Topic 2 Shares and Fixed Interest Securities Flashcards
The appeal of shares
- High _________
- Relatively easy to ______ and ______
- Easy to ______value on a daily basis
- ______ reasonably consistent dividends
- In the long term, shares can be a vehicle for the _________ of financial wealth
It is important however to ___________the risks of investing on the stock market.
The appeal of shares
- High returns
- Relatively easy to buy and sell
- Easy to track value on a daily basis
- Pay reasonably consistent dividends
- In the long term, shares can be a vehicle for the creation of financial wealth
It is important however to understand the risks of investing on the stock market.
Types of ordinary shares
- __________ shares - high quality shares
- ______ shares (income shares)
- _______ shares (high returns but also high risk)
- __________ shares (the potential for high growth but at the same time extremely risky)
- ________ shares (perform well in a booming economy)
- ___________ shares (provide hedging opportunities in recessions)
Types of ordinary shares
- Blue-chip shares - high quality shares
- Value shares (income shares)
- Growth shares (high returns but also high risk)
- Speculative shares (the potential for high growth but at the same time extremely risky)
- Cyclical shares (perform well in a booming economy)
- Defensive shares (provide hedging opportunities in recessions)
‘Cap’ shares
The share market is broken into _______ segments, as measured by a share’s ________________:
- large-cap shares - possess relatively _______risk (top 50 companies in Australia)
- mid-cap shares - possess relatively ______ to __________ risk (next top 50 companies below large cap shares in Australia)
- small-cap shares - possess relatively ______ risk (companies below the top 100 companies)
‘Cap’ shares
The share market is broken into three segments, as measured by a share’s market capitalisation:
- large-cap shares - possess relatively low risk (top 50 companies in Australia)
- mid-cap shares - possess relatively low to medium risk (next top 50 companies below large cap shares in Australia)
- small-cap shares - possess relatively high risk (companies below the top 100 companies)
Fundamental analysis versus technical analysis
- Fundamental analysis is a method that attempts to ________ the __________value of a share/security. If the shares are trading at _______ than the intrinsic value then the shares may be seen as ________ value. Fundamental analysis involves a ________examination of the financial condition and operating results - the ‘fundamentals’ of a specific company, the state of the industry a particular company belongs to and the state of the broader economy.
- In contrast, technical analysis (or charting) _______ graphs of the price history of a share over a particular time period to _______recurring patterns which will ______ what will ________ to the asset’s price in the future.
Fundamental analysis versus technical analysis
- Fundamental analysis is a method that attempts to predict the intrinsic value of a share/security. If the shares are trading at less than the intrinsic value then the shares may be seen as good value. Fundamental analysis involves a detailed examination of the financial condition and operating results - the ‘fundamentals’ of a specific company, the state of the industry a particular company belongs to and the state of the broader economy.
- In contrast, technical analysis (or charting) uses graphs of the price history of a share over a particular time period to look for recurring patterns which will indicate what will happen to the asset’s price in the future.
Executing trades
- Trading on the Australian Stock Exchange (ASX) is carried out by_________ or _____________firms
+ Market order – an order to _____ or ________securities at the best price available when the order is placed
+ Limit order – an order to _____ (______) at or below (above) a specified price
+ Stop-loss order – an order to ______ (_____ ) a share when its market price _______or ________ below (rises above) a specified level
Executing trades
- Trading on the Australian Stock Exchange (ASX) is carried out by stockbrokers or stockbroking firms
+ Market order – an order to buy or sell securities at the best price available when the order is placed
+ Limit order – an order to buy (sell) at or below (above) a specified price
+ Stop-loss order – an order to sell (buy) a share when its market price reaches or drops below (rises above) a specified level
Ex-dividend date- additional material
- The ex-dividend date is ______ business days ________ the date of record. It determines whether an investor is an official shareholder of a company and thus eligible to ________ a declared dividend.
+ The investor who ________ the shares _____ or _______ the ex-dividend date will ______ the dividend. If the investor _______ the shares ________ the ex-dividend date, the new shareholder will _________ the dividend.
Ex-dividend date- additional material
- The ex-dividend date is two business days before the date of record. It determines whether an investor is an official shareholder of a company and thus eligible to receive a declared dividend.
+ The investor who sells the shares on or after the ex-dividend date will receive the dividend. If the investor sells the shares before the ex-dividend date, the new shareholder will receive the dividend.
Basic characteristics of fixed- income securities - bonds
- Bonds are _______\_, ________\_, _________ fixed-income debt securities
- Bonds give investors:
- ____________ (coupon/interest payments)
- __________ - bond prices fluctuate with the change of market interest rates and can also be affected by supply and demand
- Bonds have an ___________relationship between _______________ and ____________:
- when market interest rates _____underlying capital values ______.
- when market interest rates _______underlying capital values ______.
Basic characteristics of fixed- income securities - bonds
- Bonds are negotiable, publicly traded, long-term fixed-income debt securities
- Bonds give investors:
- current income (coupon/interest payments)
- _capital gain_s - bond prices fluctuate with the change of market interest rates and can also be affected by supply and demand
- Bonds have an inverse relationship between market interest rates and bond prices:
- when market interest rates fall underlying capital values rise.
- when market interest rates rise underlying capital values fall.
Margin Trading
Margin Trading: involves the use of borrowed funds to _________ securities, using the securities themselves as collateral
Initial Margin: the ________ amount of equity that must be __________ by the margin investor at the time of purchase
Margin call: a _________ of the need to ________ the loan balance so as to _______ the __________ loan ratio set for the investment(s)
Margin Trading
Margin Trading: involves the use of borrowed funds to purchase securities, using the securities themselves as collateral
Initial Margin: the minimum amount of equity that must be provided by the margin investor at the time of purchase
Margin call: a notification of the need to reduce the loan balance so as to meet the maximum loan ratio set for the investment(s)
Margin trading - continued
Margin trading – calculations of return on investment
- Buy 1,000 shares @ $4.80 each
- Semi-annual dividend 15 cents per share
- Lending ratio (LVR) 70%
- Interest on loan 10% p.a.
- Holding period 6 months
- Sale price of share: $5.50
What was the annual rate of return on the transaction assuming that the investor borrowed up to the LVR limit (70% of the total purchase price)?
What was the LVR at the time of sale?
Short selling – additional material
Short selling is the sale of borrowed securities- securities are ________ by the short seller and ___________ to the lender at some future date. Profits are made if security prices _______.
Advantages – profit from ________security prices.
Disadvantages – ______risk exposure (leveraged investment, usually limited time to ________desired goals).
Short selling – additional material
Short selling is the sale of borrowed securities- securities are repurchased by the short seller and returned to the lender at some future date. Profits are made if security prices fall.
Advantages – profit from falling security prices.
Disadvantages – high risk exposure (leveraged investment, usually limited time to achieve desired goals).
