SIFD Flashcards
(123 cards)
1
Q
Market Capitalization
A
- a company’s market value
- a way one can determines a company’s value
- the value you get when you multiply all the outstanding shares of a stock by the price of a single share
- there are different stock categories for MC
2
Q
Micro Cap
A
-less than $250 million
3
Q
Small Cap
A
-$250 million to $1 billion
4
Q
Mid Cap
A
-$1 billion to $10 billion
5
Q
Large Cap
A
$10 billion to $50 billion
6
Q
Ultra Cap
A
more than $50 billion (Google or Apple)
7
Q
Small Cap stocks vs Large Cap stocks
A
- small cap stocks have a greater potential to grow but are riskier
- large cap stocks are considered safer
- tree analogy
8
Q
Investor Types
A
- Conservative
- Aggressive
9
Q
Conservative Investors
A
-worries about risk
10
Q
Aggressive Investors
A
-more tolerant to risk
11
Q
Financial Goals
A
- Long term (more than 5 years)
- Intermediate term (2 to 5 years)
- Short term (1 to 2 years)
- Very short term (less than 1 year)
12
Q
Types of Stocks
A
study table 3-1, pg 36
13
Q
Short term investing
A
- one year or less (sometimes 2 years)
- b/c stocks are unpredictable, they are a bad choice for short-term considerations
- short term is irrational because no one can predict the actions of other investors
- stocks can also be very volatile
- more appropriate to invest in stable, interest-bearing investments
14
Q
Intermediate term investing
A
- refers to the financial goals you plan to reach in 2-5 years
- investors should consider large, established companies or dividend-paying companies in industries that provide the necessities of life (food and beverage industry, electric utilities industry)
15
Q
Long term investing
A
- 5 to 10 or more years
- best time frame; most suited for stock investing
- investors should focus on carefully selecting their stocks to make sure they are valuable and positioned for growth
16
Q
Growth Investing
A
-Making loads of money quickly
17
Q
Income Investing
A
- Investors don’t need stock values to sore, they need stocks that perform well consistently
- need to choose stocks that pay dividends
- have to consider your investments yield and compare it to alternatives (a way of comparing your income with other options)
18
Q
Dividends
A
- paid quarterly on recorded, specific dates
- paid to owners (shareholders)
19
Q
Interest
A
-paid to creditors
20
Q
creditor
A
someone one loans there money or buy bonds (bank or bond issuer becomes the debtor); paid interest
21
Q
yield
A
an investment’s payout expressed as a percentage of the investment amount
yield = payout / investment
22
Q
Conservative Investing
A
- invest money in safe and secure places
- choose companies with following qualities:
- proven performance
- large market size
- proven market leadership (leaders in their industry)
- perceived staying power (despite outside influences such as poor economy or politics)
23
Q
Aggressive Investing
A
want to invest in companies that have the potential to break out of the back and exhibit the following qualities:
- great potential (superior goods, services, and ideas)
- capital gains possibility (dislike dividends becomes aggressive investors feel that that money could be more appropriately be used reinvested in the co. to spur more growth)
- innovation (qualities that make they stand out)
- stocks can be small cap; hoping business will become the next Apple or McDonalds
24
Q
***Different Kinds of Risk
A
- Financial
- Interest Rate
- Market
- Inflation
- Tax (affects how much money you get to keep)
- Political/governmental
- Personal (different situations)
- Emotional (greed, fear, and love)
25
***Market Risk
- market = group of millions of individuals making daily decisions to buy or sell stock
- supply and demand is the basis of market risk
- unpredictability of the market and stock prices
- markets are volatile
- instead, avoid speculating and short term goals and do diligent research to pick quality stocks to minimize this risk
26
***Inflation Risks
- aka purchasing power risk
- money doesn't buy as much as it used to
- risk = the value of your investment may not keep up with inflation
- ex: if you're earning 4% interest in your bank savings account but inflation is running at 5%, you're losing money
27
***inflation
the artificial expansion of the quantity of money so that too much money is used in exchange for goods and services
28
***Interest Rate Risk
- interest rates change on a regular basis causing some challenging moments
- the Fed raises or lowers its interest rates, actions that in turn cause banks to raise or lower their interest rates accordingly
- when interest rates rise, the cost of borrowing money rises too which usually reduces profitability and the ability for growth
- when interest rates rise, investors will... sell any shares in interest-sensitive stocks that they hold... OR investors who favor increased current income may switch from stocks to bonds or bank certificates of deposits
29
***Political Risks
- some laws and regulations are enough to send companies into bankruptcy
- other laws and regulation can help increase sales and profit
- ex: stock prices of tobacco companies
- politics and gov't have a direct and often negative impact on the economic environment
30
Volatility
- the movement of an asset (or the entire market) very quickly down (or up) in price due to large selling (or buying) in a very short period of time
- tends to be more associated with the negative due to crowd psychology
- Beta is used as a measurement
31
beta
- statistical measure that attempts give the investor a clue as to how volatile a stock may be
- the market is given a beta of 1 (S&P 500)
- any stock with a beta greater than one is considered more volatile than the general stock market
32
diversification
- a strategy for reducing risk by spreading your money across different investments
- don't put all your money in one stock
- don't put all your money in one industry
- don't put all your money in one type on investment (stocks, bonds, bank accounts, real estate, precious metals, etfs)
- keep only 5-10% of investment money in a single stock
- invest in 4-5 different stocks that are in different industries
33
Risk and Return
- keep in mind what your financial goal is (consider how much money you want to make and in what time span)
- consider your investor profile (nearing retirement=conservative? fresh out of college=slightly more aggressive?)
- asset allocation (old people should put less of their money in stocks compared to younger people)
34
similarities of ETFs and Mutual Funds
- aren't direct investments; act like a connection between the investor and investments
- basically pool the money of investors to create a fund which in turn invests in a portfolio of investments
- great advantage of diversification
- investors have no choice about what makes up the portfolio
35
differences of ETFs and Mutual Funds
- MFs are actively managed and ETFs are not; ETFs try to reflect an index or a particular industry/sector
- ETFs can be bought and sold like stocks
- ETFs can be bought in allotments (1,20,50 shares) whereas MFs are bough in dollar ammounts ($1000 worth)
- ETFs are marginable and MFs are not (meaning that you can borrow against them)
- you can put buy/sell brokerage orders on ETFs unlike MFs
36
Indexes
people use these indexes bascially as standards of market performance to see whether their stocks are portfolio is performing well
- Dow Jones Industrial Average (DJIA)
- Nasdaq Composite
- S&P 500 index
37
Dow Jones
- most widely watched index
- tracks 30 widely owned, large cap stocks
- technically not a stock but it is used as one
38
Nasdaq
-mix of stocks that are high-growth (riskier) companies with an over representation of technology stocks
39
S&P 500
- tracks 500 leading, publicly traded companies considered to be widely held
- created by the publishing firm Standard & Poor's
40
Stock Exchange
- organized marketplaces forthe buying and selling of stocks (and other securities)
- New York Stock Exchange & Nasdaq are the main exchanges
- since they benefit from increased popularity of stock investing, they offer a wealth of free resources and info for stock investors
- make money from cuts from every transaction and fees charged to companies and brokers that are members of its exchanges
41
***net worth
Assets - Liabilities = Net Worth; take what you own, subtract what you owe; on balance sheets; tells you whether a company is solvent (has the ability to pay its debts without going out of business)
42
***Net Income
Income - Expenses = Net Income; take what you make, subtract what you spend; found in Income Statements
43
***Comparative Financial Analysis
-how a company is doing now compared with something else (like a prior period or similar company)
44
Accounting consists mainly of
net worth, net income, and comparative financial analysis
45
Economics consists of
supply and demand, cause and effect, economic effects from government actions, gaining insight from past mistakes
46
***supply and demand
- what's available (supply) and what people want and are willing to pay for (demand)
- main engine for economic activity
47
***cause and effect
- make logical conclusions from a situation
- positive news reports about a company, its industry, its customers as well as negative reports about its competitors is likely to indicate a rise in its stock prices
48
***economic effects from government actions
- taxes, laws, regulations
- war
- governments control the money supply
49
***gaining insight from past events
- stocks should not replace savings accounts
- stocks should never occupy 100% of investment funds'
- keep debt and expenses to a mininmum
- booming economies will eventually fall (cycle)
- always question what others tell you (like experts)
50
***Sources for Financial News
- Wall Street Journal
- Investor's Business Daily
- MarketWatch
- Bloomberg
51
***What to look for in financial news about co's...
- is co. making more net income than last year
- are the co.'s sales greater than last year
- is co. issuing press releases on new products, services, inventions, or business deals
- what's going on in that co.'s industry
52
GDP
- gross domestic product
- the total value of output for a particular nation, measure in the dollar amount of goods and services
- %3 or more is considered solid growth
53
LEI
- index of leading economic indicators
| - a snapshot of a set of economic statistics covering activity that precedes what's happening in the economy
54
***Other things to look for...
- GDP
- LEI
- what politicians and government bureaucrats are doing
- checking for trends in society, culture, and entertainment
55
***Stock Tables consist of...
- 52-week high
- 52-week low
- name and symbol
- dividend
- volume
- yield
- P/E
- Day Last
- net change
56
***52 week high
-gives you the highest price that a particular stock has reached in the most recent 52 week period
57
***52 week low
-gives you the lowest price that a particular stock has reached in the most recent 52 week period
58
***Name and symbol
-tells you the company name and the stock symbol assigned to the company
59
***Dividend
- payments to owners (stock holders)
- very important to investors seeking income from their stock
- amount listed is the annual dividend (not yet divided into 4's)
60
***Volume
- tells you how many shares of that particular stock were traded that day
- trading volume that is far in excess of that stock's normal range is a sign that something is going on with that stock
61
positive volume
- lots of buying of stock
| - good earning report, new business deal,new product or service,
62
negative volume
- more selling of stock
| - bad earnings report, government problems, liability issues, financial problems
63
***yield
- reference to what percentage that particular dividend is of the stock price
- current stock price / annual dividend
64
***P/E ratio
- ratio b/t the price of the stock and the company's earnings
- used to determine whether a stock is of good value
- price = cost per share
- earnings = earnings per share
- price / earnings = P/E ratio
- P/E for large cap stocks should be 10 to 20 and small cap stocks should be 30 to 40
65
***Day last
tells you how trading ended for a particular stock on the day represented by the table
66
***Net change
-compares are the stock price did today and its price at the end of the prior trading day
67
***growth stock
the stock is growing faster and higher than the overall stock market (performs better in sales and earnings); better prospects for growth in the immediate future
68
***value stock
stocks that are priced lower than the value of the company and its assets; have less risk and steadier growth over the long term
69
***When choosing growth stocks...
- look for leaders in secular trends
- compare co. growth to industry growth
- consider a company with a strong niche
- check out a company's fundamentals (sales, earning, debt)
- evaluate a company's management
- notice who is buying and/or recommending a co.'s stock
- make sure co. continues to do well
- learn from history
70
***Companies have a strong niche when...
- they have a strong brand
- high barrier to entry (it takes a lot of money or it is hard to start a similar business, less competition)
- research and development
71
Fundamentals
refers to the company's financial condition and related data
72
***fundamental analysis
look at company fundamentals such as the balance sheet, income statement, cash flow, and external factors such as the company's market position, industry, and economic prospects
73
secular trend
a major development that has huge implications for much (if not all) of society for a long time to come (ex: internet and the aging of America)
74
***evaluating a co.'s management
- look at the ROE, the higher the better
- look for growth in equity and earnings
- look for insider buying
75
ROE
-return on equity
-equity / earnings
-10% or higher is considered good
(equity can be found on balance sheet and earnings can be found in income statement)
76
***Notice who is buying and/or recommending a co.'s stock
- institutional buying (are MF's buying up the stock, herd mentality)
- analysts' attention
- newsletter recommendation
- consumer publications
77
***Heeding investing lessons from history
- pick co.'s with strong fundamentals (earnings, sales, low debt)
- co's in a growing industry
- defensive stocks during bear markets
- fully participate during bullish markets
78
dividend
money paid out to the owner of a stock; paid on a quarterly basis
79
income stock
stocks with higher than average dividends
80
dividend rates
- not guaranteed
- can go up or down
- historically, dividend increases have equaled or exceeded the rate of inflation
81
who is best suited for income stocks
- conservative and novice investors
- retirees
- dividend reinvestment plan investors
82
pros of income stocks
- tend to be least volatile
- often defensive stocks (needed no matter what the shape of the economy is in)
- tend to be large firms in established, stable industries
- industry ex: utilities, energy, real estate
83
cons of income stocks
- income stocks can go up and down like any other stock
- interest rate sensitivity (when interest rates rise co.'s have to pay more making it harder to issue dividends and people abandon their stocks for a higher yield elsewhere
- effect of inflation (inflation greater than your yield from dividends is bad)
- taxation (gov't usually taxes dividends as ordinary income)
84
value investor
an investor who looks at a co.'s value to judge whether you can purchase the stock at a good price
85
market value
- aka market capitalization
- = share price x number of shares outstanding
- the market is responsible for setting market value
- not always a good indicator of a good investment
86
book value
- aka accounting value
- looks at a company from a balance sheet perspective (net worth)
- market value tends to be higher than book value
- if market value is more than double the book value, the business may be overvalued
87
PSR
- price-to-sales ratio
- co. stock price / sales
- a PSR of 1 or less is a reasonably priced stock
88
P/E
- price to earnings ratio
- ***how much you are paying for a dollar of earnings
- good way of measuring co.'s value
- price per share / earnings per share
- don't want a really high ratio; the higher, the more you pay for the co.'s earnings
- trailing and forward P/E
89
***Value-oriented perspective, look at...
- the balance sheet to figure out the co.'s net worth (want to buy a co. that is undervalued)
- the income statement to figure out a co.'s profitability
- ratios that let you analyze just how well or not so well the co. is doing
- P/E ratio
- debt load (is it less that the co.'s equity?)
- think in terms of 10s (net income, industry, sales are up or growing by 10%)
90
***things to look for on a balance sheet
- total assets (increased from prior year?)
- financial assets
- inventory (higher or lower than last year?)
- debt (growing or decreasing?)
- derivatives (can carry risk of increasing liabilities and hurting businesses)
- equity (increasing by 10% each year?)
91
derivatives
a speculative and complex financial instrument that doesn't constitute ownership of an asset but is a promise to convey ownership
92
***by looking at the balance sheet, you can determine...
- what the co. own (assets)
- what does the co. owe (liabilities)
- co.'s net equity/net worth
93
***things to look for on an income statement
- sales (increasing?10% higher?)
- expenses (reducing? unusual items?)
- R&D (new products mean future growth and earnings)
- ***earnings (higher than year before)
94
***by looking at the income statement, you can determine...
- what sales did the co. make
- what expenses did the co. incur
- what is the net profit/net earnings/net profit (aka the bottom line)
95
sales
the money that a company receives as customers buy its goods and/or services (should be increasing)
96
when you look at earnings, consider...
- total earnings (10% increase annually?)
- operational earnings (portion of earnings derived from the co.'s core activity)
- nonrecurring items
97
trailing P/E
-uses existing data (most recent 12 months of earnings)
98
forward P/E
-based on projections and expectations (for the next 12 months)
99
when looking at P/E ratios...
- compare them to co.'s of the same industry, the general market, and with recent periods
- watch out for a stock that doesn't have a P/E ratio
100
annual reports consist of
- income statement
- balance sheet
- letter from the chairman of the board ("Dear Stockholder"); often a bias
- the co.'s offerings (what the co. sells)
- financial statements (income statement & balance sheet)
- summary of past financial figures
- management issues
- CPA opinon letter
- co. identity data
- stock data
101
CPA opinion letter
offers an opinion about the accuracy of the financial data presented and info on how the statements were prepared
102
Form 10k
- a report that companies must file with the SEC annually
- works like the annual report that you get from the co. except that it provides more detailed financial information
- 10Q is like a smaller version of 10K; filed quarterly
103
SEC filings include
10k, 10Q, insider reports
104
sector
-a group of interrelated industries
105
industry
- typically a category of business that performs a more precise activity
- can be called a subsector
- various industries make up a sector
- ex: the healthcare sector is made up of the industries pharmaceuticals, drug retailers, health insurance, hospitals...)
106
cyclical industries
- industries whose fortunes rise and fall with the economy's rise and fall
- if economy is doing well, consumers and investors tend to spend more so cyclical industries do better
- ex: real estate and automobile industries
107
defensive industries
- industries that produce goods and services that are needed no matter what's happening in the economy
- ex: utilities and healthcare
- do better in bad economic times
- defensive stock growth generally depend on population growth and new markets (new people to buy product)
108
secular trend
a larger than life trend, a development that affects millions socially and economically, either now or in the near future
109
Political and legislative effects on economy
taxes, laws, regulations, gov't spending and debt, money supply, interest rates, gov't bailouts
110
systemic effects
means that all the players in the system are affected
| -ex: laws generally affect more than just a single co.; they affect entire industries and sectors
111
nonsystemic effects
means that the system isn't affected but a particular participant is affected
-ex: a co. is too big (monopoly) and gov't steps in
112
Measuring GDP
- more than 3% = strong growth, positive for stocks
- 1 to 3% = moderate growth
- 0 to -3% = not good; economy is shrinking a bit, recessionary
- neg 3% = bad, serious recession or possible depression
113
unemployment
The National Unemployment Report is provided by the Bureau of Labor Statistics
114
reason behind stock buybacks
- co. believes their stock is undervalued and has the potential to rise
- boost earnings per share (by buying back its own stock, the co. reduces the total shares outstanding) (ex: $1 a share out of 5 shares is better than $1 a share out of 10 shares)
- beating back a takeover bid (to protect itself, a co. may buy back its shares so that another co. couldn't buy enough of its shares to control it)
- sometimes co. will announce a stock buyback just stir interest in the stock and hopefully raise its price (doesn't mean one will actually happen)
115
stock split
- the exchange of existing shares of stocks for new shares from the same co.
- simply change the number of shares available and the the per-share price
116
ordinary stock split
- number of stock shares increases (ex: 2-for-1 split)
| - management believes that the stock is too expensive and they want to make it more affordable to new investors
117
reverse stock split
-co.'s management wants to raise the price of its stock
118
profitability
Is the co. making money? Look at...
- return on equity
- return on assets
- common size ratio (income statement)
119
solvency
Is the co. keeping debts and liabilities under control? look at...
- quick ratio
- debt to net equity
- working capital
120
liquidity ratios
ability to quickly turn assets into cash
help you understand a co.'s ability to pay its current liabilites
-current ratio
-quick ratio
121
current ratio
does the co. have enough financial cushion to meet its current bills?
- total current assets / total current liabilites
- higher ratio is better
122
quick ratio
can co. pay its bills when the times are tough
| - (current assets - inventory) / current liabilities
123
operating ratios
- ROE
| - ROA
