automobiles and designer clothes are sure to benefitInvestment Management                                         from the...
then she would be willing to invest in, say, a T-bill that      ABC Foreign Cars is purchasing 3 German cars for itspays a...
Stock Split                                                   investors, the shares are too expensive to buy in roundDefin...
treasury bill differs from other types of investments in       What        Does      Marketable      Securities   Mean?tha...
insurance market. Financial bankers, who would accept                  investor will call upon the margin account tosome o...
referred to usage of secondary market term is to             securities. Sometimes referred to as a special cash    refer ...
If you want to buy stock ABC, youll have to pay the ask of 16. If you      Earnings Surprise Definitionwant to sell stock ...
market.                                                               For example, if you want to buy the stock of a "hot"...
Definition                                                                by paying the call price, which is greater than ...
involves trial and error, it is usually done by using a programmable       but if it does it could mean that the company i...
1. UK: No OTC market on the pattern of the US exists but                  and markets are indications of future performanc...
Resistance                                                         270 days. The debt is usually issued at a discount, ref...
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Investment management

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Investment management

  1. 1. automobiles and designer clothes are sure to benefitInvestment Management from the increased purchasing power of emerging”An investment in knowledge always pays the best economies, but everyday luxuries such as cell phonesinterest” Benjamin Franklin and brand name food products are becoming popularMutual Funds much more quickly. For example, the number ofA mutual fund is a type of Investment Company that wireless subscribers in India grew at a compoundpools money from many investors and invests the annual growth rate of 91% from 2000 to 2005, andmoney in stocks, bonds, money-market instruments, Coca-Cola Company (KO) predicts that the BRICother securities, or even cash. countries will account for 41% of the companys growthFor example: You invest $1,000 in a mutual fund with by 2008.an NAV (Net Asset Value) of $10.00. You will therefore Required Rate of Returnown 100 shares of the fund. If the NAV drops to $9.00 1. The minimum rate of return that an investment must(because the value of the funds portfolio has dropped), provide or must be expected to provide in order toyou will still own 100 shares, but your investment is justify its acquisition. For example, an investor who cannow worth $900.00. If the NAV goes up to $11.00, your earn an annual return of 11% on certificates of depositinvestment is worth $1,100. (This example assumes no may set a required rate of return of 15% on a more riskysales charge.) stock investment before considering a shift of fundsEmerging markets are nations with social or business into stock. An investments required return is a functionactivity in the process of rapid growth and of the returns available on other investments and of theindustrialization. Currently, there are 28 emerging risk level inherent in a particular investment.markets in the world, with the economies of China and 2. The minimum rate of return required by an investor,India considered to be the largest.[1] According to The a stipulation that limits the types of investments theEconomist many people find the term outdated, but no investor can undertake. For example, a person with anew term has yet to gain much traction.[2] required rate of return of 15% would generally have toThe ASEAN–China Free Trade Area, launched on January invest in relatively risky securities.1, 2010, is the largest regional emerging market in the Required Rate of Returnworld. In securities, the minimum acceptable rate of return atThe term Emerging markets is used by investment a given level of risk. Different investors have differentanalysts to categorize countries that are in a transitional reasons for choosing their required returns. Normally, itphase between developing countries that are just is determined by a persons or institutions cost ofbeginning to industrialize and countries that are fully capital. For example, an investor may also carry a debtdeveloped. The main significance of the use of the term with a high interest rate; if an investment does notis that investments in emerging markets are assumed to meet a required rate of return, it would make morecarry greater risk and offer less safety in investment. sense for the investor to pay down his/her debt. TheThe term is often used interchangeably with developing required return is also related to the amount of risk anmarkets, though this is somewhat inaccurate. Examples investor is willing to accept. One with a portfolioof emerging markets include the BRIC countries (Brazil, consisting largely of bonds will generally have a lowerRussia, India, and China), several Southeast Asian required return than one whose portfolio containscountries, Eastern Europe, and parts of Africa and Latin mainly stocksAmerica. For example, if a person buys a stock, that person mayEmerging markets are characterized by strong economic desire a required rate of return of 10% per year. Thegrowth, resulting in an often marked rise in GDP and investors reasoning is that if he or she does not receivedisposable income. As a result, people in emerging 10% return, he or she would be better off paying downcountries are often able to buy goods and services that an outstanding mortgage on which he or she is payingthey previously would not have been able to afford. 10% interest.This provides international companies with the First, a quick review: the required rate of return isopportunity to tap large, new customer bases, defined as the return, expressed as a percentage, thatpotentially driving significant growth for a number of an investor needs to receive on an investment in ordercompanies and industries. Though disposable incomes to purchase an underlying security. For example, if anin emerging markets are rising, many of their citizens investor is looking for a return of 7% on an investment,are still relatively poor. Luxury goods such as high-end
  2. 2. then she would be willing to invest in, say, a T-bill that ABC Foreign Cars is purchasing 3 German cars for itspays a 7% return or higher. showroom floor. ABC cannot pay for the cars in inBut what happens when an investors required rate of advance and has not yet established a credit recordreturn increases, such as from 7% to 9%? The investor with the German manufacturer.will no longer be willing to invest in a T-bill with a return On the other hand, ABC has an excellent credit recordof 7% and will have to invest in something else, like with its bank. ABC goes to its bank and fills out thea bond with a return of 9%. But in terms of the dividend documents required for a draft to be made out to thediscount model (also known as the Gordon growth German manufacturer. The payment date of the draftmodel), what does the required rate of return do to the is one week after receipt of the 3 cars, giving ABC timeprice of a security? to perform a thorough inspection of the delivery.Bankers Acceptance ABCs bank knows from experience that ABC is good forThe Truth: the money (or perhaps the funds are deposited in theIn general, an acceptance is a promise to pay. banks escrow). Therefore, ABCs bank accepts the draftThe promise is made by the person or entity that will on behalf of ABC and sends it on to the Germanactually make the payment - the promissory - to the manufacturer who is now assured that he will be paidperson or entity who will receive payment - the payee, for the shipment of cars.or beneficiary. (see PROMISSORY NOTE) IMPORTER > IMPORTERS BANK > ACCEPTANCE >The promise-to-pay document is called a MANUFACTURERdraft. Payment of the draft will be made on a specified Zero coupon bondfuture date, so the draft is called a time draft. To seal From Wikipedia, the free encyclopediathe promise, the promissory signs the draft and stamps A zero-coupon bond (also called a discount bond oror writes the word "Accepted" above his signature and deep discount bond) is a bond bought at a price loweradds the date on which he will pay the amount written than its face value, with the face value repaid at theon the draft. time of maturity.[1] It does not make periodic interestThe draft has now been formally accepted by the payments, or have so-called "coupons," hence the termpromissory, and the commitment to pay the beneficiary zero-coupon bond. Investors earn return from theon the due date has become a legal obligation. compounded interest all paid at maturity plus theIf the acceptor is a bank, the acceptance is called a difference between the discounted price of the bondBankers Acceptance. and its par (or redemption) value. Examples of zero-A bank may accept a draft on behalf of either one of its coupon bonds include U.S. Treasury bills, U.S. savingscustomers or a note holder (payee). In either case, the bonds, long-term zero-coupon bonds,[1] and any type ofpromissory then becomes obligated to pay the bank the coupon bond that has been stripped of its coupons.amount financed in full with interest on or before the A zero-coupon bond is a bond that does not paymaturity date, and the bank becomes the primary entity interest but instead is sold at a discount, i.e., for lessobligated to pay the amount due to the payee. than its face value. For example, a zero-coupon bondBankers acceptances used in international trade fall with a face value of $5,000 may sell for only $4,200.under the regulations for a DOCUMENTARY CREDIT. When the zero-coupon bond matures years later, theFor the most part, bankers acceptances are used in the bond buyer receives the full $5,000; the $800 differencetrade of goods. An example would be when a German is the "interest" earned on the zero-coupon bond. Amanufacturer needs to be paid by an American well-known example of a zero-coupon bond is the seriesimporter (or when an American manufacturer needs to EE savings bond sold by the U.S. Treasury. This bondbe paid by an American retailer). sells for half its face value, which ranges as high asThe retailer or importers bank, under certain financial $10,000. One advantage to issuing a zero-coupon bondconditions between the bank and its customer, accepts is that the issuer does not need to make periodicto pay for the goods. Essentially, the bank is interest payments to its bondholders. One possiblesubstituting its creditworthiness for that of its customer disadvantage to bond investors is that zero-couponin order to assure the manufacturer that he will not be bond prices are more volatile on the secondary bondhung out to dry after shipping the goods. The market, since the lack of periodic interest payments isacceptance is then sent to the manufacturer. viewed as risky. A zero-coupon bond is also known as anExample: accrual bond.
  3. 3. Stock Split investors, the shares are too expensive to buy in roundDefinition lots.An increase in the number of outstanding shares of acompanys stock, such that proportionate equity of For example, if a XYZ Corp.s shares were worth $1,000each shareholder remains the same. This requires each, investors would need to purchase $100,000 inapproval from the board of directors and shareholders. order to own 100 shares. If each share was worth $10,A corporation whose stock is performing well may investors would only need to pay $1,000 to own 100choose to split its shares, distributing additional shares shares.to existing shareholders. The most common stock split Example: You own 150 shares of ABC with a basis of $24 peris two-for-one, in which each share becomes two share, and another 100 shares of ABC with a basis of $28 pershares. The price per share immediately adjusts to share. The stock splits 2-for-1. After the split, you own 300reflect the stock split, since buyers and sellers of the shares with a basis of $12 per share, and 200 shares with a basis of $14 per share. (This is true even if you receive astock all know about the stock split (in this example, the single certificate representing your 250 new shares.)share price would be cut in half). Some companies Stock dividenddecide to split their stock if the price of the stock rises Definitionsignificantly and is perceived to be too expensive for A dividend paid as additional shares of stock rather thansmall investors to afford. also called split. as cash. If dividends paid are in the form of cash, thoseA stock split occurs when a company releases additional dividends are taxable. When a company issues a stockstock in a structured manner without decreasing dividend, rather than cash, there usually are not taxshareholder equity. For example, in a 2 for 1 stock split, consequences until the shares are sold.an investor who owns 100 shares of a stock valued at When you receive additional shares as a result of a non-$100 per share before the stock split will own 200 taxable stock dividend or split, your total basis in yourshares valued at $50 per share after the split. After the stock remains the same. The basis is divided among thestock split the investor owns twice as many shares, with shares you already owned and the new shares ineach share worth exactly half as much as before the proportion to the value of the shares. In the usual case,stock split. While a 2 for 1 stock split is probably the where the new shares are exactly the same as the oldmost common form of stock split it is not the only form. ones, the value is the same, and basis is allocated3 for 1 stock splits and other ratios of stock splits are equally to each share.also possible. In the majority of cases the purpose of a Example: You own 400 shares of XYZ with a basis of $33stock split is to reduce the share price of a stock in per share (total basis of $13,200). XYZ declares a 10%order to make the stock more affordable to a wider stock dividend. You receive 40 additional shares andpool of investors. now own a total of 440 shares. Your total basis isStock Split unchanged, so your basis per share is now $13,200What Does Stock Split Mean? divided by 440, or $30.A corporate action in which a companys existing shares Stock or scrip dividends are those paid out in the formare divided into multiple shares. Although the number of additional stock shares of the issuing corporation, orof shares outstanding increases by a specific multiple, another corporation (such as its subsidiary corporation).the total dollar value of the shares remains the same They are usually issued in proportion to shares ownedcompared to pre-split amounts, because no real value (for example, for every 100 shares of stock owned, a 5%has been added as a result of the split. stock dividend will yield 5 extra shares). If the payment involves the issue of new shares, it is similar to a stockIn the U.K., a stock split is referred to as a "scrip issue", split in that it increases the total number of shares"bonus issue", "capitalization issue" or "free issue". while lowering the price of each share without changingInvestopedia explains Stock Split the market capitalization, or total value, of the sharesFor example, in a 2-for-1 split, each stockholder heldreceives an additional share for each share he or sheholds. A treasury bill, or t-bill, is a short term investment with maturity dates ranging from four to 52 weeks. TheseOne reason as to why stock splits are performed is that investments are often considered quite safe becausea companys share price has grown so high that to many they are backed by the United States government. A
  4. 4. treasury bill differs from other types of investments in What Does Marketable Securities Mean?that they do not pay interest in the traditional way. Very liquid securities that can be converted into cashWhen an investor wishes to purchase a treasury bill, quickly at a reasonable price.they buy buy it at a discount rate. The amount paid for Marketable securities are very liquid as they tend tothe treasury bill varies, and is decided by a bidding have maturities of less than one year. Furthermore, theprocess. Once the treasury bill is purchased, the owner rate at which these securities can be bought or sold hasdoes not receive any money until the t-bill matures at little effect on their prices.which time he or she will receive the face value of the t- Investopedia explains Marketable Securitiesbill. This difference, the discount rate and the face value Examples of marketable securities include commercialrate, is said to be the "interest" of a t-bill. Another paper, bankers acceptances, Treasury bills and otherbenefit of the t-bill, is that when you purchase one, you money market instruments.know exactly how much you will earn over the life of Treasury Bill - T-Billthe investment. What Does Treasury Bill - T-Bill Mean?Call Provision A short-term debt obligation backed by the U.S.Definition government with a maturity of less than one year. T-Clause in a debt instrument (such as a bond) which bills are sold in denominations of $1,000 up to aallows its issuer to redeem it before its maturity date, maximum purchase of $5 million and commonly haveusually on one or more call dates specified in its maturities of one month (four weeks), three months (13indenture. Also called redemption provision. weeks) or six months (26 weeks).Call Provision T-bills are issued through a competitive bidding processThe stipulation in most bond indentures that permits at a discount from par, which means that rather thanthe issuer to repurchase securities at a fixed price or at paying fixed interest payments like conventional bonds,a series of prices before maturity. This provision the appreciation of the bond provides the return to theoperates to the detriment of investors because calls on holder.high-interest bonds usually occur during periods of Investopedia explains Treasury Bill - T-Billreduced interest rates. Thus, an investor whose bond is For example, lets say you buy a 13-week T-bill priced atcalled must find another investment, often one that $9,800. Essentially, the U.S. government (and its nearlyprovides a lower return. Certain preferred stock issues bulletproof credit rating) writes you an IOU for $10,000are also subject to call. Also called call feature. See also that it agrees to pay back in three months. You will notmake-whole call provision. receive regular payments as you would with a coupon bond, for example. Instead, the appreciation - and,Non-Marketable Security therefore, the value to you - comes from theWhat Does Non-Marketable Security Mean? difference between the discounted value you originallyAny type of security that is difficult to buy or a sell paid and the amount you receive back ($10,000). In thisbecause it does not trade on a normal market or case, the T-bill pays a 2.04% interest rate ($200/$9,800exchange. These types of securities trade over the = 2.04%) over a three-month period.counter (OTC) or in a private transaction. Finding aparty with which to transact business is often difficult; Underwriter Meaning and Definitionin some cases, these securities cant be resold due to 1. a banker who deals chiefly in underwriting newregulations surrounding the security. securities [syn: investment banker]Investopedia explains Non-Marketable Security 2. an agent who sells insurance [syn: insuranceSome examples of non-marketable securities are broker, insurance agent, general agent]savings bonds, series (A, B, EE, etc.) bonds and private 3. a financial institution that sells insurance [syn:shares. The U.S. government offers both marketable insurance company, insurance firm, insurer,and non-marketable securities to the public. insurance underwriter}]Marketable securities, such as treasury bills and bonds Underwriting refers to the process that a large financialcan be purchased and resold to the public. But non- service provider (bank, insurer, investment house) usesmarketable securities, such as savings bonds must be to assess the eligibility of a customer to receive theirheld by the holder until maturity and cant be resold to products (equity capital, insurance, mortgage, oranother party. credit). The name derives from the Lloyds of LondonMarketable Securities
  5. 5. insurance market. Financial bankers, who would accept investor will call upon the margin account tosome of the risk on a given venture (historically a sea purchase investments, then repay the amountvoyage with associated risks of shipwreck) in exchange borrowed using the returns generated by thatfor a premium, would literally write their names under investment.the risk information that was written on a Lloyds slip The primary market is that part of the capital marketscreated for this purpose. that deals with the issuance of new securities.Once the underwriting agreement is struck, the Companies, governments or public sector institutionsunderwriter bears the risk of being able to sell the can obtain funding through the sale of a new stock orunderlying securities, and the cost of holding them on bond issue. This is typically done through a syndicate ofits books until such time in the future that they may be securities dealers. The process of selling new issues tofavorably sold. investors is called underwriting. In the case of a newPrivate placement occurs when a company makes an stock issue, this sale is an initial public offering (IPO).offering of securities not to the public, but directly to an Dealers earn a commission that is built into the price ofindividual or a small group of investors. Such offerings the security offering, though it can be found in thedo not need to be registered with the Securities and prospectus. Primary markets creates long termExchange Commission (SEC) and are exempt from the instruments through which corporate entities borrowusual reporting requirements. Private placements are from capital market.generally considered a cost-effective way for small Features of primary markets are:businesses to raise capital without "going public" This is the market for new long term equity capital.through an initial public offering (IPO). The primary market is the market where the securities are sold for the first time. Therefore it isMargin Call also called the new issue market (NIM). In a primary issue, the securities are issued by the Margin calls are simply a part of buying on company directly to investors. margin, and while some people choose to keep The company receives the money and issues new their invested equity well above the minimum security certificates to the investors. margin requirements to avoid a margin call, Primary issues are used by companies for the others keep themselves continuously invested at purpose of setting up new business or for expanding exactly the minimum, prompting a margin call or modernizing the existing business. every time the market takes a downturn. The primary market performs the crucial function of This means that as the value of someones facilitating capital formation in the economy. securities falls, he or she may get a “margin call” The new issue market does not include certain other from a broker, with the broker requesting more sources of new long term external finance, such as money to cover the maintenance margin. If an loans from financial institutions. Borrowers in the new issue market may be raising capital for investor fails to respond to a margin call, the converting private capital into public capital; this is broker can choose to liquidate his or her known as "going public." securities to address the problem. The financial assets sold can only be redeemed byMargin Account the original holder. A margin account is necessary when selling The secondary market, also known as the stocks short, and is usually used by people who aftermarket, is the financial market where simply want to leverage their investment, rather previously issued securities and financial than people who can’t afford the full purchase instruments such as stock, bonds, options, and price of the securities. A broker who offers futures are bought and sold.[1]. The term margin accounts will charge interest for the "secondary market" is also used to refer to the right to borrow the money, although the market for any used goods or assets, or an interest rate is usually very low. alternative use for an existing product or asset Brokerages set the credit limit for a margin where the customer base is the second market account based on the credit-worthiness of the (for example, corn has been traditionally used investor, often taking into account such factors primarily for food production and feedstock, but as the value of assets owned and the general a "second" or "third" market has developed for credit rating of that investor. Typically, the use in ethanol production). Another commonly
  6. 6. referred to usage of secondary market term is to securities. Sometimes referred to as a special cash refer to loans which are sold by a mortgage bank account, these cash only investment accounts are often to investors such as Fannie Mae and Freddie utilized for both retirement nest eggs and trusts for Mac. minor children. A cash account is an excellent option when the goal is to With primary issuances of securities or financial establish a secure nest egg for retirement. Perhaps the instruments, or the primary market, investors best example of a cash account for this purpose is the purchase these securities directly from issuers Individual Retirement Account. An IRA is completely such as corporations issuing shares in an IPO or funded with cash deposits that are then invested on the private placement, or directly from the federal part of the broker. Generally, the investments that are government in the case of treasuries. After the undertaken with the funds in an IRA are low risk in initial issuance, investors can purchase from nature, guaranteeing a modest but consistent pattern of other investors in the secondary market. growth. The secondary market for a variety of assets can Many investors check stock prices and are confused because they vary from loans to stocks, from fragmented to actually see three prices... the bid, the ask, and the price. All three are very important indicators of the actual stock price, but dont centralized, and from illiquid to very liquid. The feel stupid if you dont understand how to differentiate them. major stock exchanges are the most visible The Spread and Market Makers example of liquid secondary markets - in this The spread is the difference between the bid price and the ask case, for stocks of publicly traded companies. price. The reason for this is simple. For a stock to be traded, there Exchanges such as the New York Stock has to be a "market" for it. This means that if you want to sell, there has to be someone willing buy from you; and if you want to Exchange, Nasdaq and the American Stock buy, there has to be someone to sell to you. The people who Exchange provide a centralized, liquid secondary "make the market" for your stock are called market makers. These market for the investors who own stocks that are people (companies) that hold inventory of the underlying stock trade on those exchanges. Most bonds and and regulate its buying and selling. structured products trade “over the counter,” or Since the market makers are people employed by companies, they have to make money. If they didnt make money, they couldnt be by phoning the bond desk of one’s broker- in business, and there wouldnt be a market for people to buy and dealer. Loans sometimes trade online using a sell stocks. The spread, the difference between the bid and ask, Loan Exchange. generates profit for the market making companies. Third market in finance, refers to the trading of For example, take Stock XYXY with a price of 10, bid 10, ask 10.50. exchange-listed securities in the over-the- The spread for stock XYXY is (10.50 - 10 = .50) The market maker keeps the $0.50 per share traded. Assume that stock XYXY traded counter (OTC) market. These trades allow 1,000 shares yesterday, and the average spread was $0.50. That institutional investors to trade blocks of gives the market makers a profit of 1,000 shares * $0.50 = $500. securities directly, rather than through an The Bid exchange, providing liquidity and anonymity to The bid is the price that you can sell your stock for. The term "bid" buyers[1] comes from the fact that market makers are making a bid on the stock you own. Basically, its the price that theyre willing to give Third market trading was pioneered in the 1960s for your stock. by firms such as Jefferies & Company although To simplify, think of an auction. The auctioneer is selling a Monet today there are a number of brokerage firms painting (your stock), and the people in the audience (the market focused on third market trading, and more makers) are bidding the price theyre willing to pay. recently dark pools of liquidity.[2] The Ask The ask is the price that you can buy a stock for. Its basically theFourth market trading is direct institution-to-institution amount that the market makers are "asking" you to give for thetrading without using the service of broker-dealers. It is stock. A good example is when youre looking for a new car to buyimpossible to estimate the volume of fourth market (the stock). You call the owner (the market makers) from theactivity because trades are not subject to reporting classified ad, and the first thing you say is "how much are yourequirements. Studies have suggested that several asking for the car?"million shares are traded per day. The PriceCash accounts are brokerage accounts that require When looking at a stock quote the price is the dollar amount where the stock was last bought or sold. So if the last trade was a sellthe client to render full payment for a transaction by the order, the price was actually the bid price. If the last trade was aagreed upon settlement date. The nature of a cash buy order, the price quoted is actually the ask price.account means that the customer is not granted the Lets take a few examples.privilege of buying on margin, or utilizing borrowed Stock ABC: Price 15 3/4, Bid 15 3/4, Ask 16money secured through the broker in order to purchase
  7. 7. If you want to buy stock ABC, youll have to pay the ask of 16. If you Earnings Surprise Definitionwant to sell stock ABC, you must accept the bid of 15 3/4. The An earnings surprise occurs when a companysspread is $0.25.Stock XYZ: Price 77 1/2, Bid 77 3/8, Ask 77 9/16 quarterly or annual report is above or below analysts earnings estimates. There is no set number whichIf you want to sell stock XYZ you must accept a bid price of 77 3/8,and if you want to buy you have to be willing to pay an ask of 77constitutes a earnings surprise, other than it is not9/16. The spread is $0.183. within the expected consensus estimate. Many times this surprise will lead to a sharp reaction in the stock.Definition of Treasury Stock This reaction in the stock is also dependent upon howTreasury Stock is shares of a corporations capital stock that closely the stock is followed by analysts and the publichave already been issued and are now being re-purchased by at large. Like anything else in business, the number ofthe same issuing corporation. active participants will lead to more volume and potentially larger price swings.These treasury shares may be held onto by the company Growth industrypermanently or may be re-issued at a later time to thepublic. Shares of capital stock will not receive dividends, will Definitionnot have the power to vote, and cannot share in the An industry which is growing earnings and/or revenue fasterdistribution of assets upon dissolution of the company. than the overall market. Growth industries usually contain a large number of growth stocks. Investments in such industriesIt is also important to note that shares of a companys stock are usually suitable for investors who are willing to accept larger risk in exchange for the possibility of larger returns.that are held in treasury are not regarded as shares ‘’A sector of the economy experiencing a higher-than-outstanding and therefore will not be used in the calculationof earnings per share (EPS) average growth rate’’ Investopedia explains Growth IndustryFor example, assume that a company currently has in-the- If companies across an industry exhibit solid earnings and revenuemoney options that cover 10,000 shares with an exercise figures, that industry may be showing signs that it is in its growthprice of $50. If the current market price is $100, the options stage.are in-the-money and, based on the treasury method, needto be added to the diluted EPS denominator. The proceeds Growth industries tend to be composed of relatively volatile andthe company will receive will be $500,000 ($50 x risky stocks. Often investors must be willing to accept increased10,000), which allows them to repurchase 5,000 shares on risk in order to take part in the potentially large gains offered bythe market ($500,000/$100). stocks within a particular growth industry.Therefore, the net of new shares is 5,000 (10,000 option Cyclical vs. Defensive Industries that greatly differ from each other in terms of business activityshares - 5,000 repurchased shares). can react similarly to changes in the economy. For example, cyclical stocks,Ask Price like retail and travel, are sensitive to the economic cycle because in tightDefinition: The ask price is the lowest price you can pay for the economic periods, consumers are less likely to spend money on non-stock. This is because its the lowest price any seller is offering their essential items.shares of stock for. Although the ask price might be $14, you might On the other hand, defensive stocks represent necessary items, like food,pay slightly higher if you put in a large order. gas and medicine, and tend to change very little with the economic cycle because consumers are likely to continue buying them even in toughSome companies are very illiquid and have large spreads between economic times.the bid and ask prices. For example, a stock might be quoted at Investing in both cyclical and defensive stocks can potentially help hedge$13.50 but the ask price might actually be $14.00. If you place an against the risk you face by selecting only industries that react similarly toorder, youll pay $14.00. That means youll lose 3.5% of your changing market conditionsinvestment immediately BULLS AND BEARS IN THE MARKET A Bull Market Sustainable growth is the rate of growth that is most realistic This is when the market showing is confidence. Indicatorsestimate of the growth in a company’s earnings, assuming that thecompany does not alter its capital structure. The most common of confidence are prices going up, market indices like themethod of estimation is to estimate sustainable growth as the stock exchange go up too. Number of shares traded is alsoproduct of the return on equity and earnings retention: high and even the number of companies entering theSustainable growth = return on equity retention rate stock market show that the market is confident. The return on equity is the return per dollar of owners’ equity; thereturn is calculated as the ratio of net income to book value of These are bullish characteristics. If there is a run of bullishequity. The retention rate is the percentage of earnings retained days then you may hear the market is a bull market.by the company – that is, not paid out in the form of dividends. In Technically though a bull market is a rise in value of theother words, the retention rate is the complement of the dividend market of at least 20%. The huge rise of the Dow and stockpayout ratio (DPO). exchange during the tech boom is a good example of a bull
  8. 8. market. For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but dont want to end upA Bear Market paying more than $20 for the stock, you can place aA bear market is the opposite of a bull. If the markets fall by limit order to buy the stock at any price up to $20. Bymore than 20% then we have entered a bear market. A bear entering a limit order rather than a market order, youmarket is a market showing a lack of confidence. Prices will not be caught buying the stock at $90 and thenhover at the same price then go down, indices fall too andvolumes are stagnant. In a bear market people are waiting suffering immediate losses if the stock drops later in thefor the bulls to start driving the prices up again. However, a day or the weeks ahead.bear is a very tentative bull or a bull that is asleep. Convertible bondInvestopedia explains Risk-Free Rate Of Return DefinitionIn theory, the risk-free rate is the minimum return an investor A corporate bond, usually a junior debenture, that can beexpects for any investment because he or she will not accept exchanged, at the option of the holder, for a specific number ofadditional risk unless the potential rate of return is greater than shares of the companys preferred stock or common stock.the risk-free rate. Convertibility affects the performance of the bond in certain ways. First and foremost, convertible bonds tend to have lowerIn practice, however, the risk-free rate does not exist because interest rates than non-convertibles because they also accrueeven the safest investments carry a very small amount of risk. value as the price of the underlying stock rises. In this way,Thus, the interest rate on a three-month Treasury bill is often convertible bonds offer some of the benefits of both stocks andused as the risk-free rate. bonds. Convertibles earn interest even when the stock is trading down or sideways, but when the stock prices rise, theMarket Order value of the convertible increases. Therefore, convertibles canA market order is an order to buy or sell a stock at the offer protection against a decline in stock price. Because theycurrent market price. Unless you specify otherwise, are sold at a premium over the price of the stock, convertiblesyour broker will enter your order as a market order. should be expected to earn that premium back in the first three or four years after purchase. In some cases, convertibles mayThe advantage of a market order is you are almost be callable, at which point the yield will cease.always guaranteed your order will be executed (as longas there are willing buyers and sellers). Depending on Commercial paper is the most prevalent form ofyour firm’s commission structure, a market order may security in the money market, issued at a discount, withalso be less expensive than a limit order. a yield slightly higher than Treasury bills. The mainA market order is an order to buy or sell a stock at the issuers of commercial paper are finance companies andcurrent market price. A broker enters an order as a banks, but also include corporations with strong credit,market order when requested to do so by his or her client. and even foreign corporations and sovereign issuers.When a market order is placed, it is almost guaranteed The main buyers of commercial paper are mutual funds,that the order will be executed. Ultimately, however, this banks, insurance companies, and pension funds.depends on whether or not there is a willing buyer or Because commercial paper is usually sold in round lotsseller. of $100,000, very few retail investors buy paper.A market order is usually less expensive than a limit order.A limit order is an order to buy a security at a price no In law, a debenture is a document that either createsgreater than what has been specified by the owner. This a debt or acknowledges it. In corporate finance, thegives the customer control over the price of the trade. A term is used for a medium- to long-term debtbuy limit order can only be executed by the broker. It also instrument used by large companies to borrow money.has to meet or fall short of the limit price. In some countries the term is used interchangeably withLimit Orders bond, loan stock or note.To avoid buying or selling a stock at a price higher or Debentures are generally freely transferable by thelower than you wanted, you need to place a limit order debenture holder. Debenture holders have no rights torather than a market order. A limit order is an order to vote in the companys general meetings ofbuy or sell a security at a specific price. A buy limit shareholders, but they may have separate meetings ororder can only be executed at the limit price or lower, votes e.g. on changes to the rights attached to theand a sell limit order can only be executed at the limit debentures. The interest paid to them is a chargeprice or higher. When you place a market order, you against profit in the companys financial statements.cant control the price at which your order will be filled. Zero growth
  9. 9. Definition by paying the call price, which is greater than theZero growth is a concept that all economic activities should aim at face value of the bond, to the bondholder. Often,the equilibrium state rather than continuing growth whichultimately leads to overshoot and the following collapse of the callable bonds cannot be called until 5 or 10 yearssystem. after they were issued. When this is the case, the bonds are said to be call protected. The date whenThe main question is: can continuous growth in the context of the bonds can be called is refered to as the call date.finite resources lead to prosperity? It seems contradictory, yet in The yield to call is the rate of return that an investormost peoples minds growth implies prosperity. Its so axiomaticthat no proof is required or sought. But is this belief, as universally would earn if he bought a callable bond at its currentheld as was once the notion that the earth is flat, be a truism, market price and held it until the call date given thatderived from faulty, simplistic observation, as wrong as was that the bond was called on the call date. It representsearlier mistaken assumption? the discount rate which equates the discounted value of a bonds future cash flows to its currentAs the Zero Growth Initiative puts it: "In boasting of our prosperity,our economic growth, are we like lemmings boasting of how many market price given that the bond is called on the callmiles they have advanced in a day. Are we as blind to our ultimate date. This is illustrated by the following equation:fate as those lemmings scurrying merrily to the awaiting sea? Thewarnings are as obvious as the view out the window in any of ourgreat cities on a sultry summer day and as veiled as a chemicalreaction happening in an ionized stratum far above our growth-distracted heads. "A constant growth stock is a stock whose dividendsare expected to grow at a constant rate in theforeseeable future. This condition fits many establishedfirms, which tend to grow over the long run at the same Yield to Call Examplerate as the economy, fairly well. The value of a constantgrowth stock can be determined using the following Find the yield to call on a semiannual coupon bondequation: with a face value of $1000, a 10% coupon rate, 15 years remaining until maturity given that the bond price is $1175 and it can be called 5 years from now Constant Growth Stock Valuation Example at a call price of $1100. Solution:Find the stock price given that the current dividendis $2 per share, dividends are expected to grow at arate of 6% in the forseeable future, and the requiredreturn is 12%.What Does Yield To Call Mean?The yield of a bond or note if you were to buy and hold the securityuntil the call date. This yield is valid only if the security is called Yield To Maturity - YTMprior to maturity. The calculation of yield to call is based on thecoupon rate, the length of time to the call date and the market What Does Yield To Maturity - YTM Mean?price. The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressedInvestopedia explains Yield To Call as an annual rate. The calculation of YTM takes into account theGenerally speaking, bonds are callable over several years and are current market price, par value, coupon interest rate and time tonormally called at a slight premium. maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.Yield to CallMany bonds, especially those issued by Investopedia explains Yield To Maturity - YTM An approximate YTM can be found by using a bond yield table.corporations, are callable. This means that the issuer However, because calculating a bonds YTM is complex andof the bond can redeem the bond prior to maturity
  10. 10. involves trial and error, it is usually done by using a programmable but if it does it could mean that the company is undervalued and business calculator. might be an attractive buy. The Yield to maturity (YTM) or redemption yield of a bond What Does Book Value Per Common Share Mean? or other fixed-interest security, such as gilts, is the internal A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share rate of return (IRR, overall interest rate) earned by an after all debts are paid accordingly. investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that Formula: all coupon and principal payments will be made on schedule. Yield to maturity is actually an estimation of future return, as the rate at which coupon payments can be reinvested when received is unknown.[1] It enables investors to compare the Investopedia explains Book Value Per Common Share merits of different financial instruments. The YTM is often Should the company decide to dissolve, the book value per given in terms of Annual Percentage Rate (A.P.R.), but more common indicates the dollar value remaining for common usually market convention is followed: in a number of major shareholders after all assets are liquidated and all debtors are paid. markets the convention is to quote yields semi-annually (see compound interest: thus, for example, an annual effective In simple terms it would be the amount of money that a holder of a yield of 10.25% would be quoted as 5.00%, because 1.05 x common share would get if a company were to liquidate. 1.05 = 1.1025). Book value per share The ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an DEFINITION indicator of economic worth, since it reflects accounting valuation Yield to maturity is the most commonly used measure (and not necessarily market valuation). of value of a bond. This yield includes the compounding Book value per share of interest and assumes that the bond is held until Common stockholders equity determined on a per-share basis. maturity. Book value per share is calculated by subtracting liabilities and the par value of any outstanding preferred stock from assets and Book Value Per Share - BV dividing the remainder by the number of outstanding shares of stock. Also called book, book value. See also market to book. Stockholders Equity - Preferred Stock Moving Averages = Average Outstanding Shares What is a moving average? Somewhat similar to the earnings per share, but it relates the Moving averages simply measure the average price or stockholders equity to the number of shares outstanding, giving exchange rate of a currency pair over a specific time frame. the shares a raw value. For example, if we take the closing prices of the last 10 days, Things to remember add them together and divide the result by 10, we haveComparing the market value to the book value can indicate whether or not the stockin overvalued or undervalued. created a 10-day simple moving average (SMA).During bull markets the stock price is more likely to trade significantly higher thanbook value, and in a bear market the two values may be close to equal. Over-The-Counter Market [Click on the image(s) above to see the financial statements] What Does Over-The-Counter Market Mean? A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or For Corys Tequila Co. electronic network instead of a physical trading floor. There is no $11,678 - $0 central exchange or meeting place for this market. = $3.57 3271 Also referred to as the "OTC market". Book Value Analysis: For the most part the book value really doesnt tell us a whole lot. Investopedia explains Over-The-Counter Market Corys Tequila Co. is trading at over $100 and the BV is only $3.57? In the OTC market, trading occurs via a network of middlemen, What is up with that? Well BV is considered to be the accounting called dealers, who carry inventories of securities to facilitate the value of each share, drastically different than what the market is buy and sell orders of investors, rather than providing the order valuing the stock at. And the truth is that market and book value matchmaking service seen in specialist exchanges such as the have nothing in common. Market value is what the investment NYSE. communitys expectations are and book value is based on costs and retained earnings. One situation where BV can be useful is if the Over the counter (OTC) market market value is trading below the book value, this rarely happens, Definitions (2)
  11. 11. 1. UK: No OTC market on the pattern of the US exists but and markets are indications of future performance.unlisted securities are traded on the Alternative InvestmentMarket of the London Stock Exchange (LSE). In a shopping mall, a fundamental analyst would go to each store,2. US: OTC securities trading system in which brokers or dealers study the product that was being sold, and then decide whether to(called market makers) negotiate over telephone or buy it or not. By contrast, a technical analyst would sit on a benchcomputerized networks instead of through a stock exchange. in the mall and watch people go into the stores. Disregarding theTrading rules for this market are established and enforced by intrinsic value of the products in the store, the technical analyststhe National Association Of Securities Dealers. In dollar terms, it decision would be based on the patterns or activity of people going into each store.is the largest securities market in the US. Also called outsidemarket or third market. See also NASDAQ. Short saleBid Price and Ask Price DefinitionThe stock exchanges are the places where the actual setting of the Borrowing a security (or commodity futures contract) from astock prices happens. They are the places where bid and ask prices broker and selling it, with the understanding that it must latercross their ways and the exchange serves as the intermediary be bought back (hopefully at a lower price) and returned to thebetween the two. broker. Short selling (or "selling short") is a technique used bySo, as an educated investor you should be acquainted with the investors who try to profit from the falling price of a stock. Formeaning of bid and ask prices. example, consider an investor who wants to sell short 100Bid price is the price announced by the buyer at which s/he is shares of a company, believing it is overpriced and will fall. Thewilling to purchase a stock. investors broker will borrow the shares from someone whoAsk price is the price announced by the seller at which s/he iswilling to sell a stock. owns them with the promise that the investor will return themThe major role of the exchange is to coordinate the bid and ask later. The investor immediately sells the borrowed shares at theprices of buyers and sellers. This service, of course, is not for free. current market price. If the price of the shares drops, he/sheBid and ask prices are never the same. In fact, the price announced "covers the short position" by buying back the shares, andby the seller (the ask price) is always higher than the bid price. As a his/her broker returns them to the lender. The profit is theresult you are required to pay the ask price in case you have difference between the price at which the stock was sold anddecided to purchase a stock and pay a higher price. On the other the cost to buy it back, minus commissions and expenses forhand, if you decide to sell a stock you will have to receive the bid borrowing the stock. But if the price of the shares increase, theprice, which is of a lower amount than the ask price. potential losses are unlimited. The companys shares may go upOpen-End Fund and up, but at some point the investor has to replace the 100 shares he/she sold. In that case, the losses can mount withoutWhat Does Open-End Fund Mean? limit until the short position is covered. For this reason, shortA type of mutual fund that does not have restrictions on the selling is a very risky technique. For a while, SEC rules onlyamount of shares the fund will issue. If demand is high enough, the allowed investors to sell short only on an uptick or a zero-plusfund will continue to issue shares no matter how many investors tick, to prevent "pool operators" from driving down a stockthere are. Open-end funds also buy back shares when investors price through heavy short-selling, then buying the shares for awish to sell. large profit. This rule was eliminated in July 2007.Investopedia explains Open-End Fund Bid Ask QuoteThe majority of mutual funds are open-end. By continuously selling A two-way price comprising a bid, or the price at which aand buying back fund shares, these funds provide investors with a dealer is willing to buy, and an ask (or offer) at which avery useful and convenient investing vehicle. dealer is willing to sell. The bid, by definition, is always below the ask and is always the first quoted price. The differenceIt should be noted that when a funds investment manager(s) between the two quotes is known as the spread. The spreaddetermine that a funds total assets have become too large to between the best bid and best offer is called the touch.effectively execute its stated objective, the fund will be closed tonew investors and in extreme cases, be closed to new investmentby existing fund investors. SupportTechnical Analysis A support level is a price level where the price tends to find support as it is going down. This means the price isWhat Does Technical Analysis Mean? more likely to "bounce" off this level rather than breakA method of evaluating securities by analyzing statistics generated through it. However, once the price has passed thisby market activity, such as past prices and volume. Technicalanalysts do not attempt to measure a securitys intrinsic value, but level, by an amount exceeding some noise, it is likely toinstead use charts and other tools to identify patterns that can continue dropping until it finds another support level.suggest future activity.Investopedia explains Technical AnalysisTechnical analysts believe that the historical performance of stocks
  12. 12. Resistance 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.A resistance level is the opposite of a support level. It is Investopedia explains Commercial Paperwhere the price tends to find resistance as it is going up. Commercial paper is not usually backed by any form ofThis means the price is more likely to "bounce" off this collateral, so only firms with high-quality debt ratings willlevel rather than break through it. However, once the easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.price has passed this level, by an amount exceedingsome noise, it is likely that it will continue rising until it A major benefit of commercial paper is that it does not needfinds another resistance level. to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine monthsBond Rating (270 days), making it a very cost-effective means of financing.What Does Bond Rating Mean? The proceeds from this type of financing can only be used onA grade given to bonds that indicates their credit quality. current assets (inventories) and are not allowed to be used onPrivate independent rating services such as Standard & fixed assets, such as a new plant, without SEC involvement.Poors, Moodys and Fitch provide these evaluations of abond issuers financial strength, or its the ability to pay abonds principal and interest in a timely fashion.Investopedia explains Bond RatingBond ratings are expressed as letters ranging from AAA,which is the highest grade, to C ("junk"), which is the lowestgrade. Different rating services use the same letter grades,but use various combinations of upper- and lower-case lettersto differentiate themselves.To illustrate the bond ratings and their meaning, well use theStandard & Poors format:AAA and AA: High credit-quality investment gradeAA and BBB: Medium credit-quality investment gradeBB, B, CCC, CC, C: Low credit-quality (non-investmentgrade), or "junk bonds"D: Bonds in default for non-payment of principal and/orinterestPortfolio ManagementWhat Does Portfolio Management Mean?The art and science of making decisions about investmentmix and policy, matching investments to objectives, assetallocation for individuals and institutions, and balancing riskagainst. performance.Portfolio management is all about strengths, weaknesses,opportunities and threats in the choice of debt vs. equity,domestic vs. international, growth vs. safety, and many othertradeoffs encountered in the attempt to maximize return at agiven appetite for risk.Investopedia explains Portfolio ManagementIn the case of mutual and exchange-traded funds (ETFs),there are two forms of portfolio management: passive andactive. Passive management simply tracks a market index,commonly referred to as indexing or index investing. Activemanagement involves a single manager, co-managers, or ateam of managers who attempt to beat the market return byactively managing a funds portfolio through investmentdecisions based on research and decisions on individualholdings. Closed-end funds are generally actively managedCommercial PaperWhat Does Commercial Paper Mean?An unsecured, short-term debt instrument issued by acorporation, typically for the financing of accountsreceivable, inventories and meeting short-term liabilities.Maturities on commercial paper rarely range any longer than

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