COWL 52

Savings

Money set aside for near-term goals or emergencies. Money is insured and earns a small amount of interest; taxes are paid on the interest; the assets in a savings account are liquid.

Loss aversion

People hate losses more than they love gains. It causes people to lose money when stock prices fall and they sell stocks are lower prices locking in their losses to avoid even more losses, even when in the long term their stocks might have made money Overly cautious decisions can lead people to lose out on earning money

Anchoring

People tend to anchor themselves to information they receive and then refuse to face new information. For example if a price becomes fixed in your mind and even if you see lower prices you may not realize you are overvaluing a product and you won't see the reality of the overall market

Budgeting

Planning ahead to handle your money responsibly, so you know which daily expenses and bigger purchases you can afford and so you can cover emergency expenses. DON'T SPEND MORE THAN YOU HAVE

Speculative Bubbles

Prices and demand for a product rise and rise and rise above its actual value. Driven by herd behavior when people see success and want to be a part of it. Fed into by recency bias (prices are going up so they will continue to do so) and anchoring (I heard these stocks are worth a lot so they really must be)

Rules of Thumb

Recommended asset allocation based on age (but also depending on your risk tolerance): - 20s - 30s: 100% stocks - 40s - 50s: 85% stocks; 15% bonds - 60s - 80s: 50% stocks and bonds - Over 80: 5% stocks, 40% bonds, 55% cash

50/30/20 budget

Starting with your AFTER TAX income: 50% of budget goes to necessary purchases 30% of budget goes to leisure/luxury/unnecessary expenses 20% of budget goes to savings and debt repayments Other rules to follow: - rent should be less than 30% of take home pay - loan repayments should be less than 20% - savings should be about 15%

securities

Stocks and Bonds -- a financial instrument that represents financial value.

Withholdings

Taxes collected from your paycheck by an employer on your earned income.

DJIA

The Dow Jones Industrial Average is a price-weighted average of 30 significant (blue chip) stocks traded on the New York Stock Exchange and the Nasdaq.

How does the Fed modulate economic cycles?

The Fed can use fiscal policy and monetary policy to modulate the economic cycles, but can't ensure that the economy moves in the direction it wants to nudge it in. (ex: banks are too nervous to lend out money that the reserve lent them as in the most recent recession)

US Taxes

The US tax system is based on income earned, and is a progressive tax system meaning the more money you earn the more you are taxed on. As you earn money the government makes you pay what is due. If you work for the government taxes are taken out of each paycheck; for a private company employee your employer takes estimated taxes out of your paycheck; for contractors you will have to estimate your own taxes and set that aside.

Economic cycles

The economy tends to increase and decrease in GDP value over time in a cyclical process. At a peak, the interest rates will fall, leading to bond prices rising and this causes a CONTRACTION at a trough the stock prices will initially be falling and then turn around during an EXPANSION. As the Fed increases the interest rates again, bond prices will fall until the next peak. The fed announces when it will increase and decrease interest rates

interest rates

The federal reserve sets interest rates to try to nudge the market in a certain direction.

time value of money

The idea that money available in the present is worth more than the same amount of money in the future. This is due to the fact that money now can earn interest/grow and any amount of money is worth more the sooner it is received.

Investing

The process of setting money aside to increase wealth over time for long-term financial goals such as retirement, using a portfolio and strategies to meet financial goals. Used to hedge against inflation but is not guaranteed or insured

Compensation and benefits

The salary (or hourly wage), vacation time, sick days, and company cars you get in exchange for doing your job. A list of compensation should be formalized before you start a job and a salary should be negotiated

Good til Canceled

This type of order will remain active until the order is filled or until the investor cancels it Can be set to expire after 30 to 90 days to avoid forgotten orders from being filled

market dip

a decline in the price of a security 5-10% from its most recent peak

Certificate of Deposit (CD)

a savings certificate that entitles the bearer to receive a fixed interest rate

Day Order

expires at the end of the trading day if it is left unfilled

Social Security

federal program of disability and retirement benefits that covers most working people it is NOT a federal pension plan and is not meant to cover more than 10% of your retirement expenses

Volatility

fluctuations in the securities market that can be tied to investor sentiments or to supply and demand.

Gross Domestic Product (GDP)

general measure of economic activity; the US GDP is the value of goods/services produced in the united states and can be used to estimate the standard of living in the country

What does the DOW index tell you?

level of the market - is it high or low compared to the past trend - is it going up/down/holding steady valuations - is it cheap or expensive relatively DOW is a measure of the robustness and optimism of investors in the economy and indicator of what the economy will be doing in the next 6 mo - 1 yr

capital gains

money made on a stock -- selling a stock for more than what you paid

Consumer discretionary sector

one of the 11 economic sectors which includes industries like autos, retail, leisure, homes, that people don't tend to spend a lot in while the economy is dragging.

securities market

provides governments and corporations with financing from investors

Price to Earnings Ratio (P/E)

ratio of a stock price per share/earnings per share if the earnings of a company fall that makes that stock more expensive relative to earnings (P/E rises)

Dividend Yield

ratio of stock per share/price per share is dividends rise then yield rises and the stock is more valuable

capital loss

selling your stocks at a loss and therefore losing money

limit order

sets the maximum or minimum price you are willing to buy or sell a stock The price is the primary concern; if the value of the security is outside the parameters set in the limit order the transaction won't happen

Small Cap

smaller companies, investing a riskier investment

Large Cap

stalwarts of the economy -- they do well or have done well over the long term

stock market

stocks are exchanged between investors and prices are generally determined by supply and demand

Keogh

tax-deferred retirement account designed for high-income self-employed and small-business owners

marginal tax rate

the extra taxes paid on an additional dollar of income

Speculation

the practice of making high-risk investments in hopes of getting a big return, based off of hunches

Herd behavior

the tendency to mimic actions of larger groups in order to not miss out

market order

transactions that occur as quickly as possible at the present or current market price In this case the price of the security is secondary to the speed of completing the trade

Value stocks

undervalued stocks in companies that may have taken a hit for some reason or another but their products/management indicate that they are still fundamentally sound and should return to regular valuations

Gross National Product (GNP)

whereas the GDP is the value of products/services produced in the US; the GNP is the value of any goods/services produced by any US resident For example, an employee that lives in SF but works for a London based company

market correction

10% or greater decline in the price of a security from its most recent peak

NASDAQ

300,200 stocks traded on the NASDAQ index, usually smaller tech companies that are too small to be on the NYSE

S&P 500

500 largest blue chip companies known as a benchmark for what the NYSE is doing

GDP equation

70% Consumer services + 12% Investments + 20% government expenditures - 2% (Exports - Imports)

Portfolio

A collection of financial assets for your investment accounts wherein stocks are combined to maximize returns and minimize risks There are 5 classes of portfolios based on how you choose to divide your assets among stocks, bonds, and cash 1. Very conservative 2. Conservative 3. Moderate 4. Aggressive 5. Very Aggressive

Fiduciary responsibilities

A company agrees to invest your money to ensure it's there and to avoid conflicts of interest

Pension

A company agrees to pay for your income once you retire based off of how long you worked for them, your salary level when you retired, etc. If you leave a company you also lose your pension. This is very expensive for companies and has led to the popularity of 401(k)s Pensions are also risky because 1. If you are fired or laid off or your company goes bankrupt soon before retirement you lose your pension and 2. if you ever want to change jobs you will lose your pension

Bonds

A creditor relationship with a governmental body or a corporation, which pays interest and the principal payment at the date at the bond maturity. Less risky than buying stocks.

w-2

A form employers must send their employees at the end of each year which reports employee's annual wages and the amount of taxes withheld from their paycheck.

403(b)

A retirement account similar to a 401(k)but offered for non-profit workers, teachers, and those in a similar carreer

401(k)

A tax advantaged savings account set up by the company you work for. Some employers may also contribute to your 401k but it is not required You can transfer it to a new company if you change jobs

index funds

A type of mutual fund with a portfolio constructed to match or track the components of the market index such as the S&P 500. It is a passively managed mutual fund

growth funds

A type of mutual fund with capital appreciation as its primary goal consisting of investments in companies with above average growth. Most growth funds offer higher potential capital gains but also present higher risks.

Stocks

A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

Fiscal Policy

Canzian economics Spending money on projects to get people back to work. Ex: shovel ready projects during the obama administration Taxation policies - ex: if the trump administration lowers taxes then people and businesses that are not paying as much in taxes can use that money to invest

How do you make or lose money on the stock market?

Capital gains (earnings from stock prices increasing) are made when you sell prices at a higher price than what you bought them at. Unrealized gains are when prices are higher than what you bought them for but you don't sell stock. Capital losses happen when you sell your stock at a lower price than what you bought them for. Unrealized gains occur when the stocks are worth less than what you bought them for but you haven't locked in those losses by actually selling your stock. You sell stocks with either a market order or a limit order

Bear Market

Characterized by falling securities prices and negative investor sentiment. (bears attack from the top down -- falling like the market) Typically in line with a decrease in overall market index, low employment, low disposable income

Stock Indices

Collections of particular companies whose stock prices are calculated individually and then combined into one index to estimate what is generally happening in the stock market

Growth stocks

Companies that are expected to have earnings growth faster than the economy in general

Reconcilliation

Comparing your record of bank statements to the bank's records of your bank statements

Bull Market

Condition of the financial market in which prices are rising or expected to rise (bulls attack from bottom up -- rising like the market) happen in line with strong GDP and a drop in unemployment

Diversification

Diversifying among asset classes (stocks, bonds, cash, real estate, etc) and securities (which specific stocks). Diversifying reduces specific risk from individual stocks and only leaves systemic risk (aka collapse of the entire market)

Asset Allocation

How you choose to divide your investments between stocks and bonds and cash. Your asset allocation should change as your time horizon changes (how old you are/ how close to retirement) and as your risk tolerance changes.

Raises

Increase in salary -- if you do not receive a raise in line with inflation (~3%) then you are actually getting a pay cut :o

Monetary Policy

Interest rate policies -- ex: when interest rates are lowered (to avoid the economy dipping/correcting) companies can invest more since it is cheaper for them to borrow money Borrowing and lending money to banks -- this affects the money supply.

mutual funds

Investment vehicle with a pool of money made up from many investors with the purpose of investing in securities. Operated by money managers who attempt to produce capital gains for the fund's investors. A mutual fund's portfolio is structured to match investment objectives

W-4

An employee's withholding allowance form which is used to indicate an employee's tax situation to their employer. It tells the employer how much tax to withhold from paychecks based on the number of exceptions and deductions (marital status, divorce, # dependents). Any time an employee's situation changes they can file a new w-4

Roth IRA

An individual retirement account funded with after-tax contributions with tax free withdrawals (with qualified distributions)

Traditional IRA

An individual retirement account that allows people to direct pretax income toward investments and that can grow tax deferred. No capital gains or dividend taxes are assessed until a withdrawal is made. There is a specified maximum contribution of $6000 of earned income per year.

The Greater Fool Theory

An investor is willing to buy a security/product at an unreasonable price with the mindset that they will be able to sell it for even more money to a greater fool

Recency Bias

People believe that what has occurred in the recent past will repeat again or continue in the future. Can cause people to pull out of the market after a crash and then never go back in -- losing out on investment opportunities