business in action 6e bovée/thill financial markets and investment strategies chapter 19

Business in Business in Action 6e Action 6e Bovée/ThillBovée/Thill

Financial Markets Financial Markets and Investmentand Investment

StrategiesStrategies

Chapter 19Chapter 19

Stocks

Stock Ownership of or

equity in a company

a share of stock represents a specific portion of ownership

Securities Investments such

as stocks, bonds, options, futures, and commodities

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall19-2

Types of Stock

Common Stock Shares of ownership that include voting rights

Preferred Stock Shares of ownership without voting rights but

with defined dividends


Stock Valuation

Par Value the value assigned when the stock is first

issued

Book Value The difference between the assets and

liabilities as listed on the balance sheet


Stock Valuation (cont.)

Market Value The price at which

the stock is actually selling in the stock market

Intrinsic Value An estimate of what

a company is actually worth, independent of book and market values


Investment Categories of Common Stock


Stock Valuation

Price/ Earnings Ratio The market value per share divided by the

earnings per share

Stock Split The act of dividing a share into two or more

new shares and reducing the market value by the same ratio


How to Read a Stock Quotation


Bonds

Face Value The amount of money, or principal , a bond

buyer lends to a bond issuer; also known as par value or denomination


Bonds (cont.)

Maturity Date The date on which the principal of a bond will

be repaid in full

Yield Interest income a purchaser receives from the

bond


How to Read a Bond Quotation


Advantages of Bonds

1. Most bonds are less risky than stocks and many other investments

2. Bonds offer lower volatility than stocks

3. Corporate bonds with twice-yearly interest payments can provide a regular source of income


Bond Issuers

Treasury Bills Short-term debt securities issued by the

federal government also referred to as T-bills

Treasury Notes Debt securities issued by the federal

government that are repaid within 1 to 10 years after issuance


Bond Issuers (cont.)

Treasury Bonds Debt securities issued by the federal

government that are repaid more than 10 years after issuance

Municipal Bonds Bonds issued by states, cities, and various

government agencies to fund public projects


Bond Issuers (cont.)

Treasury Inflation-Protected Securities (TIPS) Treasury issues in which the principal amount

is tied to the Consumer Price Index to protect the buyer against the effects of inflation


Mutual Funds

Portfolio Diversification Spreading investments across enough

different vehicles to protect against significant declines in any one vehicle

Mutual Funds Financial instruments that pool money from

many investors to buy a diversified mix of stocks, bonds, or other securities


Mutual Funds

Expense Ratio The annual cost of owning a mutual fund,

expressed as a percentage

No-load Funds

Mutual funds that do not charge loads Load

The sales commission charged when buying or selling a mutual fund


Mutual Funds (cont.)

Index Funds Mutual funds that mirror the composition of a

particular market or index

Index A statistical indicator of the rise and fall of a

representative group of securities


Mutual Funds (cont.)

Exchange Traded Funds (ETFs) Mutual funds whose shares are traded on

public exchanges in the same way as stocks


How to Read a Mutual Fund Quotation


Options

Option The purchased right—but not the obligation—

to buy or sell a specified number of shares of a stock at a predetermined price during a specified period


Types of Options


Financial Futures

Financial Futures Contracts to buy or sell a financial instrument

(such as stocks, Treasury bonds, and foreign currencies) for a set price at a future date


Financial Futures (cont.)

Commodities Futures Contracts to buy or sell specific amounts of

commodities for a set price at a future date

Currency Futures Contracts to buy or sell amounts of specified

currency at some future date


Financial Markets

Stock Exchanges Organizations that

facilitate the buying and selling of stock

Bond Market The collective

buying and selling of bonds

most bond trading is done over the counter, rather than in organized exchanges


Establishing Investment Objectives

Why do you want to get more money?How much will you need - and when?How much can you invest?How much risk are you willing to accept?How much liquidity do you need?What are the tax consequences?


Learning to Analyze Financial News

Bull Market A market situation

in which most stocks are increasing in value

Bear Market A market situation

in which most stocks are decreasing in value


Creating an Investment Portfolio

Investment Portfolios Collections of

various types of investments

Asset Allocation Management of a

portfolio to balance potential returns with an acceptable level of risk


Buying and Selling Securities

Broker A certified expert who is legally registered to

buy and sell securities on behalf of individual and institutional investors

Market Order A type of securities order that instructs the

broker to buy or sell at the best price that can be negotiated at the moment


Buying and Selling Securities

Limit Order An order that stipulates the highest or lowest

price at which the customer is willing to trade securities

Stop Order An order to sell a stock when its price falls to

a particular point, to limit an investor’s losses


business in action 6e bovée/thill financial markets and investment strategies chapter 19

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prentice hall

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