INVESTING 101

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INVESTING 101
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Table of Contents

• I. Investing Terms and Concepts
• II. Ratios
• III. Going Public
• IV. Trading
• V. Castles In the Air Theory
• VI. Firm Foundation Theory
• VII. Financial Statements
• APPENDIX A Useful Reading
• APPENDIX B Websites
• APPENDIX C Analyst Reports

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Terms and Concepts
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Investing Terms and Concepts

• Security (financial instrument) is a claim on
  the issuers future income or assets

• Bond - A debt security that promises to make
  periodic payments for a specified period of time
• Government Bonds
• Corporate Bonds
• Municipal Bonds
• BOND RATINGS are important!

• Stock - Claim to share in the net income and
  assets of a corporation (common stock is an
  example)
• Preferred Stock
• Common Stock
• Different classes
• Voting Rights

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Investing Terms and Concepts

• Mutual Fund
• A single portfolio of stocks, bonds, and/or cash
  managed by an investment company on behalf of
  many investors.
• Hedge Fund
• A lightly regulated investment vehicle, where
  management has greater freedom what to invest and
  where, e.g. in more risky stocks like Emerging
  Markets
• Hedges bets by investing in counterpart to reduce
  risk
• Venture Capital
• Provide start-up capital for new companies, think
  tech-boom of the late 90s.

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Investing Terms and Concepts

• Income from Investing
• Capital Gains
• The difference in price between what you sold
  your stock for and what you originally bought it
  for.
• E.g. You bought 1 share of Veritas (VTS)
  yesterday for 62. Today, you sell this share for
  70. Your capital gain is 8.
• Dividends
• Quarterly, usually a fraction of the stock price
  (0-4).
• Other investing instruments and methods
• Futures / Options
• Selling short

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Ratios
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Ratios

• Help us to evaluate a stock / company
• Current performance / financial health
• Price / Earnings Ratio
• Stock price / earnings per share
• How much your paying for each dollar of earnings
• Return on assets (ROA)
• Net profits after taxes per dollar of assets
• Return on Equity (ROE)
• Net profits after taxes per dollar of equity

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Going Public
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Going Public

• Public vs. Private Companies
• Ownership
• Compliance
• Reporting
• SEC (Security Exchange Commission)
• Registration with SEC
• Ongoing Reporting
• Annual Report (10-K) - Audited
• Quarterly Report (10-Q) Not Audited

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Going Public

• IPO - Initial Public Offering
• Underwriting
• Managing Underwriter
• Underwriting Syndicate
• SEC filing
• Prospectus
• Primary Market
• Company receives capital
• Secondary Market
• Company receives nothing
• Exchanges

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Going Public

• Public vs. Private Companies
• Ownership
• Compliance
• Reporting
• SEC (Security Exchange Commission)
• Registration with SEC
• Ongoing Reporting
• Annual Report (10-K) - Audited
• Quarterly Report (10-Q) Not Audited

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Trading
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Trading

• Stock Exchanges
• NYSE (still use Specialists, but becoming
  electronic)
• NASDAQ (lower listing requirements, mostly tech
  stocks)
• London Stock Exchange (LSE), EuroNext, Latibex
  (part of BME)
• Foreign Exchange Markets
• Volume 1.9 Trillion/day
• Derivatives (Mercantile) Exchanges
• Derivatives? Derived from the price of an
  underlying asset.
• Commodities? Futures?
• Ex. Crude Oil Futures, Weather futures etc.

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Trading

• Actual Trade Flow

Investor (DIFA)
Seller
Broker (Schwab)
Broker (other)
Trading Floor (NYSE)
Trading Floor (NYSE)
Specialist / Computer
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Trading

• Price Terms
• Bid
• Highest price a buyer is willing to pay for a
  security
• Ask
• Lowest price a seller is willing to receive for a
  security
• Spread
• Difference between the bid and ask price
• Quote
• The highest bid and lowest ask price currently
  available

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Investing Theory

• Why do we invest?

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Castles in the Air Theory

• Mass Psychology
• Analysis of how a crowd of investors are likely
  to behave in the future under different
  circumstances.
• During periods of optimism, they tend to build
  hopes into castles in the air.
• The General Theory of Employment, Interest and
  Money,John Maynard Keynes
• Most prominently used this theory in his
  investments he played the market for 30 min
  each morning and made millions
• He wrote It is not sensible to pay 25 for an
  investment of which you believe the prospective
  yield to justify a value of 30, if you also
  believe the market will value it at 20 three
  months hence.
• The key is foreseeing changes in the
  conventional basis of valuation a short time
  ahead of the general public.

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Castles in the Air Theory

• Greater Fool Theory
• An investment is only worth a certain price
  because we expect someone else will buy it for a
  higher price. The new buyer will assume that they
  can in turn sell it to someone else for an even
  higher price. Therefore, any price will do as
  long as someone else is willing to pay more.
• Technical Analysis
• Looking at charts and trading volumes to predict
  future prices.

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Firm Foundation Theory

• Each investment instrument has a basis for how
  much it is worth that it linked to the companys
  earnings, assets, and future financial
  performance.
• Intrinsic Value
• What is the value of the underlying entity?
• Determined by looking at present conditions and
  future prospects.
• A Stocks intrinsic value is its theoretical
  price.
• When investing, we compare a companys current
  price with its intrinsic value. In theory, these
  two prices should be the same.
• The Theory of Investing, John B. Williams
• The intrinsic value of a stock is equal to the
  present value of all its future dividends.

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Firm Foundation Theory

• Arriving at a Stock Price
• Since owning a stock means that you own a small
  part of the company, you are also entitled to a
  small proportion of that companys profits every
  year.
• Therefore, a stock price can be viewed as an
  estimation of a companys profits out into the
  future and seeing how much that is worth today.
• Four Key Drivers of Stock Prices
• The Expected Growth Rate
• The Expected Dividend Payout
• The Degree of Risk
• The Level of Market Interest Rates

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Portfolio Theory

• Diversification Investing in a collection
  (portfolio) of assets whose return do not always
  move together, with the result that overall risk
  is lower than for individual assets.
• Modern Portfolio Theory (Harry Markowitz)

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Financial Statements

• Reported Financial Information

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Financial Statements

• The Balance Sheet
• Shows a companys financial performance at a
  point in time
• Used to see a companys financial structure
• The Income Statement
• Shows a companys revenues and expenses over a
  given period of time
• How the company is using their assets to create
  earnings
• Statement of Cash Flows
• Reports the impact of a firms activities on cash
  flows over a given period of time.
• Operating, Financing, Investing

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Financial Statements
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Financial Statements
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Financial Statements
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Financial Statements
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Appendix C Analyst Reports

• Reuters ProVestor Company Reports
• Schwab
• GS Research Reports
• Argus
• SP