CA 3341

Be able to explain/discuss the four principles of investing

-Compound interest: interest that earns interest; effective rate of interest is higher than stated rate -Interest rate earned: comes with risks -save early -consistent investment

If an investment "compounds" the interest during the year, how is the "stated" rate of interest effected? The more frequently the interest is "compounded", what happens to the "rate of interest earned"?

-Effective rate of interest is higher than stated rate -The more frequent the compounding the higher the effective rate of return

Describe the characteristics of 'good" goals. Be able to write examples of well-written financial goals.

-Specific in purpose -includes completion date -includes estimated cost Example: By 2017 save 20,000 for a down payment on a home in Cinco Ranch

Blue chip stock

-large respectable corporation -dominate the industry -solid investment -earnings continue to grow -lowest risk

Explain "compound interest"

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What is the rule of 72? How can it be used (what is it used for)? Know how to calculate the time required to double the value of an investment (or reduce the purchasing power by 50%)

72/interest rate= the number of years to double investment -simple way to determine how long it will take to double your investment at a fixed rate 72/inflation rate= number of years to cut buying power in half

What does a stock's Beta tell an investor about that stock?

Compares investment to similar investments, predicts future stock price, measures change in price compared to market index; higher beta indicates greater risk

What is the relationship between risk and high P/E's?

High risk = high reward

Liquidity risk

How easily you get your money out/ selling it to someone else

What does Earning Per Share (EPS) tell an investor about a stock?

Indicated company's ability to pay dividends or reinvest in company (EPS- earnings per share; annual profits (after all bills and debts paid)/ number of stock shares)

What are the two broad categories of investments? Be able to give examples of each

Lend money- savings account, savings bond, corporate bonds, municipal bonds, certificate of deposit Ownership- common stock, real estate, mutual funds

Which is the most important to consider? Why?

Real rate of return is most important because it is adjusted for inflation and taxes and would be the actual money you earned

Fundamental Analysis

analyze underlying factors including future earnings, expected levels of interest rates, firm's risk

Financial risk

company goes bankrupt (Enron)

Call risk

company pays you off early, forced to get another one. hurts you

What is Price/Earning Ratio?

current market price for a stock divided by earning per share (EPS) over the past 4 quarters

Market risk

effects everyone/ the whole market

Lend Money (characteristics, advantages, disadvantages)

fixed income (get back what you gave) and fixed maturity -advantages: know the rate of return know when you get your money back -disadvantages: never make more than what the stated rate is no capital gain

Technical Analysis

future depends on past performance; proved to be of little value

What does it indicate to an investor?

it is used as the primary way of valuing stock

Random Walk Theory

like throwing a dart; random pick

Random risk

own one stock hits one company and you have all your money there

Ownership (characteristics, advantages, disadvantages)

return based on incoming producing potential of investments -advantages: better potential for rate of return -disadvantages: a lot of risk

What does Price/Sales ratio (P/S) tell an investor about a stock?

tells the number of dollars it takes to buy a dollars worth of a companys annual revenues. Calculated by dividing companys total market capitalization by its sales for the past 4 quarters

political and regulatory risk

the govt can change the rules on taxing

In relationship to inflation, when are stocks a "good " hedge against inflation and when are stocks NOT a "good" hedge against inflation.

• "Good"- if inflation is 5% or less • NOT- if inflation is 10% or more

What are the "foundation blocks" on the Building Blocks of Success chart?

• Foundation blocks- career, housing, adequate insurance, balanced budget, cash reserves, wise credit usage (Do all these first then move on to higher investments)

Nominal Rate of Return

• Nominal rate of return- not adjusted for inflation and income taxes

What are characteristics of stocks?

• Ownership in company • Not liable for debts • No maturity date • Voting rights • Entitled to corporate dividends

Which of the 2 types of investments tend to do better in inflationary times (especially less than 5% inflation)? What is rule concerning lending investments in times of inflation.

• Ownership investments do better during times of inflation • Avoid lending investments with long maturity in periods of inflation

Real Rate of Return

• Real rate of return- allows you to see how much you have really earned