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Chapter 19

Chapter 19 of 'Introduction to Business II' covers financial markets and investment strategies, detailing various investment vehicles like stocks, bonds, and mutual funds. It explains key concepts such as stock ownership, bond types, and investment portfolio management, along with strategies for buying and selling securities. The chapter also addresses market conditions and the importance of establishing investment objectives and risk tolerance.

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14 views22 pages

Chapter 19

Chapter 19 of 'Introduction to Business II' covers financial markets and investment strategies, detailing various investment vehicles like stocks, bonds, and mutual funds. It explains key concepts such as stock ownership, bond types, and investment portfolio management, along with strategies for buying and selling securities. The chapter also addresses market conditions and the importance of establishing investment objectives and risk tolerance.

Uploaded by

yosunkayadervisyunus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Introduction to Business II

Chapter 19
Financial Markets and
Investment Strategies

Adopted From

Bovee, J.L., and Thill, J.V. (2015), Business in Action, (7th Edition),
Pearson, New York
Stocks
Stock: Ownership of or equity in a company; a share
of stock represnets a specific portion of ownership.

Securities: Investments such as stocks, bonds,


options, futures, and commodities.

Common Stock: Shares of ownership that include


voting rights.

Capital gains: Increases in the value of a stock or


other asset.
Stocks
Preffered Stock: Shares of ownership without voting
rights but with defined dividends.

Book value: The difference between the assets and


liabilities as listed on the balance sheet.

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.
Stocks
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.
Bonds
Face Value: The amount of money, or principal, a
bond buyer lends to a bond issuer; also known as par
value or denomination.

Maturity date: The date on which the principal of a


bond will be repaid in full.

Yield: Interest income a purchaser recieves from the


bond.
Bonds
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.

Treasury bonds: Debt securities issued by the federal


government that are repaid more than 10 years after
issuance.
Bonds
Bond Issuers

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.

Municipal bonds: Bonds issued by states, cities, and


various goverment agencies to fund public projects.
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.

Expense ratio: The annual cost of owning a mutual


fund, expressed as a percentage.
Mutual Funds
Load: The sales commission charged when buying or selling a
mutual fund.

No-load funds: Mutual funds that do not charge loads.

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.

Exchange-traded funds (ETFs): Mutual funds whose shares are


traded on public exchanges in the same way as stocks.
Mutual Funds
Choosing Mutual Funds
Money-market funds: Which invest in high-quality,
short-term debt issues from governments and
corporations.

Growth funds, which invest in stocks of rapidly


growing companies.

Value funds, which invest in stocks considered to be


selling below their true value.
Mutual Funds
Choosing Mutual Funds
Income funds, which invest in securities that pay high
dividends and interest.

Balanced funds, which invest in a combination of


stocks and bonds.

Sector funds, also known as specialty funds, or


industry funds, which invest in companies in a
particular industry, such as technology or health care.
Mutual Funds
Choosing Mutual Funds
Target-date funds, which attempt to maintain a desirable
balance of risk and growth potential based on a target
retirement date.

Global funds, which invest in foreign and U.S. securities.

International funds, which invest strictly in foreign


securities.

Socially responsible funds, which make investment


choices based on criteria related to corporate social
responsibility.
Mutual Funds
Net asset value (NAV): A mutual fund’s assets minus
its liabilities; usually expressed as NAV per share.
Derivatives
Derivatives: Contracts whose value is derived from
some other entity (usually an asset of some kind, but
not necessarily); used to hedge against or speculate
on risk.

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.
Derivatives
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.

Commodities futures: Contracts to buy or sell specific


amounts of commodities for a set price at a future date.

Currency futures: Contratcs to buy or sell amounts of


specified currency at some future date.

Credit derivatives: Derivatives used to reduce a lender’s


exposure to credit risk.
Financial Markets
The Stock Market

Stock exchanges: Organizations that facilitate the


buying and selling of stock.

The Bond Market

Bond market: The collective buying and selling of


bonds; most bond trading is done over the counter,
rather than in organized exchanges.
Financial Markets
The Money Market

Money market: An over-the-counter marketplace for


short-term debt instruments such as Treasury bills and
commercial paper.

The Derivatives Market

Derivatives market: A market that includes exchange


trading (for futures and some options) and over-the-
counter trading (for all other derivatives, at least
currently).
Investment Strategies and Techniques
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 can you invest?
• How much risk are you willing to accept?
Rate of return: The gain (or loss) of an
investment over time, expressed as a percentage.
• How much liquidity do you need?
• What are the tax consequences?
Investment Strategies and Techniques
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.
Investment Strategies and Techniques
Creating an Investment Portfolio
Investment portfolios: Collections of various types of
invetsments.

Asset allocation: Management of a portfolio to


balance potential returns with an acceptable level of
risk.
Investment Strategies and Techniques
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.

Limit order: An order that stipulates the highest or lowest


price at which the customer is willing to trade securities.
Investment Strategies and Techniques
Buying and Selling Securities

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


a particular point, to limit an investor’s losses.

Margin trading: Borrowing money from brokers to buy


stock, paying interest on the borrowed money, and
leaving the stock with the broker as collateral.

Short selling: Selling stock borrowed from a broker with


the intention of buying it back later at a lower price,
repaying the broker, and keeping the profit.

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