ECON NEED TO KNOW
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Stock is a share in the ownership of a company
o if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money
until the banks and bondholders have been paid out; we call this absolute priority
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Profits are sometimes paid out in the form of dividends
A market maker is a broker-dealer firm that assumes the risk of holding a certain
number of shares of a particular security in order to facilitate the trading of that
security.
share prices change because of supply and demand. If more people want to buy a stock
(demand) than sell it (supply), then the price moves up
The value of a company is its market capitalization, which is the stock price multiplied by
the number of shares outstanding
A bull market is when everything in the economy is great, people are finding jobs, gross
domestic product (GDP) is growing, and stocks are rising
A bear market is when the economy is bad, recession is looming and stock prices are falling.
o One solution to this is to make money when stocks are falling using a technique
called short selling.
Pigs are high-risk investors looking for the one big score in a short period of time
Stock means ownership. As an owner, you have a claim on the assets and earnings of a
company as well as voting rights with your shares.
Stock is equity, bonds are debt. Bondholders are guaranteed a return on their
investment and have a higher claim than shareholders. This is generally why stocks are
considered riskier investments and require a higher rate of return.
You can lose all of your investment with stocks. The flip-side of this is you can make a lot
of money if you invest in the right company.
The two main types of stock are common and preferred. It is also possible for a
company to create different classes of stock.
Stock markets are places where buyers and sellers of stock meet to trade. The NYSE and
the Nasdaq are the most important exchanges in the United States.
Stock prices change according to supply and demand. There are many factors
influencing prices, the most important of which is earnings.
There is no consensus as to why stock prices move the way they do.
To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
Stock tables/quotes actually aren't that hard to read once you know what everything
stands for!
Bulls make money, bears make money, but pigs get slaughtered!
The issuer of a bond must pay the investor something extra for the privilege of using his or her
money. This "extra" comes in the form of interest payments, which are made at a
predetermined rate and schedule. The interest rate is often referred to as the coupon. The date
on which the issuer has to repay the amount borrowed (known as face value) is called
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thematurity date. Bonds are known as fixed-income securities because you know the exact
amount of cash you'll get back if you hold the security until maturity
Bonds are appropriate any time you cannot tolerate the short-term volatility of the stock
market.
Examples of when bonds are more appropriate:
o Retirement - The easiest example to think of is an individual living off a fixed income. A
retiree simply cannot afford to lose his/her principal as income for it is required to pay
the bills.
o Shorter time horizons - Say a young executive is planning to go back for an MBA in three
years. It's true that the stock market provides the opportunity for higher growth, which
is why his/her retirement fund is mostly in stocks, but the executive cannot afford to
take the chance of losing the money going towards his/her education. Because money is
needed for a specific purpose in the relatively near future, fixed-income securities are
likely the best investment.
The face value (also known as the par value or principal) is the amount of money a holder will
get back once a bond matures
When a bond trades at a price above the face value, it is said to be selling at a premium. When a
bond sells below face value, it is said to be selling at a discount.
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A rate that stays as a fixed percentage of the par value like this is a fixed-rate bond.
Another possibility is an adjustable interest payment, known as a floating-rate bond. In
this case the interest rate is tied to market rates through an index, such as the rate on
Treasury bills.
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A bond that matures in one year is much more predictable and thus less risky than a bond that
matures in 20 years. Therefore, in general, the longer the time to maturity (more fluctuation),
the higher the interest rate.
the U.S. government is far more secure than any corporation. Its default risk (the chance of the
debt not being paid back) is extremely small - so small that U.S. government securities are
known as risk-free assets.
yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate.
When the price changes, so does the yield
when price goes up, yield goes down and vice versa
When interest rates in the economy rise, the prices of bonds in the market fall
Bonds are just like IOUs. Buying a bond means you are lending out your money.
Bonds are also called fixed-income securities because the cash flow from them is fixed.
Stocks are equity; bonds are debt.
The key reason to purchase bonds is to diversify your portfolio.
The issuers of bonds are governments and corporations.
A bond is characterized by its face value, coupon rate, maturity and issuer.
Yield is the rate of return you get on a bond.
When price goes up, yield goes down, and vice versa.
When interest rates rise, the price of bonds in the market falls, and vice versa.
Bills, notes and bonds are all fixed-income securities classified by maturity.
Government bonds are the safest bonds, followed by municipal bonds, and then corporate
bonds.
Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for
the borrower to default on the debt payments.
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High-risk/high-yield bonds are known as junk bonds.
You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can
buy government bonds through TreasuryDirect.
Often, brokers will not charge a commission to buy bonds but will mark up the price instead.
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US monetary policy:
o Federal Reserve (non-governmental, president appoints chairperson, but it is not
political)
 Janet Yellen
 Decides what is best for economy
 12 banks, committees involved, get together throughout year to decide what
actions to take in economy's best interest
o Government is in charge of fiscal policy (DIFFERENT than central banking system/FR)
o What factors do they look for:
 Job growth, Unemployment
 Inflation (Goal = 2% inflation)
 Interest rates
Election Economics:
 Government policy --> fiscal policy
o Changes taxes
o Changes spending/government programs
 Issues in this Election:
o Immigration
o Foreign Policy/trade policy
o Unemployment
o Size of government
o Taxes
o Education
o Healthcare
o Military spending
Democratic Policy
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Republican Policy
Taxes
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Continue to tax the upper class
at high levels
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Decrease taxes on upper class
Healthcare
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Government regulation
affordability
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Privatization of healthcare (take care of
your own healthcare
Social
Security
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Increase taxes or change
regulations
o Raise minimum age
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Keep the system
Goals of the Federal Reserve: full employment and stable price levels (low inflation)
o Hawks:
 Inflation central = hawks
Doves:
 Full employment central
 Dovish committees want to keep interest rates constant
 Low interest rates means more money circulating because things are cheaper, so
more jobs (businesses more willing to expand)
o Cant address inflation and interest rates
 Full employment pumps more money into the economy and it gets to unsustainable
levels (more cheap money is out there, and that cant be sustained for long periods of
time)
 Too much expansion can mean that it takes very little to make it fall A LOT
 More money than we really need
Impact on flow of capital when keeping interest rates the same
o Domestically- stable or slightly increased
o Internationally- keeps value steady and encourages foreign transactions
 Increases foreign investment
 Maintains liquidity in the market
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Followers of the efficient market hypothesis, however, are usually in disagreement with both
fundamental and technical analysts. The efficient market hypothesis contends that it is
essentially impossible to produce market-beating returns in the long run, through either
fundamental or technical analysis. The rationale for this argument is that, since the market
efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived
from fundamental (or technical) analysis would be almost immediately whittled away by the
market's many participants, making it impossible for anyone to meaningfully outperform the
market over the long term
competitive advantage means a company is performing better than rivals by doing different
activities or performing similar activities in different ways. Investors should know that few
companies are able to compete successfully for long if they are doing the same things as their
competitors.