts receivable, and prepaid expenses like rent. Fixed assets - Owned items that are NOT easily converted to cash such as equipment, property, furniture. Most fixed assets can depreciate over time due to being old or outdated, they will be documented under accumulated depreciation which is subtracted from assets. EXCEPT LAND Intangible assets - Owned items that don’t have physical properties such as patents, trademarks, formulas, copyrights, goodwill. Goodwill is the amount over paid when purchasing another company.

Answer 11

Current liabilities - debt obligations that are due to pay in the next 12 months. This includes accounts payable (company bills), wages, debt securities due to mature, short-term notes payable, declared cash dividends, and taxes Long term liabilities - debt obligations due to pay after 12 months, this includes mortgages, bank loans, outstanding corp bonds, long term notes.

Answer 12

What the company is worth is the difference from the assets - liabilities Par value of common stock - the arbitrary amount a company uses for bookkeeping purposes. If a company issues $1 million in shares (common stock) at $1 PAR, the Par value on the stockholder's equity portion of the balance sheet is $1 million. Par value of Preferred stock - The value the company uses for bookkeeping purposes, (usually $100 but can be $25 or $50). If a company issues 10 thousand shares at $100 par, the value of the shareholders stock equity is $1 million (10000 x 100 = 1,000,000) Additional paid in capital - Also known as capital in excess of Par, the amount over par value received during initial IPO or secondary offering. This is paid to the company directly Ex if common stock is $1 but they receive $7, the $6 is the additional paid in capital PAR value is the accounting floor, investors pay based on perceived value, the excess goes to APIC. Treasury stock - Stock that was outstanding in the market but was repurchased by the company Retained earnings - The amount of net earnings after paying out dividends (if any) to its shareholders

Answer 13

Documents how profitable a company is. It shows revenue and expenses during a period of time (monthly, quarterly, yearly) Includes □ Net Sales - Cost of goods sold (EBITDA) earnings before interest, taxes, depreciation, and amortization. □ Operating expenses (includes depreciation) - Operating profit (EBIT) earnings before interest and taxes □ Interest expenses - taxable income (EAT) earnings after taxes □ Preferred dividends - Earnings available to common shareholders □ Common dividend - Retained earnings

Answer 14

Tech analysis looks to identify patterns based on past performance to help determine future performance of specific industries or securities.

Answer 15

§ Trading volume § Market sentiment § Market indices (S&P 500, Dow Jones 100, etc) § Options volatility § Market momentum § Available funds § Index futures § New highs and lows § Advanced decline ratio § Odd lot volume § Short interest § Put to call ratios

Answer 16

Fundamental analysis

Answer 17

Technical analysis

Answer 18

Such as NASDAQ or DOW JONES (DJIA) are performance indicators (indexes) that are used as benchmarks for individual or a group of investments. Indices can be narrow or broad based

Answer 19

Narrow - provide information on a specific industry such as transportation or finance Broad based - measure information on the overall market

Answer 20

□ Ex of Broad based Indexes ® S&P 500 index - includes top 500 large cap companies (corps that have market cap over 10 billion) ® Wilshire 5000 - largest of all stock indexes, includes over 5000 listed stocks ® Russel 2000 index - an index of small cap companies (more than 300 million but less than 10 billion) ® Lipper Indexes - Tracks the financial performance of the largest mutual funds based on strategy. Ex Large -cap growth, mid-cap value, international fund, etc) ® Dow jones Composite average - Tracks 65 of the largest industrial sector stocks. ◊ DJIA - tracks 30 stocks of the transportation industry, most commonly used as an indicator of the market in general ◊ DJTA - DJ Transportation Average - tracks 20 stocks from the transportation sector ◊ DJUA - tracks 15 companies from the utility sector

Answer 21

If the DJIA and DJTA are trending in the same direction (up/down) that is a good indicator of the market overall. If companies are producing products, they need to transport them.

Answer 22

Is the natural rise and fall of consumer goods and services (GDP) that occur over time.

Answer 23

Expansion - may also be known as the recovery phase, when the demand for goods and services is higher, property values are increasing, and the market is considered bullish (values are going up).

Answer 24

Peak - the peak of expansion happens before the market starts to contract

Answer 25

Contraction - demand for goods and services are down, more and more companies default on their bonds and consumer debt is up.

Answer 26

Through - the lowest part of the contraction cycle before the market starts recovering.

Answer 27

An investor can perceive the whole market, certain sectors, or individual companies as bullish or bearish.

Answer 28

Bullish strats - Buying common stock, selling uncovered put options, buying call options, buying mutual funds.

Answer 29

Bearish strats - selling short individual stocks, buying bearish funds (funds that increase during a bearish market), buying inverse ETFs (go in the opposite direction of indexes), selling uncovered calls, buying put options, etc

Answer 30

If supply is higher than average, interest rates go down, people borrow more, and people spend more.

Answer 31

○ The negatives here include inflation (prices go up) and weakening of the US dollar in relation to foreign currency.

Answer 32

The Federal reserve board (the Fed or FRB) balances the flow by controlling the supply of money and ensuring a slow and steady increase The fed controls monetary policy, government politicians (senate, house, prez) control the fiscal policy.

Answer 33

§ Monetary policy = money supply, interest rates § Fiscal supply = gov borrowing, gov spending, taxes collected

Answer 34

Can affect economic growth, inflation, and the state of the us dollar vs foreign currency. There are two strategies, easing the money supply (easy money) or tightening the money supply.

Answer 35

Easing helps the US get out of a recession by allowing consumers to borrow more at lower interest rates. Higher interest rates can slow down economic growth since consumers aren't spending as much, this also leads to more small business failure.

Answer 36

With more money, investors can invest more, businesses can also borrow at a lower interest rate thus increasing profits. (debt to revenue is down). Market becomes Bullish Higher interest rates mean investors don’t have as much cash to invest and companies borrow at higher rates thus reporting lower profits. This leads to a Bearish market.

Answer 37

Lower interest rates lead to inflation. Companies raise prices based on consumer spending. Tighter money supply can help curve high inflation.

Answer 38

The value of the dollar goes down. Foreign exports increase because foreign companies can buy more US goods, adversely foreign imports decrease because the US dollar lost value, we can afford less. The value of the dollar increases, foreign exports are lessened because US goods are more expensive, foreign imports increase because we can buy more thanks to supply and demand of US dollar.

Answer 39

Easing money supply can lead to lowered interest rates, the fed does this by ○ Buying US gov securities in the open market ○ Lowering the discount rate, reserve requirements, and/or RegT (changing REGT is not likely) ○ Printing more US currency

Answer 40

Tightening money supply is key to slowing down economic growth and increasing interest rates, they do this by Selling US gov securities (pulling money out of the baking system) Increasing discount rate, increasing reserve requirements, and or raising REG T.

Market and Risks Flashcards

(64 cards)