Fund Analyst Reports Stock Investing

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Fund Analyst Reports Stock Investing Powered By Docstoc
					INVESTING 101
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

                      November 13, 2010
Terms and Concepts
       Investing Terms and Concepts

       Security (financial instrument): is a
       claim on the issuer’s future income or
Bond - A debt                      Stock - Claim to share in the
security that promises to           net income and assets of a
make periodic payments              corporation (common stock is an
for a specified period of           example)
time                                         Preferred Stock
    Government Bonds                        Common Stock
    Corporate Bonds                         Different classes
    Municipal Bonds                              –Voting Rights
    BOND  RATINGS are

                         November 13, 2010
Investing Terms and Concepts
Mutual Fund
  A single portfolio of stocks, bonds, and/or cash
   managed by an investment company on behalf of many

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.

              November 13, 2010
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

                  November 13, 2010
II. 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

               November 13, 2010
Going Public
III.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

                 November 13, 2010
III.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

                November 13, 2010
III.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

                 November 13, 2010

Stock Exchanges
  NYSE (still use Specialists, but becoming electronic)
  NASDAQ (lower listing requirements, mostly tech stocks)
        London Stock Exchange (LSE), EuroNext, Latibex (part of

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.

                   November 13, 2010

         Actual Trade Flow

      Investor (DIFA)

              (Schwab)                         Broker (other)

Trading                                                            Trading
 Floor                                                              Floor
                                Specialist /
(NYSE)                                                             (NYSE)

                         November 13, 2010

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

              November 13, 2010
Investing Theory

    Why do we invest?
V. 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.”

                November 13, 2010
V. 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.

                November 13, 2010
VI. Firm Foundation Theory
      Each investment instrument has a basis for how much it is worth
       that it linked to the company’s 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 Stock’s intrinsic value is its theoretical price.
        – When investing, we compare a company’s current price with it’s
          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 it’s future dividends.

                November 13, 2010
VI. 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
         company’s profits every year.
        Therefore, a stock price can be viewed as an estimation of a
         company’s profits out into the future and seeing how much that
         is worth today.

•   Four Key Drivers of Stock Prices
    1.   The Expected Growth Rate
    2.   The Expected Dividend Payout
    3.   The Degree of Risk
    4.   The Level of Market Interest Rates

                November 13, 2010
     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

Modern Portfolio Theory (Harry Markowitz)

               November 13, 2010
Financial Statements

   Reported Financial Information
VII. Financial Statements

• The Balance Sheet
      Shows a company’s financial performance at a point in time
      Used to see a company’s financial structure

• The Income Statement
      Shows a company’s 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 firm’s activities on cash flows over a
       given period of time.
      Operating, Financing, Investing

                November 13, 2010
VII. Financial Statements

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VII. Financial Statements

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VII. Financial Statements

        November 13, 2010
VII. Financial Statements

        November 13, 2010
Appendix C – Analyst Reports
 Reuters ProVestor Company Reports
 Schwab
 GS Research Reports
 Argus
 S&P

          November 13, 2010

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