Investing 101

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  • Why do we invest?
  • Investing 101

    1. 1. INVESTING 101
    2. 2. Table of Contents <ul><li>I. Investing Terms and Concepts </li></ul><ul><li>II. Ratios </li></ul><ul><li>III. Going Public </li></ul><ul><li>IV. Trading </li></ul><ul><li>V. Castles In the Air Theory </li></ul><ul><li>VI. Firm Foundation Theory </li></ul><ul><li>VII. Financial Statements </li></ul><ul><li>APPENDIX A – Useful Reading </li></ul><ul><li>APPENDIX B – Websites </li></ul><ul><li>APPENDIX C – Analyst Reports </li></ul>
    3. 3. Terms and Concepts
    4. 4. Investing Terms and Concepts <ul><li>Security (financial instrument): is a claim on the issuer’s future income or assets </li></ul><ul><ul><li>Bond - A debt security that promises to make periodic payments for a specified period of time </li></ul></ul><ul><ul><ul><li>Government Bonds </li></ul></ul></ul><ul><ul><ul><li>Corporate Bonds </li></ul></ul></ul><ul><ul><ul><li>Municipal Bonds </li></ul></ul></ul><ul><ul><ul><li>BOND RATINGS are important! </li></ul></ul></ul><ul><ul><li>Stock - Claim to share in the net income and assets of a corporation (common stock is an example) </li></ul></ul><ul><ul><ul><li>Preferred Stock </li></ul></ul></ul><ul><ul><ul><li>Common Stock </li></ul></ul></ul><ul><ul><ul><li>Different classes </li></ul></ul></ul><ul><ul><ul><ul><li>Voting Rights </li></ul></ul></ul></ul>
    5. 5. Investing Terms and Concepts <ul><li>Mutual Fund </li></ul><ul><ul><li>A single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. </li></ul></ul><ul><li>Hedge Fund </li></ul><ul><ul><li>A lightly regulated investment vehicle, where management has greater freedom what to invest and where, e.g. in more risky stocks like Emerging Markets </li></ul></ul><ul><ul><li>Hedges bets by investing in counterpart to reduce risk </li></ul></ul><ul><li>Venture Capital </li></ul><ul><ul><li>Provide start-up capital for new companies, think tech-boom of the late 90s. </li></ul></ul>
    6. 6. Investing Terms and Concepts <ul><li>Income from Investing </li></ul><ul><ul><li>Capital Gains </li></ul></ul><ul><ul><ul><li>The difference in price between what you sold your stock for and what you originally bought it for. </li></ul></ul></ul><ul><ul><ul><li>E.g. You bought 1 share of Veritas (VTS) yesterday for $62. Today, you sell this share for $70. Your capital gain is $8. </li></ul></ul></ul><ul><ul><li>Dividends </li></ul></ul><ul><ul><ul><li>Quarterly, usually a fraction of the stock price (0%-4%). </li></ul></ul></ul><ul><li>Other investing instruments and methods </li></ul><ul><ul><li>Futures / Options </li></ul></ul><ul><ul><li>Selling short </li></ul></ul>
    7. 7. Ratios
    8. 8. <ul><li>Ratios </li></ul><ul><li>Help us to evaluate a stock / company </li></ul><ul><ul><li>Current performance / financial health </li></ul></ul><ul><li>Price / Earnings Ratio </li></ul><ul><ul><li>Stock price / earnings per share </li></ul></ul><ul><ul><li>How much your paying for each dollar of earnings </li></ul></ul><ul><li>Return on assets (ROA) </li></ul><ul><ul><li>Net profits after taxes per dollar of assets </li></ul></ul><ul><li>Return on Equity (ROE) </li></ul><ul><ul><li>Net profits after taxes per dollar of equity </li></ul></ul>
    9. 9. Going Public
    10. 10. <ul><li>Going Public </li></ul><ul><li>Public vs. Private Companies </li></ul><ul><ul><li>Ownership </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Reporting </li></ul></ul><ul><li>SEC (Security Exchange Commission) </li></ul><ul><ul><li>Registration with SEC </li></ul></ul><ul><ul><li>Ongoing Reporting </li></ul></ul><ul><ul><ul><li>Annual Report (10-K) - Audited </li></ul></ul></ul><ul><ul><ul><li>Quarterly Report (10-Q) – Not Audited </li></ul></ul></ul>
    11. 11. <ul><li>Going Public </li></ul><ul><li>IPO - Initial Public Offering </li></ul><ul><ul><li>Underwriting </li></ul></ul><ul><ul><ul><li>Managing Underwriter </li></ul></ul></ul><ul><ul><ul><li>Underwriting Syndicate </li></ul></ul></ul><ul><ul><li>SEC filing </li></ul></ul><ul><ul><ul><li>Prospectus </li></ul></ul></ul><ul><ul><li>Primary Market </li></ul></ul><ul><ul><ul><li>Company receives capital </li></ul></ul></ul><ul><ul><li>Secondary Market </li></ul></ul><ul><ul><ul><li>Company receives nothing </li></ul></ul></ul><ul><ul><ul><li>Exchanges </li></ul></ul></ul>
    12. 12. <ul><li>Going Public </li></ul><ul><li>Public vs. Private Companies </li></ul><ul><ul><li>Ownership </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Reporting </li></ul></ul><ul><li>SEC (Security Exchange Commission) </li></ul><ul><ul><li>Registration with SEC </li></ul></ul><ul><ul><li>Ongoing Reporting </li></ul></ul><ul><ul><ul><li>Annual Report (10-K) - Audited </li></ul></ul></ul><ul><ul><ul><li>Quarterly Report (10-Q) – Not Audited </li></ul></ul></ul>
    13. 13. Trading
    14. 14. <ul><li>Trading </li></ul><ul><li>Stock Exchanges </li></ul><ul><ul><li>NYSE (still use Specialists, but becoming electronic) </li></ul></ul><ul><ul><li>NASDAQ (lower listing requirements, mostly tech stocks) </li></ul></ul><ul><ul><li>London Stock Exchange (LSE), EuroNext, Latibex (part of BME) </li></ul></ul><ul><li>Foreign Exchange Markets </li></ul><ul><ul><li>Volume: $1.9 Trillion/day </li></ul></ul><ul><li>Derivatives (Mercantile) Exchanges </li></ul><ul><ul><ul><li>Derivatives? Derived from the price of an underlying asset. </li></ul></ul></ul><ul><ul><ul><li>Commodities? Futures? </li></ul></ul></ul><ul><ul><ul><li>Ex. Crude Oil Futures, Weather futures etc. </li></ul></ul></ul>
    15. 15. <ul><li>Trading </li></ul><ul><li>Actual Trade Flow </li></ul>Investor (DIFA) Broker (Schwab) Specialist / Computer Seller Trading Floor (NYSE) Broker ( other ) Trading Floor (NYSE)
    16. 16. <ul><li>Trading </li></ul><ul><li>Price Terms </li></ul><ul><ul><li>Bid </li></ul></ul><ul><ul><ul><li>Highest price a buyer is willing to pay for a security </li></ul></ul></ul><ul><ul><li>Ask </li></ul></ul><ul><ul><ul><li>Lowest price a seller is willing to receive for a security </li></ul></ul></ul><ul><ul><li>Spread </li></ul></ul><ul><ul><ul><li>Difference between the bid and ask price </li></ul></ul></ul><ul><ul><li>Quote </li></ul></ul><ul><ul><ul><li>The highest bid and lowest ask price currently available </li></ul></ul></ul>
    17. 17. Investing Theory Why do we invest?
    18. 18. <ul><li>Castles in the Air Theory </li></ul><ul><li>Mass Psychology </li></ul><ul><ul><ul><li>Analysis of how a crowd of investors are likely to behave in the future under different circumstances. </li></ul></ul></ul><ul><ul><ul><li>During periods of optimism, they tend to build hopes into castles in the air. </li></ul></ul></ul><ul><ul><ul><li>The General Theory of Employment, Interest and Money ,John Maynard Keynes </li></ul></ul></ul><ul><ul><ul><ul><li>Most prominently used this theory in his investments – he played the market for 30 min each morning and made millions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>He wrote “It is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe the market will value it at 20 three months hence.” </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The key is “foreseeing changes in the conventional basis of valuation a short time ahead of the general public.” </li></ul></ul></ul></ul>
    19. 19. <ul><li>Castles in the Air Theory </li></ul><ul><li>Greater Fool Theory </li></ul><ul><ul><ul><li>An investment is only worth a certain price because we expect someone else will buy it for a higher price. The new buyer will assume that they can in turn sell it to someone else for an even higher price. Therefore, any price will do as long as someone else is willing to pay more. </li></ul></ul></ul><ul><li>Technical Analysis </li></ul><ul><ul><ul><li>Looking at charts and trading volumes to predict future prices. </li></ul></ul></ul>
    20. 20. <ul><li>Firm Foundation Theory </li></ul><ul><ul><ul><li>Each investment instrument has a basis for how much it is worth that it linked to the company’s earnings, assets, and future financial performance. </li></ul></ul></ul><ul><li>Intrinsic Value </li></ul><ul><ul><ul><li>What is the value of the underlying entity? </li></ul></ul></ul><ul><ul><ul><ul><li>Determined by looking at present conditions and future prospects. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A Stock’s intrinsic value is its theoretical price. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>When investing, we compare a company’s current price with it’s intrinsic value. In theory, these two prices should be the same. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The Theory of Investing , John B. Williams </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The intrinsic value of a stock is equal to the present value of all it’s future dividends. </li></ul></ul></ul></ul></ul>
    21. 21. <ul><li>Firm Foundation Theory </li></ul><ul><li>Arriving at a Stock Price </li></ul><ul><ul><ul><li>Since owning a stock means that you own a small part of the company, you are also entitled to a small proportion of that company’s profits every year. </li></ul></ul></ul><ul><ul><ul><li>Therefore, a stock price can be viewed as an estimation of a company’s profits out into the future and seeing how much that is worth today. </li></ul></ul></ul><ul><li>Four Key Drivers of Stock Prices </li></ul><ul><ul><ul><li>The Expected Growth Rate </li></ul></ul></ul><ul><ul><ul><li>The Expected Dividend Payout </li></ul></ul></ul><ul><ul><ul><li>The Degree of Risk </li></ul></ul></ul><ul><ul><ul><li>The Level of Market Interest Rates </li></ul></ul></ul>
    22. 22. Portfolio Theory <ul><li>Diversification: Investing in a collection (portfolio) of assets whose return do not always move together, with the result that overall risk is lower than for individual assets. </li></ul><ul><li>Modern Portfolio Theory (Harry Markowitz) </li></ul>
    23. 23. Financial Statements Reported Financial Information
    24. 24. <ul><li>Financial Statements </li></ul><ul><li>The Balance Sheet </li></ul><ul><ul><ul><li>Shows a company’s financial performance at a point in time </li></ul></ul></ul><ul><ul><ul><li>Used to see a company’s financial structure </li></ul></ul></ul><ul><li>The Income Statement </li></ul><ul><ul><ul><li>Shows a company’s revenues and expenses over a given period of time </li></ul></ul></ul><ul><ul><ul><li>How the company is using their assets to create earnings </li></ul></ul></ul><ul><li>Statement of Cash Flows </li></ul><ul><ul><ul><li>Reports the impact of a firm’s activities on cash flows over a given period of time. </li></ul></ul></ul><ul><ul><ul><li>Operating, Financing, Investing </li></ul></ul></ul>
    25. 25. <ul><li>Financial Statements </li></ul>
    26. 26. <ul><li>Financial Statements </li></ul>
    27. 27. <ul><li>Financial Statements </li></ul>
    28. 28. <ul><li>Financial Statements </li></ul>
    29. 29. Appendix C – Analyst Reports <ul><ul><li>Reuters ProVestor Company Reports </li></ul></ul><ul><ul><li>Schwab </li></ul></ul><ul><ul><li>GS Research Reports </li></ul></ul><ul><ul><li>Argus </li></ul></ul><ul><ul><li>S&P </li></ul></ul>

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