Finance Club
Dictionary Definitions:
Finance: The science of the management of money and other assets.
The management of money, banking, investments, and credit.
Investing: The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.
Stock-Picking Strategies:
- Fundamental
Analysis: The method of evaluating a company by
assessing its financial statements, earnings, sales, and management
- Qualitative
Analysis: Securities analysis that uses
subjective judgment based on nonquantifiable
information, such as management expertise, industry cycles, strength of
research and development, and labor relations. This type of analysis
technique is different than quantitative analysis, which focuses on
numbers. The two techniques, however, will often be used together.
- Value
Investing: Stocks
that have a lower-than-average price as measured by such metrics as
price-to-earnings or price-to-book ratios. Value investing is often
considered the opposite of growth investing,
which concentrates on finding companies with above-average sales and
earnings growth prospects.
- Price to Earnings Ratio of
S&P 500 = 31.7
- Price to Earnings Ratio
Union Pacific Railroad = 17.31
- Growth
Investing: Companies believed to be growing earnings and
sales faster than the average company in the market. Growth stocks usually
pay little or no dividend, as they are still at a stage in their
businesses where they are reinvesting most or all of their earnings into
the further development of new areas of the business.
- Price to Earnings Ratio of
S&P 500 = 31.7
- Price to Earnings Ratio of
Google = 58.8
- Technical
Analysis: Technical analysis dwells on charts of stock
price movements and trading volume, as opposed to a company's business,
earnings, and competition. Investors who use technical analysis focus on
the psychology of the market, scrutinizing investor behavior. They try to
determine where the big, institutional money is going so they can put
their cash in the same places.
- Income
Investing: Income investing aims to pick companies
that provide a steady stream of income. This is one of the most
straightforward stock-picking strategies. When investors think of steady
income they commonly think of fixed-income securities such as bonds.
However, stocks can also provide a steady income by paying a solid
dividend.
Investment )nstruments:
- Stock:
An ownership share in a corporation. Each share of stock is a
proportional stake in the corporation's assets and profits, and purchasing
a stock should be thought of as owning a proportional share of the
successes and failures of that business.
- Bonds:
An interest bearing or discounted debt security issued by
corporations and governments. Bonds are essentially loans by the investor
to the issuer in return for interest payments.
- Mutual
Funds: The pooled cash of many shareholders that is invested
according to a stated objective, as defined by the fund's prospectus.
Asset Allocation (Investment
Strategies):
·
Definition: The process of dividing a portfolio among major
asset categories such as bonds, stocks or cash. The purpose of asset allocation
is to reduce risk by diversifying the portfolio.
·
Purpose: The
main goal of allocating your assets among various asset classes is to maximize
return for your chosen level of risk, or stated another way, to minimize risk
given a certain expected level of return. Of course to maximize return and
minimize risk, you need to know the risk-return characteristics of the various
asset classes. The following chart compares the risk and potential return of
some of the more popular ones:
The Psychology of the Market: Why is the stock market reaching all time highs,
when gas prices are way up, inflation is rising, and the real estate market is
showing signs of weakness?
Resouces: www.fool.com
CNBC
Television Network (channel 58 in SF)
Wall
Street Journal
How Stocks Trade (from www.fool.com):
Probably one of the most
confusing aspects of investing is understanding how
stocks actually trade. Words such as "bid," "ask,"
"volume," and "spread" can be quite confusing.
Listed Exchange.
The New York Stock
Exchange (NYSE) and the American Stock Exchange (AMEX, composed of the
NYSE trades still take place face-to-face
in the trading pit (yes, just like in the movies) where buyers and sellers
physically converge on the specialist who matches buyers with sellers, but
computers play a big part in the process these days. All trades are
"auctions." There is no set price, although the last trade is often
considered to be the "price" of a stock. In reality, the price is the
highest amount any buyer is willing to pay at any given moment. When demand for
a certain stock is high, the various buyers bid the price higher to induce
sellers to sell. When demand for a stock is low, sellers must sell at lower
prices to attract buyers and the price drops.
Over-the-Counter Market.
The Nasdaq stock market, the Nasdaq
SmallCap, and the OTC Bulletin Board are the three
main over-the-counter markets. In an over-the-counter market, brokerages (also
known as broker-dealers) act as "market makers" for various stocks.
The brokerages interact over a centralized computer system managed by the Nasdaq.
Market makers may match up buyers and
sellers directly, but mostly they maintain an inventory of shares to meet the
demands of the market. So when you want to sell 100 shares of ABC stock, you
don't have to wait for someone else to place an order to buy 100 shares of ABC;
the market maker steps in, buys them from you immediately, then sells them when
a buyer comes along. Market makers and specialists keep the markets
"liquid" each in their own way. You are assured that, except in
extraordinary circumstances, you can always buy or sell your shares if the
market is open.
"Volume" numbers under the Nasdaq system are often
inaccurate. Since most trades are in and out of the market makers accounts,
what would be one trade on the NYSE (where buyers and sellers are matched
directly) is usually two trades on the Nasdaq.
Bid, Ask, Spread
Handling all those orders
is very valuable service, and market makers (and specialists) are appropriately
rewarded. Suppose you want to sell ABC and the last trade was at $6.25. When
your "market" order (an order to sell at the going price) goes out on
the Nasdaq system, the
companies that make a market in ABC will bid for the right to buy your shares.
If they see a lot of orders for ABC, they might bid $6.50 for your shares,
because they know that they can turn around and ask $6.60 to sell them. If they
see a slackening of demand for ABC, they might only bid $6.00 and ask $6.10. On
the NYSE, specialists won't match orders for the exact same price. They will
match buy orders for slightly more than the seller is asking.
The difference between the
bid and ask price is the spread and it goes into the pockets of the market
makers and specialists. The amount of spread will vary depending on the volume
of shares traded. For a very heavily traded stocks,
market makers will compete vigorously for the business and the spread will be
quite small. For thinly traded stock, market makers may demand a very large
spread because they may have to hold the stock for a long time before a buyer
comes along, increasing the risk that they won't be able to sell it for as much
as they paid.
Investors can set their own
bid or ask prices, too, by placing orders to sell or buy only at a specific
price. Market makers and specialists keep a close eye on these "open"
orders, executing them when conditions are met, and using them to gauge demand
for the stock.