beginning investor class 3 2010

8/7/2019 Beginning Investor Class 3 2010

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GI Beginners’ Series: Class III

November 8, 2010



Agenda

Review of P/E and Bond Fundamentals

Fundamental Analysis

Revenue Growth, Book Value

ROE, Debt/Equity Ratio

PEG Ratio

Types of Orders

Limit vs. Market

Stop Order

Bid vs. Ask



Bond Terminology

Maturity

Face value (assume $1,000)

Coupon rate

Federal Reserve

Issues federal government bonds

“Quantitative Easing”



Quantitative Easing

Many believe the Fed will take a gradual approach to buying,revealing a small initial purchase and intent to assess whetheranother is needed after a certain period of time

Primary dealers believe, in its entirety, such a program could

total anywhere from $500 billionJefferies Group Inc.'sJefferies & Co. and Citigroup Inc. are of this viewto $1.2trillion, Cantor Fitzgerald Securities Corp.'s projection

Overall, though, while more quantitative easing will help tokeep interest rates low, primary dealer banks aren't fullyconvinced that the move will prove to be the U.S. economy'sknight in shining armor (WSJ)

http://online.wsj.com/public/quotes/main.html?type=djn&symbol=JEF

http://online.wsj.com/public/quotes/main.html?type=djn&symbol=C

http://online.wsj.com/public/quotes/main.html?type=djn&symbol=C

http://online.wsj.com/public/quotes/main.html?type=djn&symbol=JEF



Corporate Bond Example

Company XYZ issued $10,000 worth of $1,000face value debt with a maturity of 5 years anda coupon rate of 10%.

Your cash flows, afterloaning $1,000

0

200

400

600

800

1000

1200

1 2 3 4 5



Price-to-Earnings Ratio

How much, per $ of earnings, investors arewilling to pay for each share

P/E Ratio Based on latest earnings report

Forward P/E Ratio

Based on forecasted earnings



Price-to-Earnings Ratio

Implications

Growth Stock

High P/E Ratio Forward P/E > P/E

Lower earnings forecasted

Forward P/E < P/E Higher earnings forecasted




Focus on Financial Statements

Use ratios to determine true value of a firm

Measures are relative to the firm’s industry

Champion Fundamentalists:

Warren Buffet Peter Lynch

Benjamin Graham




P/E Ratio

Revenue Growth from Period to Period

Indicates expansion or contraction of business

Book Value aka Shareholders’ Equity

Equals Firm’s Assets minus its Liabilities

Stock Price > BV per share (generally) Lower Stock Price relative to BV better value




Return on Equity

Net Income divided by Book Value

Indicates how well firm is able to generate profits

from shareholders’ equity

Debt/Equity Ratio

Total Debt divided by Book Value

Indicates how much of the firm is financed by debt

Take Corporate Finance (BUS 320) for furtherexamination of the dynamics of debt




Price/Earnings Growth Ratio (PEG) P/E Ratio divided by Expected Growth

Used to dig deeper into P/E Ratio

PEG < 1

Firm is “cheap” PEG > 1 Firm is “overvalued”

Example: Firm ABC

Price=$100 EPS=$10 Expected Growth=12% P/E = 10

PEG = 10/12 = 0.83



Beta

Represents the relationship between an indexand an individual stock

Calculated using regressionTypical Index: S&P 500

Can be positive, negative, or zero

Not a perfect predictor of stock price changes



Beta

Implications High Beta ( |Beta| > 1 )

Volatile stock Risky

Low Beta ( |Beta| < 1 ) Conservative stock Safe

Zero Beta

No direct relationship between Index and Stock

Negative Beta

Stock moves in opposite direction of Index



Beta

ExampleStock ABC: Beta = 1.3

S&P 500: Up 1.0% for the day

ABC likely to increase by 1.3% that day

Morgan Stanley: Beta 1.34

S&P 500: Down .21% for the dayMorgan Stanley likely to increase by .28%today (actual .26%)



Types of Orders

Market vs. Limit Order Market Order: Execute trade immediately

Limit Order: Execute trade as long as price is

within range Buying: Limit Price = Maximum Price to be paid

Selling: Limit Price = Minimum Price to be received

Stop Order

Trade becomes active once Stop level is reached

Typically used to prevent losses

Can also be used on the buy-side



Market Orders

Basically guaranteed sale will go through Will execute almost immediately

May pay a higher (or lower) price than thought

For large orders, shares may be bought atdifferent prices

Example :Bought 10,000 shares of ABC 4000 @ $21/share

5000 @ $21.40/share 1000 @ $22/share

Unit cost = .4(21) + .5 (21.4) + .1(22) = 21.3



Limit Orders

Avoid buying too high or selling too low

Less likely to execute because there must bea willing buyer or seller

Limit order can only be executed at the limitprice or lower

Limit order can only be executed at the limit

price or higher



Limit Orders

Want to buy the stock of hot company trading at$50/share, don’t want to pay more than $52

Place limit order to buy stock at any price up to

$52 Will not be caught buying the stock at $60/share

if it rises rapidly



Stop Orders

Trade becomes active (a market order) oncestop level is reached

Typically used to prevent losses

Can also be used on the buy-side

Can be activated by a quick fluctuation in price

Example: Set a stop sell order for EXPE (beta = 2.15) for

$27/share (currently trading at $28) Falls to $26.30, then rises to $30

Executed a market sell order at $27/share



Fantasy Stock Market Game

SIGN UP TODAY!

1. Go to http://simulator.investopedia.com/

2. Create an account3. Find our game by searching for a game

4. Type in “Goizueta Investors Fall 2010” in Search box

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6. Start trading!

Email any questions to [email protected]

http://simulator.investopedia.com/

http://simulator.investopedia.com/



Fantasy Stock Market Game

Rules Start with $100,000 (plus margin)

Long-Short Only

No Options Game ends in December

Highest percentage gainer will receivegrand prize!



Current Rank Previous day’s rank Account Value (USD)Today’s change in

valueOverall%

1. ManvirHeir (history) 1 $116,644.55 $0.00 +16.64%

2. wilmahchoo (history) 2 $113,311.22 $0.00 +13.31%

3. dfratto (history) 3 $110,906.24 $0.00 +10.91%

4. abhat26 (history) 4 $110,629.91 $0.00 +10.63%

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6. JamesLB1992(history)

6 $109,627.07 $0.00 +9.63%

7. SGuo26 (history) 7 $108,596.67 $0.00 +8.60%

8. cwconne (history) 8 $107,993.91 $0.00 +7.99%

9. mike6492 (history) 9 $107,554.07 $0.00 +7.55%

10. gwolozin (history) 10 $106,751.15 $0.00 +6.75%

http://simulator.investopedia.com/Trade/TradeOverview.aspx?UserID=1508188&GameID=132398






















“Beat the Board” Competition

Compete against the GI Board in the fantasystock market game!

If the board isn’t number 1, the top 5 highestpercentage gainers above the board will receive

a free Goizueta Investors t-shirt!

At the conclusion of the game we will host anopen forum to discuss our investment strategy

alongside the top competitors.



Class IV

Technical Analysis

Stock Screener

Trading Strategies

Diversification

Margin

beginning investor class 3 2010

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