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Reference Guide

Stocks & Bonds - Reference Guides

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Biology
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BIOL2761
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All

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l e a r n • r e f e r e n c e • r e v i e w permacharts TM Stocks & Bonds WHAT IS A STOCK? WHAT IS A BOND? • Stocks are shares of ownership in a company; they are listed • A bond is an IOU, where the buyer lends money to the government on one or more stock exchanges or a corporation • Investor purchases share(s) and becomes part owner of • The loan amount is the principal; the interest paid to the bondholder corporation is the coupon • Shareholder can vote for company directors and on major issues • Interest rates are fixed and guaranteed when sold at maturity; they • Shareholder makes money via dividends (direct payments) can be sold before maturity (subject to current interest rates) from company and selling shares • Bond holders receive priority claim to assets of company (compared • Some companies offer dividend reinvestment plans; dividends to stocks) automatically purchase more stock • Par is the face value of the bond (usually $1,000) • Stock prices are affected by company news, media coverage • Discount bonds sell below par value; premium bonds sell above par of new products, projected future performance, and economy value • Registered bonds are registered in the name of the owner; interest TYPES OF STOCKS and final redemption are paid automatically • Bearer bonds have attached coupons that must be sent to issuer for Common Represent ownership in a company interest to be paid Stocks • Shareholders are owners in common with other shareholders • Secured bonds are supported by company capital (e.g., real estate, • All shareholders share in the company’s profits machinery); unsecured (debenture) bonds are backed by the and losses company’s credit rating • When there are profits, common stock shareholders benefit most with higher dividends TYPES OF BONDS and capital appreciation • Shareholders have lower priority than Convertible Can be traded for company stock at any time bondholders, creditors, and preferred Corporate Fully taxable stockholders in cases of bankruptcy or liquidation • Reliability depends on issuing company • Risk ranges from low (investment-grade bonds) Preferred Pay dividends (fixed income) but there is no to high (junk bonds, high-yield issues) Stocks ownership interest • Stockholders take priority with regards to Foreign Sensitive to changes in exchange rates (that is, dividend payments and claims of company assets higher when dollar value increases) • Purchased for income purposes Income Pay interest only if permitted by earnings • Some types may be converted to common stock Mortgage-backed Mortgage loans that are issued or backed by w STOCK CATEGORIES government agencies Municipal Issued by state and local governments w Blue Chip Stocks from companies with good w prospects for long-term growth • Free from federal (and state) taxes • Good history of earnings and Serial Issued from the same body but with different . dividends maturity dates and interest rates • Suitable for conservative investors who p want to earn profits but do not want Sinking-fund Funds set by corporation to buy out bonds e U.S. Treasuries Backed by federal government high risk • Exempt from state and local taxes r Cyclical React strongly to changes in the business • Include Treasury bills (short-term), notes (mid- m cycle term), and bonds (long-term) • Perform well when the economy is a strong and poorly during recession Variable Rate Interest rate is tied to other financial instrument (treasury bill) c Defensive Protect shareholder against a Zero Interest Pay interest only at maturity h recession • Usually sold at discount from par and gains • Not affected by business cycle value from compounded interest a Growth Stocks are projected to grow in value r over time BOND RATINGS • Value comes from rising earnings and t share price Standard & Poor’s Moody’s Meaning s • Little or no dividends; profits are A+++ Aaa Highest quality reinvested . AA+ (AA, AA-) Aa (1,2,3) High quality c Income Pay relatively high dividends A+ (A, A-) A (1,2,3) Upper medium quality o • Provide stockholder with decent income International Foreign stocks BBB+ (BBB, BBB-) Baa (1,2,3) Medium quality m • Investment is in foreign currency BB+ (BB, BB-) Ba (1,2,3) Speculative Over-the-counter Too small to be listed on an exchange B+ (B, B-) B (1,2,3) Very speculative • Traded through brokers CCC Caa Poor, may be in default Penny Low-priced stocks • Usually quoted in cents CC Ca Highly speculative C C Poorest quality Speculative Very risky investments • Potential for very high return D In default 1 STOCKS & BONDS • A-858-3 © 2003-2008 Mindsource Technologies Inc. l e a r n • r e f e r e n c e • r e v i e w permachartsM INVESTMENT RISKS STOCKBROKERS • All investments carry some risk (varying from low to high) • You must have a stockbroker to purchase stocks • The higher the risk, the greater the potential for profit • Broker will not manage money; you must monitor portfolio by yourself SYSTEMATIC RISKS • Broker must be a member of an exchange to purchase stock for someone else Interest Rate Risk Changes to market interest rates may affect future value of Full-service Broker • Broker handles your account investment • Assists with investment decisions • Tends to affect safe investments • Provides research, advising, and that have distant maturity dates safekeeping of securities • Avoid risk by purchasing • Paid by commission (higher fees) investments that can easily be converted into cash if interest rates Discount Broker • Investor instructs broker • Cost less than full-service fluctuate • Do not provide research or advice Market Risk Future prices are affected by future services attitudes, politics, or major events • Paid by commission • Avoid investments that are highly Deep-discount Broker • Charges the lowest prices (flat fee) and sensitive by choosing stable, provides the least service conservative company stocks and bonds • Best option if you know what stocks you want to purchase Purchasing Power Risk Return must keep up with inflation or value falls and investment loses purchasing power UNSYSTEMATIC RISKS STOCK EXCHANGE • Risks affecting individual company or industry only • Location where buyers and sellers trade shares of stocks; like an auction Financial Risk • Company may not be able to pay back • Buyers compete for lowest prices; sellers compete for highest principal or interest prices • Choose companies with solid financial background • Companies that sell shares list on a stock exchange Industry Risk • Many companies in an industry • Only members of an exchange can trade experience impacts from outside forces • Only registered securities may be traded; regulated by Securities that drive share price up or down and Exchange Commission (SEC) • May be caused by policies, • Each exchange poses regulations for trading government problems, and so on Liquidity Risk • Refers to the investment’s ability or ease AMERICAN STOCK EXCHANGES with which it can be converted into cash • Also applies to the degree to which • New York Stock Exchange (NYSE); also known as Wall Street one can obtain the full cash value of an (physical location) m investment • American Stock Exchange (AMEX) o • National Association of Securities Dealers Automated Quotations Management Risk • Returns depends on management of c company (NASDAQ); trades occur through computer networks . • Often difficult to assess management risk • Also regional stock exchanges s CANADIAN STOCK EXCHANGES t DIVERSIFYING THE INVESTMENT PORTFOLIO r • Do not put all your money in one investment area • Toronto Stock Exchange (TSX); there are also regional stock exchanges (for example, Vancouver) a • Buy stocks in different industries that will be influenced by different events h FOREIGN STOCK EXCHANGES c • Stocks may be listed on other country’s stock exchanges (for example, Nikkei) a BULL AND BEAR MARKETS • Also stock exchange quotations by country m • Individual stock prices tend to rise in bull markets and fall in • Exchange rates shown at inter-bank rates r bear markets, but not always e • Bull and bear markets follow one another p TYPES OF MARKETS . INVESTING STRATEGIES Bull Markets • Overall, stock prices are on the way up w • Occur when business activity is projected to Growth Investing • Invest in companies based on their increase excellent growth rate histories w • Tend to last twice as long as bear markets • Usually start quietly and then rise to Technical Investing • Buy stock based on stock’s (not w become “raging bulls” company’s) technical performance Value Investing • Locate corporations with good Bear Markets • Overall, stock prices are on the way down • Occur when business activity is decreasing management, decent products, and strong • Tend to drop drastically and then level out track records into the beginning of another bull market 2 STOCKS & BONDS • A-858-3 © 2003-2008 Mindsource Technologies Inc. l e a r n • r e f e r e n c e • r e v i e w permachartsM BUYING & SELLING STOCKS • Buy and sell stocks on trading floors of stock exchanges or through computerized trading lines • Round lots are units of 100 shares; odd lots are units less than 100 shares • It is best to buy and sell in multiples of round lots; extra costs are involved with odd lots
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