Finance Terms and Concepts

Stocks – Ownership in Company• Prices – Determinants

– What people think it will be worth/profit in

future

– Expectations of Future Earnings

– Cheap/Expensive – not based on price

• Earnings

“Blue Chip” Stocks

• Giant companies with solid reputations.

• General Electric, Intel, Visa, Wal-Mart and

Walt Disney

“Penny” Stocks

• Common stock valued at less than one

dollar, and therefore highly speculative

Types of Investing

• Investor

– Long Term Growth

– Dividends

– Buy and Hold (2-3 yrs)

– Diversify

• Speculator

– Quick Profit

– Day Traders

– High Risk - High Reward

– Penny Stocks

Analysis

• Fundamentals

– Earnings

– Annual Reports

– Management Team

– Conference calls

• Technical

– Charts

– Formulas

Historical Returns

• Gamble but best place for your investment

dollars when young

• 1990-1999 = 15.3% average return per

year

• 1926-2002 = 10.2% average return

Exchanges

• Buy/Sell Meeting Places

New York Stock Exchange

• "Big Board“

• American stock exchange located at 11 Wall

Street, NYC

• World's largest equities-based stock exchange

Indices (Indexes)

• List of stocks – Give snapshot of market

– NASDAQ – 3,200 Tech Heavy

Dow-Jones Industrial Average

• Price-weighted average of 30 significant

stocks traded on the New York Stock

Exchange and the Nasdaq.

• Invented by Charles Dow back in 1896.

Standard & Poor’s 500

(S&P 500)• American stock market index based on the

market capitalizations of 500 large

companies having common stock listed on

the NYSE or NASDAQ.

Securities and Exchange

Commission (SEC)• Government commission created by

Congress to regulate the securities

markets and protect investors.

Stocks

• Stock Categories

– Size (Large Cap vs Small Cap)

– Sector – Part of Economy

• Stock Types – Best Returns over long term

– Value (On sale at discount) vs Growth

Dividends

• Profits – Payout to owners of corp

(Stockholers)

• DRiPs – Dividend Reinvestment Plan

Mutual Funds• Individuals invest money together (pool)

• Professional Money Managers

– Benefit: Manage Portfolio

• Fee - 0.5% to 2%

– Financial institution

– 1000’s of different types

• Diversified portfolios of securities

– Investment objectives different – Safe vs Aggressive

• Most Retirement Accounts (401K)

Selling Short

• Expecting price of stock

to decrease

• Betting against

– Very Risky

• Sale of security that is

not owned by seller, or

that seller has borrowed

• Hoping to buy back at a

lower price to make a

profit.

Buying Long

• Buying of a security such as a stock,

commodity or currency, with the

expectation that the asset will rise in value.

“Bubbles”

• Big price increase in technology/housing/stocks

• Over inflated prices -> crash

Diversification

• Spread risk of stock failures

– Minimizes profits/losses

Risk vs. Return

• Higher Risk = Bigger Return on investment/money

Efficient Market Hypothesis

• Investment theory

• It is impossible to "beat

the market" because

stock market efficiency

causes existing share

prices to always

incorporate and reflect all

relevant information.

Bull Market

• A market in which share prices are rising,

encouraging buying.

Bear Market

• A market in which prices are falling,

encouraging selling

Market Crashes

• 1929 – Great Depression follows

• Oct 19th 1987 – Worst one day drop –

22.6%

• Financial Crisis of 2007-2008

– Sub prime housing market crash

– Banks collapse

– Bailouts from government

Stock Splits

• 2 for 1 Doubles # of Shares

– ½ price for shares

– Makes shares more tradeable

– Reverse split – Not good

Bonds

• Debt investment -investor loans money to a

corporate or governmental group

• Borrows funds for defined period of time at a

variable or fixed interest rate.

– Long Term Bond – More Risk – Higher Return

– Shorter Term Bond – Less Risk – Lower Return

• Used by companies, municipalities, states and

sovereign governments to finance a variety of

projects and activities.

Junk Bonds• Bonds with low ratings

• High risk

• Offer high interest rates in

exchange for high risk

• Pay between 3-5% higher

interest rates than the

regular bonds

Corporate Bonds• Debt obligations, or IOUs, issued by

private and public corporations.

• Typically issued in multiples of $1,000

and/or $5,000.

Municipal Bonds• Debt obligations issued by

governmental entities

• Raise money to do projects for the public good

• You are lending money to an issuer who promises to pay you back a specified amount of interest and return the principal

• MUNIS

– bonds that are free of federal taxes

Silicon Valley

• California

– Where all the technology companies are located

IPO

• Initial Public Offering

• First time a company is offered to the public.

• Investors make the big money

– Venture Capital guys

“Pink Slip” Party

Monopoly

• Exclusive control of a commodity or

service in a particular market, or a control

that makes possible the manipulation of

prices

Sub-Prime Mortgages

• Type of loan granted to individuals with

poor credit histories (often below 600)

• Result of deficient credit ratings, not be

able to qualify for conventional mortgages.

One company absorbs another.

In a merger, absorbed

company often is forced to abandon

its identity