Stock Market Investing Unit 2 – Investment Power Study Guide
2.1 The Power of investing
_______________________ is generally used to refer to putting money aside for a rainy day, whether in
a savings bank or a piggy bank. (Savings bank is better)! The point is to have money on hand when
needed.
_______________________ is taking measures to make your money grow over time. Stocks, bonds,
mutual funds, commodities, properties or anything you think will increase in value over time.
The Rewards of investing
1. A great way of making money
2. Rewards can last a lifetime
3. _______________________________________________________________________
4. Can help you beat _______________________________________________________
5. A way of owning a piece of _________________________________________________
6. It’s fun!
The growing importance of investing

___________________________________ are changing rapidly.

One company for life and retire on a pension is no longer the case.

Over your career, you’re likely to work for at least _______________________________
employers.

With no single life-long employer and no company pension, your
________________________________________________ will reside in your own
hands.

Investing will not be a ___________________, it will be a _______________________.
The magic of compounding
_______________________ – The money you have on deposit on which interest is calculated.
_____________________________________ – Interest paid once per year at the end of the
year on the average balance in an account.
_____________________________________ – Interest paid on the principal and on previously
earned interest, assuming that the interest is left in the account. One of the reasons why
investing over a long period of time is so profitable is the fact that your earnings compound and
as a result, grow by larger and larger amounts.
The Rule of 72
One of the easiest ways to calculate the effects of _______________________ is the Rule of 72.
This states that if an asset grows X% per year, its value will double in 72/X years. So in order to
find how long it takes an investment to double, divide 72 by the annual rate of return.
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Example: if you can earn 10% rate of return per year, it will take 7.2 years (72/10) for
your money to double.
Four basic rules for investors
Four basic rules for taking advantage of the long-term power of investing are:
1. Invest on a ___________________________ basis over a long period of time
2. ______________________________ all earnings (dividends, interest, capital gains)
3. Invest in common stocks or mutual funds of good quality ________________ companies
4. ______________________________ your portfolio
2.2 The Corporation
Organizing a business
All businesses offer products or services that satisfy customer _________________ and
________________ in order to earn a profit.
Before any business can begin to operate, it must meet two basic needs:
◦
___________________: People who will do the work
◦
___________________: Money to buy real estate, equipment, raw materials and
underwrite other start-up costs.
Generally, a new business needs more capital than a single owner or a small team of owners can
provide and it must look to two primary sources of business capital:
_______________________________ and ___________________________________
_____________________________ are people who lend money to the business in return for a
contracted rate of interest or return for their investment.
_____________________________ are those who buy shares of stock in a company and
become part owners. Instead of receiving a fixed rate of interest, stockholders profit from the
success of a business.
Legal forms of business
1. _____________________________________________ – The most common form of business
ownership. This is a business owned and managed by one person.
Advantages:
Owner is boss. Owner receives all profits. Owner can make quick decisions. Less “red tape”.
Owner usually pays less income taxes
Disadvantages:
Owner may lack necessary skills/abilities. Owner may lack funds. Owner bears all losses. Illness
or death may close the business
2. ______________________________________________ - Businesses owned by two or more
people that is not incorporated.
A key factor in the success of a ___________________________ is for partners to clearly agree
on each person’s responsibilities.
Advantages:
Skills and abilities are pooled. Sources of capital are increased. Credit position is improved. Less
tax burden than corporations. Operating economies
Disadvantages:
Unlimited Financial Liability. Disagreement among partners. Uncertain Life. Difficulty in
withdrawing.
3. ______________________________________________ - a business owned by a group of
people and authorized by the State in which it is located to act as though it were a single person.
To get permission to form a ______________________________, organizers must obtain a
charter (often called a __________________________________________________________).
A _________________________________ is, in a sense an artificial person created by the laws
of the State.
A _________________________________ can make contracts, borrow money, own property
and sue or be sued.
Advantages:
Available sources of capital. Limited liability of stockholders. Permanency of existence. Ease in
transferring ownership
Disadvantages:
High Taxation. Government regulations and reports. Stockholders records and communication.
Charter restrictions
Private and Public Corporations
The vast majority of corporations in the U.S. are ___________________________ corporations.
Shares in _______________________ corporations are not sold on the stock market and can
only be purchased from _________________________________ stockholders (generally a
pretty small group of people).
________________________ companies are a little like private parties – you have to be invited.
Shares in _______________________________ corporations, however, can be purchased from
dealers and other shareholders and traded openly on stock markets.
How businesses raise money
When a corporation is raising new money for some venture, it may sell stocks or bonds directly
to investors. This is called a ______________________________________________________.
As a rule, however, the stock you buy will be sold in a __________________________ market. A
__________________________________________________is created when stockholders buy
and sell shares from one another on a stock market with the help of brokers.
The New York Stock Exchange and the NASDAQ over-the counter market are predominantly
involved in this ___________________________________________ market.
The Securities and Exchange Commission
The SEC is a _________________________________________________ which is considered the
“policeman” of the securities industry (stocks and bonds).
The SEC is responsible for establishing and enforcing regulations which protect the investing
public from unfair practices.
A publicly traded company is required to file registration information with the SEC. Company
data, industry information, management and other important facts are included.
Severe penalties are imposed for violations of full disclosure rules.
2.3 The Investment Supermarket
Level 1 – Lowest Risk/Lowest Return
_________________________________________________________ - (guaranteed by the
federal government which has the power to tax and create money).
____________________ Bonds – issued in small denominations and discounted to 50% of face
value. Variable rate. Advantages include 1)Safety and 2) Deferred Taxes.
____________________ Bonds – Sold in larger denominations and at face value. Interest is
currently taxable.
Both types of U.S. savings bonds are non-marketable (cannot be sold and must be redeemed
usually through bank).
Treasury Bills – Short term (mature in 3 -12 months). $10,000 minimum.
Treasury Notes and Treasury Bonds – Longer maturities (notes 1-10 years and bonds more than
10 years). $1,000 minimum.
Insured Savings and Checking Accounts – FDIC insured up to $250,000 in commercial and savings
banks. Low rate of interest. Suitable for short-term money.
Insured Certificates of Deposit (CDs)- Slightly longer term investments ranging from 3 months to
several years. Also FDIC insured up to $250,000. Higher interest than savings and checking
accounts since money is tied up longer.
Level 2 – Low Risk/Low Return
Money Market Accounts (or MM Mutual Funds) – low risk, relatively short term securities such
as T-bills, large CDs and notes issued by large stable corporations.
High Quality Corporate Bonds (or Corp Bond Mutual Funds) – Loaning money to higher rated
corporations. Riskier than loans to federal government. Bonds are rated by Standard & Poor or
Moody’s.
High Quality ________________________________(or _______________________________
Mutual Funds) – Similar to high quality corporate bonds but issued by federal, state and city
government entities. Interest earned is ___________________________________.
Level 3 – Relatively Low Risk
High Quality Convertible Bonds – A corporate bond which pays a fixed rate of interest but can be
exchanged for common stock. Rate of return is usually lower than the rate on “straight” (nonconvertible) bonds.
High Quality ____________________________ – Non-voting stock which pays a fixed dividend.
________________________________Stock/Bond Mutual Funds – Offer an opportunity to
invest in a mixed bag of several companies’ stocks and bonds. Level of risk varies with the
percentage of fund invested in stocks versus bonds. (More stocks means higher risk).
Level 4 – Intermediate Risk
Quality ______________________________ (or Mutual Funds) – Shares of companies which are
leaders in their industry and have demonstrated consistent growth rates for both earnings and
revenues. Usually pay low dividends but offer opportunity to profit from rising stock prices.
Large Capitalization (Large Cap) Stocks (or Mutual Funds) – Shares in corporations with a total
market value of outstanding stock of $10 Billion or more. These corporations are the largest in
the world. __________________________________ is calculated by multiplying the number of
common shares outstanding by the current price per share.
Level 5 – Relatively High Risk
Medium Capitalization (Mid Cap) Stocks (or Mutual Funds) – Shares of corporations with a
market value of between $________________________and $_________________________.
Large, but not enormous corporations.
Small Capitalization (Small Cap) Stocks (or Mutual Funds) – Shares of corporations with a market
value of less than $2 Billion. Most numerous but smallest corporations.
Specific Industry Mutual Funds – Investing in several companies that are all in the same industry.
(Health Care, Financial Services, Technology, etc.)
Low Quality Stocks (or Mutual Funds) – “low quality” is somewhat objective. Could be high risk
for several reasons including small revenue and earnings base, erratic past performance,
concentration on one product, company management.
Low Quality Bonds – Because these are non-investment grade bonds, there is a higher likelihood
that they could default and not pay the interest due and/or the face value of the bond at
maturity. At the bottom of this group are “junk bonds”.
Collectibles – Includes things like rare coins, art, sports cards, comic books and historical
memorabilia. Considerations include proper insurance and storage.
Level 6 – High Risk
Futures – Commodity futures are contracts to buy and sell items that are mined and grown at
some time in the future. (Soy beans, coffee, cattle, orange juice, etc). The investor is betting on
future movement of prices.
Options – A contract to buy or sell a stock at a certain price during a specified period of time.
The investor is betting on the future direction of the price of that stock.
__________________Stocks – Stock of corporations which sell for under $1. These are generally
small companies without a track record.