Stocks Basics

1.
Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
Wouldn't you love to be a business owner without ever having to show up at work? Imagine if
you could sit back, watch your company grow, and collect the dividend checks as the money
rolls in! This situation might sound like a pipe dream, but it's closer to reality than you might
think.
As you've probably guessed, we're talking about owning stocks. This fabulous category of
financial instruments is, without a doubt, one of the greatest tools ever invented for building
wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you
start on your road to financial freedom, you need to have a solid understanding of stocks and
how they trade on the stock market.
Over the last few decades, the average person's interest in the stock market has grown
exponentially. What was once a toy of the rich has now turned into the vehicle of choice for
growing wealth. This demand coupled with advances in trading technology has opened up the
markets so that nowadays nearly anybody can own stocks.
Despite their popularity, however, most people don't fully understand stocks. Much is learned
from conversations around the water cooler with others who also don't know what they're talking
about. Chances are you've already heard people say things like, "Bob's cousin made a killing in
XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your
shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality,
which was especially prevalent during the amazing dotcom market in the late '90s. People
thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom
crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but
they aren't without risks. The only solution to this is education. The key to protecting yourself in
the stock market is to understand where you are putting your money.
It is for this reason that we've created this tutorial: to provide the foundation you need to make
investment decisions yourself. We'll start by explaining what a stock is and the different types of
stock, and then we'll talk about how they are traded, what causes prices to change, how you buy
stocks and much more. If you're interested in learning more about investing outside of just st
Read more: Stocks Basics: Introduction | Investopedia
http://www.investopedia.com/university/stocks/#ixzz4GTFvolWM
Follow us: Investopedia on Facebook
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
The Definition of a Stock

Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the
company's assets and earnings. As you acquire more stock, your ownership stake in the company
becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a
company and, as such, you have a claim (albeit usually very small) to everything the company
owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every
trademark, and every contract of the company. As an owner, you are entitled to your share of the
company's earnings as well as any voting rights attached to the stock.
Example stock certificate

(Click to enlarge)
A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your
ownership. In today's computer age, you won't actually get to see this document because your
brokerage keeps these records electronically, which is also known as holding shares "in street
name". This is done to make the shares easier to trade. In the past, when a person wanted to sell
his or her shares, that person physically took the certificates down to the brokerage. Now, trading
with a click of the mouse or a phone call makes life easier for everybody.
Being a shareholder of a public company does not mean you have a say in the day-to-day
running of the business. Instead, one vote per share to elect the board of directors at annual
meetings is the extent to which you have a say in the company. For instance, being a Microsoft
shareholder doesn't mean you can call up Bill Gates and tell him how you think the company
should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean
you can walk into the factory and grab a free case of Bud Light!
The management of the company is supposed to increase the value of the firm for shareholders.
If this doesn't happen, the shareholders can vote to have the management removed, at least in
theory. In reality, individual investors like you and I don't own enough shares to have a material
influence on the company. It's really the big boys like large institutional investors and billionaire
entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage the company isn't such a big deal. After all,
the idea is that you don't want to have to work to make money, right? The importance of being a
shareholder is that you are entitled to a portion of the company's profits and have a claim on
assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the
larger the portion of the profits you get. Your claim on assets is only relevant if a company goes
bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.
This last point is worth repeating: the importance of stock ownership is your claim on assets
and earnings. Without this, the stock wouldn't be worth the paper it's printed on.
Another extremely important feature of stock is its limited liability, which means that, as an
owner of a stock, you are not personally liable if the company is not able to pay its debts. Other
companies such as partnerships are set up so that if the partnership goes bankrupt the creditors
can come after the partners (shareholders) personally and sell off their house, car, furniture, etc.
Owning stock means that, no matter what, the maximum value you can lose is the value of your
investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose
your personal assets.
Debt vs. Equity

Why does a company issue stock? Why would the founders share the profits with thousands of
people when they could keep profits to themselves? The reason is that at some point every
company needs to raise money. To do this, companies can either borrow it from somebody or
raise it by selling part of the company, which is known as issuing stock. A company can borrow
by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt
financing. On the other hand, issuing stock is called equity financing. Issuing stock is
advantageous for the company because it does not require the company to pay back the money or
make interest payments along the way. All that the shareholders get in return for their money is
the hope that the shares will someday be worth more than what they paid for them. The first sale
of a stock, which is issued by the private company itself, is called the initial public offering
(IPO).
It is important that you understand the distinction between a company financing through debt and
financing through equity. When you buy a debt investment such as a bond, you are guaranteed
the return of your money (the principal) along with promised interest payments. This isn't the
case with an equity investment. By becoming an owner, you assume the risk of the company not
being successful - just as a small business owner isn't guaranteed a return, neither is a
shareholder. As an owner, your claim on assets is less than that of creditors. This means that 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. Shareholders earn a lot
if a company is successful, but they also stand to lose their entire investment if the company isn't
successful.
Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some
companies pay out dividends, but many others do not. And there is no obligation to pay out
dividends even for those firms that have traditionally given them. Without dividends, an investor
can make money on a stock only through its appreciation in the open market. On the downside,
any stock may go bankrupt, in which case your investment is worth nothing.
Although risk might sound all negative, there is also a bright side. Taking on greater risk
demands a greater return on your investment. This is the reason why stocks have historically
outperformed other investments such as bonds or savings accounts. Over the long term, an
investment in stocks has historically had an average return of around 10-12%.
Read more: Stocks Basics: What Are Stocks? | Investopedia
http://www.investopedia.com/university/stocks/stocks1.asp#ixzz4GTG5GSc0
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
There are two main types of stocks: common stock and preferred stock.
Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to
this type. In fact, the majority of stock is issued is in this form. We basically went over features
of common stock in the last section. Common shares represent ownership in a company and a
claim (dividends) on a portion of profits. Investors get one vote per share to elect the board
members, who oversee the major decisions made by management.
Over the long term, common stock, by means of capital growth, yields higher returns than almost
every other investment. This higher return comes at a cost since common stocks entail the most
risk. If a company goes bankrupt and liquidates, the common shareholders will not receive
money until the creditors, bondholders and preferred shareholders are paid.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with
the same voting rights. (This may vary depending on the company.) With preferred shares,
investors are usually guaranteed a fixed dividend forever. This is different than common stock,
which has variable dividends that are never guaranteed. Another advantage is that in the event of
liquidation, preferred shareholders are paid off before the common shareholder (but still after
debt holders). Preferred stock may also be callable, meaning that the company has the option to
purchase the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of
these kinds of shares is to see them as being in between bonds and common shares.
Different Classes of Stock

Common and preferred are the two main forms of stock; however, it's also possible for
companies to customize different classes of stock in any way they want. The most common
reason for this is the company wanting the voting power to remain with a certain group;
therefore, different classes of shares are given different voting rights. For example, one class of
shares would be held by a select group who are given ten votes per share while a second class
would be issued to the majority of investors who are given one vote per share.
When there is more than one class of stock, the classes are traditionally designated as Class A
and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms
are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb"
or "BRK.A, BRK.B".
Read more: Stocks Basics: Different Types Of Stocks | Investopedia
http://www.investopedia.com/university/stocks/stocks2.asp#ixzz4GTGCnmok
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide
on a price. Some exchanges are physical locations where transactions are carried out on a trading
floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their
arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual,
composed of a network of computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of securities between buyers and
sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you
had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing
more than a super-sophisticated farmers' market linking buyers and sellers.
Before we go on, we should distinguish between the primary market and the secondary market.
The primary market is where securities are created (by means of an IPO) while, in the secondary
market, investors trade previously-issued securities without the involvement of the issuingcompanies. The secondary market is what people are referring to when they talk about the stock
market. It is important to understand that the trading of a company's stock does not directly
involve that company.
The New York Stock Exchange
The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big
Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement
by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General
Electric, McDonald's, Citigroup, Coca-Cola, Gillette and Wal-mart, is the market of choice for
the largest companies in America.
Read more: Stocks Basics: How Stocks Trade | Investopedia

http://www.investopedia.com/university/stocks/stocks3.asp#ixzz4GTGGzQES
The trading floor of The NYSE is the first type of exchange (as we referred to above), where
the NYSE
much of the trading is done face-to-face on a trading floor. This is also
referred to as a listed exchange. Orders come in through brokerage firms that are members of the
exchange and flow down to floor brokers who go to a specific spot on the floor where the stock
trades. At this location, known as the trading post, there is a specific person known as the
specialist whose job is to match buyers and sellers. Prices are determined using an auction
method: the current price is the highest amount any buyer is willing to pay and the lowest price
at which someone is willing to sell. Once a trade has been made, the details are sent back to the
brokerage firm, who then notifies the investor who placed the order. Although there is human
contact in this process, don't think that the NYSE is still in the stone age: computers play a huge
role in the process.
The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of
which the Nasdaq is the most popular. These markets have no central
location or floor brokers whatsoever. Trading is done through a computer
and telecommunications network of dealers. It used to be that the largest
companies were listed only on the NYSE while all other second tier
stocks traded on the other exchanges. The tech boom of the late '90s
changed all this; now the Nasdaq is home to several big technology
companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has
resulted in the Nasdaq becoming a serious competitor to the NYSE.
On the Nasdaq brokerages act as market makers for various stocks. A
The Nasdaq market
market maker provides continuous bid and ask prices within a prescribed site in Times Square
percentage spread for shares for which they are designated to make a
market. They may match up buyers and sellers directly but usually they will maintain an
inventory of shares to meet demands of investors.
Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX
used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact,
the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought
the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.
There are many stock exchanges located in just about every country around the world. American
markets are undoubtedly the largest, but they still represent only a fraction of total investment
around the globe. The two other main financial hubs are London, home of the London Stock
Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth
mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter

market, but the term commonly refers to small public companies that don't meet the listing
requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to
penny stocks because there is little to no regulation. This makes investing in an OTCBB stock
very risky.
Read more: Stocks Basics: How Stocks Trade | Investopedia
http://www.investopedia.com/university/stocks/stocks3.asp#ixzz4GTGTm19H
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
Stock prices change every day as a result of market forces. By this we mean that 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. Conversely, if more people wanted to sell a stock than buy it,
there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is difficult to comprehend is what makes people
like a particular stock and dislike another stock. This comes down to figuring out what news is
positive for a company and what news is negative. There are many answers to this problem and
just about any investor you ask has their own ideas and strategies.
That being said, the principal theory is that the price movement of a stock indicates what
investors feel a company is worth. Don't equate a company's value with the stock price. The
value of a company is its market capitalization, which is the stock price multiplied by the number
of shares outstanding. For example, a company that trades at $100 per share and has 1 million
shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares
outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further
complicate things, the price of a stock doesn't only reflect a company's current value, it also
reflects the growth that investors expect in the future.
The most important factor that affects the value of a company is its earnings. Earnings are the
profit a company makes, and in the long run no company can survive without them. It makes
sense when you think about it. If a company never makes money, it isn't going to stay in
business. Public companies are required to report their earnings four times a year (once each
quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings
seasons. The reason behind this is that analysts base their future value of a company on their
earnings projection. If a company's results surprise (are better than expected), the price jumps up.
If a company's results disappoint (are worse than expected), then the price will fall.
Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn,
changes its price). It would be a rather simple world if this were the case! During the dotcom
bubble, for example, dozens of internet companies rose to have market capitalizations in the
billions of dollars without ever making even the smallest profit. As we all know, these valuations
did not hold, and most internet companies saw their values shrink to a fraction of their highs.
Still, the fact that prices did move that much demonstrates that there are factors other than
current earnings that influence stocks. Investors have developed literally hundreds of these
variables, ratios and indicators. Some you may have already heard of, such as the price/earnings
ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or
moving average convergence divergence.
So, why do stock prices change? The best answer is that nobody really knows for sure. Some
believe that it isn't possible to predict how stock prices will change, while others think that by
drawing charts and looking at past price movements, you can determine when to buy and sell.
The only thing we do know is that stocks are volatile and can change in price extremely rapidly.
The important things to grasp about this subject are the following:
1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a
company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other
indicators that investors use to predict stock price. Remember, it is investors' sentiments,
attitudes and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do.
Unfortunately, there is no one theory that can explain everything.
Read more: Stocks Basics: What Causes Stock Prices To Change? | Investopedia
http://www.investopedia.com/university/stocks/stocks4.asp#ixzz4GTGsFc7M
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
You've now learned what a stock is and a little bit about the principles behind the stock market,
but how do you actually go about buying stocks? Thankfully, you don't have to go down into the
trading pit yelling and screaming your order. There are two main ways to purchase stock:
1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different
flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your
account; they also charge a lot. Discount brokerages offer little in the way of personal attention
but are much cheaper.
At one time, only the wealthy could afford a broker since only the expensive, full-service brokers
were available. With the internet came the explosion of online discount brokers. Thanks to them
nearly anybody can now afford to invest in the market.
2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which
individual companies, for a minimal cost, allow shareholders to purchase stock directly from the
company. Drips are a great way to invest small amounts of money at regular intervals.
Read more: Stocks Basics: Buying Stocks | Investopedia
http://www.investopedia.com/university/stocks/stocks5.asp#ixzz4GTH18WjQ
1.
Any financial paper has stock quotes that will look something like the image below:
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest
prices at which a stock has traded over the previous 52 weeks (one year). This
typically does not include the previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the
company. If there are no special symbols or letters following the name, it is common
stock. Different symbols imply different classes of shares. For example, "pf" means
the shares are preferred stock.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies
the stock. If you watch financial TV, you have seen the ticker tape move across the
screen, quoting the latest prices alongside this symbol. If you are looking for stock
quotes online, you always search for a company by the ticker symbol. If you don't
know what a particular company's ticker is you can search for it at:
http://finance.yahoo.com/l.
Column 5: Dividend Per Share - This indicates the annual dividend payment per
share. If this space is blank, the company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as
annual dividends per share divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock
price by earnings per share from the last four quarters. For more detail on how to
interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded
for the day, listed in hundreds. To get the actual number traded, add "00" to the end
of the number listed.
Column 9 & 10: Day High and Low - This indicates the price range at which the
stock has traded at throughout the day. In other words, these are the maximum and
the minimum prices that people have paid for the stock.
Column 11: Close - The close is the last trading price recorded when the market
closed on the day. If the closing price is up or down more than 5% than the previous
day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not
guaranteed to get this price if you buy the stock the next day because the price is
constantly changing (even after the exchange is closed for the day). The close is
merely an indicator of past performance and except in extreme circumstances
serves as a ballpark of what you should expect to pay.
Column 12: Net Change - This is the dollar value change in the stock price from
the previous day's closing price. When you hear about a stock being "up for the
day," it means the net change was positive.
Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet.
This method is superior because most sites update throughout the day and give you
more information, news, charting, research, etc.
To get quotes, simply enter the ticker symbol into the quote box of any major
financial site like Yahoo! Finance, CBS Marketwatch, or MSN Moneycentral. The
example below shows a quote for Microsoft (MSFT) from Yahoo Finance. Interpreting
the data is exactly the same as with the newspaper.
Read more: Stocks Basics: How to Read A Stock Table/Quote | Investopedia

http://www.investopedia.com/university/stocks/stocks6.asp#ixzz4GTH7vZGa
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms
already, you undoubtedly will as you begin to invest.
The Bulls
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. Things are just plain rosy! Picking
stocks during a bull market is easier because everything is going up. Bull markets cannot last
forever though, and sometimes they can lead to dangerous situations if stocks become
overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a
"bull" and is said to have a "bullish outlook".
The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling.
Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make
money when stocks are falling using a technique called short selling. Another strategy is to wait
on the sidelines until you feel that the bear market is nearing its end, only starting to buy in
anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he
or she is called a "bear" and said to have a "bearish outlook".
The Other Animals on the Farm - Chickens and Pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they
turn only to money-market securities or get out of the markets entirely. While it's true that you
should never invest in something over which you lose sleep, you are also guaranteed never to see
any return if you avoid the market completely and never take any risk,
Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on
hot tips and invest in companies without doing their due diligence. They get impatient, greedy,
and emotional about their investments, and they are drawn to high-risk securities without putting
in the proper time or money to learn about these investment vehicles. Professional traders love
the pigs, as it's often from their losses that the bulls and bears reap their profits.
What Type of Investor Will You Be?
There are plenty of different investment styles and strategies out there. Even though the bulls and
bears are constantly at odds, they can both make money with the changing cycles in the market.
Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.
Make sure you don't get into the market before you are ready. Be conservative and never invest
in anything you do not understand. Before you jump in without the right knowledge, think about
this old stock market saying:
"Bulls make money, bears make money, but pigs just get slaughtered!"
Read more: Stocks Basics: The Bulls, The Bears And The Farm | Investopedia
http://www.investopedia.com/university/stocks/stocks7.asp#ixzz4GTHIkusB
1. Stocks
Basics:
Introdu
ction
2. Stocks
Basics:
What
Are
Stocks?
3. Stocks
Basics:
Differe
nt
Types
Of
Stocks
4. Stocks
Basics:
How
Stocks
Trade
5. Stocks
Basics:
What
Causes
Stock
Prices
To
Change
?
6. Stocks
Basics:
Buying
Stocks
7. Stocks
Basics:
How to
Read A
Stock
Table/Q
uote
8. Stocks
Basics:
The
Bulls,
The
Bears
And
The
Farm
9. Stocks
Basics:
Conclu
sion
Let's recap what we've learned in this tutorial:
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!
Read more: Stocks Basics: Conclusion | Investopedia

http://www.investopedia.com/university/stocks/stocks8.asp#ixzz4GTHPMq52
Pattern
DEFINITION of 'Pattern'
In technical analysis, patterns are the distinctive formations created by the movements of security
prices on a chart. A pattern is identified by a line connecting common price points (such as
closing prices, highs or lows) over a period of time. Chartists try to identify patterns to anticipate
the future price direction.
Next Up
1. Continuation Pattern
2. Diamond Top Formation
3. Hook Reversal
4. Double Bottom
5.
BREAKING DOWN 'Pattern'

Also known as trading patterns, patterns in security prices can occur at any point or measure in
time. Although price patterns may be easy to see in hindsight, they are much harder to spot in
real time. There are many different kinds of patterns in technical analysis, including the cup and
handle, ascending/descending channels, and the head-and-shoulders pattern.
There are two types of analysis for stocks: fundamental and technical. Fundamental analysis
looks at company performance. If revenues have gone up over the past three years, it may be safe
to assume they will go up next year. Technical analysis is primarily concerned with patterns,
regardless of performance. These patterns are then used to find trends in pricing. Fundamental
analysis is used to determine what to buy, whereas technical analysis is used to determine when
to buy it.
Technical analysts use chart patterns to find trends in a company's price. The analyst looks for
trends in the movement of the stock. Patterns can be based on seconds, minutes, hours, days,
months or ticks and can be applied to bar, candlestick and line charts. The most basic form of
chart pattern is a trend line.
Trend Lines
"The trend is your friend" is a common saying among technical analysts. The trend is often
located by forming a trend line. A trend line is the line formed between a high and a low. If the
trend line is going up, the trend is up. If the trend line is going down, the trend is down. Trend
lines form the foundation for most chart patterns. Trend lines are also used to locate support and
resistance levels, which are also part of pattern recognition. A line of support is a level a stock
price won't go below; a line of resistance is a level the stock won't go above.
Pattern Types
There are two basic types of patterns: continuation and reversal. Continuation patterns are used
to find opportunities for traders to continue with the trend. These are retracements or temporary
consolidation patterns. Different names have been given to the most common continuation
patterns, such as ascending triangles, descending triangles, flag patterns, pennant patterns and
symmetrical triangles.
Reversal patterns are the opposite of continuation patterns. They are used to find opportunities to
enter a trade on the reversal of a trend. In other words, reversal patterns find areas where trends
have ended. Common reversal patterns are the head-and-shoulders patterns, triple tops and
bottoms, or double tops and bottoms.
Read more: Pattern Definition | Investopedia
http://www.investopedia.com/terms/p/pattern.asp#ixzz4GTHk6Wi4
What is a 'Technical Indicator'
Any class of metrics whose value is derived from generic price activity in a stock or asset.
Technical indicators look to predict the future price levels, or simply the general price direction,
of a security by looking at past patterns. Examples of common technical indicators include
Relative Strength Index, Money Flow Index, Stochastics, MACD and Bollinger Bands.
Next Up
1. Indicator
2. Unique Indicator
3. Technical Analysis
4. Market Indicators
5.
BREAKING DOWN 'Technical Indicator'

Technical indicators, collectively called "technicals", are distinguished by the fact that they do
not analyze any part of the fundamental business, like earnings, revenue and profit margins.
Technical indicators are used most extensively by active traders in the market, as they are
designed primarily for analyzing short-term price movements. To a long-term investor, most
technical indicators are of little value, as they do nothing to shed light on the underlying
business. The most effective uses of technicals for a long-term investor are to help identify good
entry and exit points for the stock by analyzing the long-term trend.
Read more: Technical Indicator Definition | Investopedia
http://www.investopedia.com/terms/t/technicalindicator.asp#ixzz4GTHutEri
1. Options
Basics:
Introdu
ction
2. Options
Basics:
What
Are
Options
?
3. Options
Basics:
Why
Use
Options
?
4. Options
Basics:
How
Options
Work
5. Options
Basics:
Types
Of
Options
6. Options
Basics:
How To
Read
An
Options
Table
7. Options
Basics:
Conclu
sion
Nowadays, many investors' portfolios include investments such as mutual funds, stocks and
bonds. But the variety of securities you have at your disposal does not end there. Another type of
security, called an option, presents a world of opportunity to sophisticated investors.
The power of options lies in their versatility. They enable you to adapt or adjust your position
according to any situation that arises. Options can be as speculative or as conservative as you
want. This means you can do everything from protecting a position from a decline to outright
betting on the movement of a market or index.
This versatility, however, does not come without its costs. Options are complex securities and
can be extremely risky. This is why, when trading options, you'll see a disclaimer like the
following:
Options involve risks and are not suitable for everyone. Option trading can be speculative in
nature and carry substantial risk of loss. Only invest with risk capital.
Despite what anybody tells you, option trading involves risk, especially if you don't know what
you are doing. Because of this, many people suggest you steer clear of options and forget their
existence.
On the other hand, being ignorant of any type of investment places you in a weak position.
Perhaps the speculative nature of options doesn't fit your style. No problem - then don't speculate
in options. But, before you decide not to invest in options, you should understand them. Not
learning how options function is as dangerous as jumping right in: without knowing about
options you would not only forfeit having another item in your investing toolbox but also lose
insight into the workings of some of the world's largest corporations. Whether it is to hedge the
risk of foreign-exchange transactions or to give employees ownership in the form of stock
options, most multi-nationals today use options in some form or another.
This tutorial will introduce you to the fundamentals of options. Keep in mind that most options
traders have many years of experience, so don't expect to be an expert immediately after reading
this tutorial. If you aren't familiar with how the stock market works, check out the Stock Basics
tutorial.
Read more: Options Basics: Introduction | Investopedia
http://www.investopedia.com/university/options/#ixzz4GTIH3Cgi
1. Options
Basics:
Introdu
ction
2. Options
Basics:
What
Are
Options
?
3. Options
Basics:
Why
Use
Options
?
4. Options
Basics:
How
Options
Work
5. Options
Basics:
Types
Of
Options
6. Options
Basics:
How To
Read
An
Options
Table
7. Options
Basics:
Conclu
sion
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an
underlying asset at a specific price on or before a certain date. An option, just like a stock or
bond, is a security. It is also a binding contract with strictly defined terms and properties.
Still confused? The idea behind an option is present in many everyday situations. Say, for
example, that you discover a house that you'd love to purchase. Unfortunately, you won't have
the cash to buy it for another three months. You talk to the owner and negotiate a deal that gives
you an option to buy the house in three months for a price of $200,000. The owner agrees, but
for this option, you pay a price of $3,000.
Now, consider two theoretical situations that might arise:
1. It's discovered that the house is actually the true birthplace of Elvis! As a result, the
market value of the house skyrockets to $1 million. Because the owner sold you the
option, he is obligated to sell you the house for $200,000. In the end, you stand to make a
profit of $797,000 ($1 million - $200,000 - $3,000).
2. While touring the house, you discover not only that the walls are chock-full of asbestos,
but also that the ghost of Henry VII haunts the master bedroom; furthermore, a family of
super-intelligent rats have built a fortress in the basement. Though you originally thought
you had found the house of your dreams, you now consider it worthless. On the upside,
because you bought an option, you are under no obligation to go through with the sale. Of
course, you still lose the $3,000 price of the option.
This example demonstrates two very important points. First, when you buy an option, you have a
right but not an obligation to do something. You can always let the expiration date go by, at
which point the option becomes worthless. If this happens, you lose 100% of your investment,
which is the money you used to pay for the option. Second, an option is merely a contract that
deals with an underlying asset. For this reason, options are called derivatives, which means an
option derives its value from something else. In our example, the house is the underlying asset.
Most of the time, the underlying asset is a stock or an index.
Calls and Puts
The two types of options are calls and puts:
1. A call gives the holder the right to buy an asset at a certain price within a specific period
of time. Calls are similar to having a long position on a stock. Buyers of calls hope that
the stock will increase substantially before the option expires.
2. A put gives the holder the right to sell an asset at a certain price within a specific period
of time. Puts are very similar to having a short position on a stock. Buyers of puts hope
that the price of the stock will fall before the option expires.
Participants in the Options Market
There are four types of participants in options markets depending on the position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options are called writers;
furthermore, buyers are said to have long positions, and sellers are said to have short positions.
Here is the important distinction between buyers and sellers:
Call holders and put holders (buyers) are not obligated to buy or sell. They have the
choice to exercise their rights if they choose.
Call writers and put writers (sellers), however, are obligated to buy or sell. This means
that a seller may be required to make good on a promise to buy or sell.
Don't worry if this seems confusing - it is. For this reason we are going to look at options from
the point of view of the buyer. Selling options is more complicated and can be even riskier. At
this point, it is sufficient to understand that there are two sides of an options contract.
The Lingo
To trade options, you'll have to know the terminology associated with the options market.
The price at which an underlying stock can be purchased or sold is called the strike price. This is
the price a stock price must go above (for calls) or go below (for puts) before a position can be
exercised for a profit. All of this must occur before the expiration date.
An option that is traded on a national options exchange such as the Chicago Board Options
Exchange (CBOE) is known as a listed option. These have fixed strike prices and expiration
dates. Each listed option represents 100 shares of company stock (known as a contract).
For call options, the option is said to be in-the-money if the share price is above the strike price.
A put option is in-the-money when the share price is below the strike price. The amount by
which an option is in-the-money is referred to as intrinsic value.
The total cost (the price) of an option is called the premium. This price is determined by factors
including the stock price, strike price, time remaining until expiration (time value) and volatility.
Because of all these factors, determining the premium of an option is complicated and beyond
the scope of this tutorial.
Read more: Options Basics: What Are Options? | Investopedia
http://www.investopedia.com/university/options/option.asp#ixzz4GTIOeozl
There are two main reasons why an investor would use options: to speculate and to hedge.
Speculation
You can think of speculation as betting on the movement of a security. The advantage of options
is that you aren't limited to making a profit only when the market goes up. Because of the
versatility of options, you can also make money when the market goes down or even sideways.
Speculation is the territory in which the big money is made - and lost. The use of options in this
manner is the reason options have the reputation of being risky. This is because when you buy an
option, you have to be correct in determining not only the direction of the stock's movement, but
also the magnitude and the timing of this movement. To succeed, you must correctly predict
whether a stock will go up or down, and you have to be right about how much the price will
change as well as the time frame it will take for all this to happen. And don't forget commissions!
The combinations of these factors means the odds are stacked against you.
So why do people speculate with options if the odds are so skewed? Aside from versatility, it's all
about using leverage. When you are controlling 100 shares with one contract, it doesn't take
much of a price movement to generate substantial profits.
Hedging
The other function of options is hedging. Think of this as an insurance policy. Just as you insure
your house or car, options can be used to insure your investments against a downturn. Critics of
options say that if you are so unsure of your stock pick that you need a hedge, you shouldn't
make the investment. On the other hand, there is no doubt that hedging strategies can be useful,
especially for large institutions. Even the individual investor can benefit. Imagine that you
wanted to take advantage of technology stocks and their upside, but say you also wanted to limit
any losses. By using options, you would be able to restrict your downside while enjoying the full
upside in a cost-effective way. (For more on this, see Married Puts: A Protective Relationship
and A Beginner's Guide To Hedging.)
A Word on Stock Options
Although employee stock options aren't available to everyone, this type of option could, in a
way, be classified as a third reason for using options. Many companies use stock options as a
way to attract and to keep talented employees, especially management. They are similar to
regular stock options in that the holder has the right but not the obligation to purchase company
stock. The contract, however, is between the holder and the company, whereas a normal option is
a contract between two parties that are completely unrelated to the company. (To learn more, see
The "True" Cost Of Stock Options.)
Options Basics: How Options Work
Maximize you
Read more: Options Basics: Why Use Options? | Investopedia
http://www.investopedia.com/university/options/option1.asp#ixzz4GTIUMzZo
1. Options
Basics:
Introdu
ction
2. Options
Basics:
What
Are
Options
?
3. Options
Basics:
Why
Use
Options
?
4. Options
Basics:
How
Options
Work
5. Options
Basics:
Types
Of
Options
6. Options
Basics:
How To
Read
An
Options
Table
7. Options
Basics:
Conclu
sion
Now that you know the basics of options, here is an example of how they work. We'll use a
fictional firm called Cory's Tequila Company.
Let's say that on May 1, the stock price of Cory's Tequila Co. is $67 and the premium (cost) is
$3.15 for a July 70 Call, which indicates that the expiration is the third Friday of July and the
strike price is $70. The total price of the contract is $3.15 x 100 = $315. In reality, you'd also
have to take commissions into account, but we'll ignore them for this example.
Remember, a stock option contract is the option to buy 100 shares; that's why you must multiply
the contract by 100 to get the total price. The strike price of $70 means that the stock price must
rise above $70 before the call option is worth anything; furthermore, because the contract is
$3.15 per share, the break-even price would be $73.15.
When the stock price is $67, it's less than the $70 strike price, so the option is worthless. But
don't forget that you've paid $315 for the option, so you are currently down by this amount.
Three weeks later the stock price is $78. The options contract has increased along with the stock
price and is now worth $8.25 x 100 = $825. Subtract what you paid for the contract, and your
profit is ($8.25 - $3.15) x 100 = $510. You almost doubled our money in just three weeks! You
could sell your options, which is called "closing your position," and take your profits - unless, of
course, you think the stock price will continue to rise. For the sake of this example, let's say we
let it ride.
By the expiration date, the price drops to $62. Because this is less than our $70 strike price and
there is no time left, the option contract is worthless. We are now down to the original investment
of $315.
To recap, here is what happened to our option investment:
Date
May 1
May 21
Expiry Date
Stock Price
$67
$78
$62
Option Price
$3.15
$8.25
worthless
Contract Value
$315
$825
$0
Paper Gain/Loss
$0
$510
-$315
The price swing for the length of this contract from high to low was $825, which would have
given us over double our original investment. This is leverage in action.
Exercising Versus Trading-Out

So far we've talked about options as the right to buy or sell (exercise) the underlying. This is true,
but in reality, a majority of options are not actually exercised.
In our example, you could make money by exercising at $70 and then selling the stock back in
the market at $78 for a profit of $8 a share. You could also keep the stock, knowing you were
able to buy it at a discount to the present value.
However, the majority of the time holders choose to take their profits by trading out (closing out)
their position. This means that holders sell their options in the market, and writers buy their
positions back to close. According to the CBOE, about 10% of options are exercised, 60% are
traded out, and 30% expire worthless.
Intrinsic Value and Time Value
At this point it is worth explaining more about the pricing of options. In our example the
premium (price) of the option went from $3.15 to $8.25. These fluctuations can be explained by
intrinsic value and time value.
Basically, an option's premium is its intrinsic value + time value. Remember, intrinsic value is
the amount in-the-money, which, for a call option, means that the price of the stock equals the
strike price. Time value represents the possibility of the option increasing in value. So, the price
of the option in our example can be thought of as the following:
Premium = Intrinsic Value
$8.25 = $8
+ Time Value
+ $0.25
In real life options almost always trade above intrinsic value. If you are wondering, we just
picked the numbers for this example out of the air to demonstrate how options work.
Read more: Options Basics: How Options Work | Investopedia
http://www.investopedia.com/university/options/option2.asp#ixzz4GTIb3C5R
We hope this tutorial has given you some insight into the world of options. Once again, we must
emphasize that options aren't for all investors. Options are sophisticated trading tools that can be
dangerous if you don't educate yourself before using them. Please use this tutorial as it was
intended - as a starting point to learning more about options.
Let's recap:
An option is a contract giving the buyer the right but not the obligation to buy or sell an
underlying asset at a specific price on or before a certain date.
Options are derivatives because they derive their value from an underlying asset.
A call gives the holder the right to buy an asset at a certain price within a specific period
of time.
A put gives the holder the right to sell an asset at a certain price within a specific period
of time.
There are four types of participants in options markets: buyers of calls, sellers of calls,
buyers of puts, and sellers of puts.
Buyers are often referred to as holders and sellers are also referred to as writers.
The price at which an underlying stock can be purchased or sold is called the strike price.
The total cost of an option is called the premium, which is determined by factors
including the stock price, strike price and time remaining until expiration.
A stock option contract represents 100 shares of the underlying stock.
Investors use options both to speculate and hedge risk.
Employee stock options are different from listed options because they are a contract
between the company and the holder. (Employee stock options do not involve any third
parties.)
The two main classifications of options are American and European.
Long term options are known as LEAPS.
Read more: Options Basics: Conclusion | Investopedia

http://www.investopedia.com/university/options/option5.asp#ixzz4GTIsAYG5
Christian Mueller-Glissmann, equity strategist at Goldman Sachs Group, is neutral on stocks
over the next year, according a recent research report. David Kostin, chief U.S. equity strategist
at Goldman, expects the S&P 500 to fall between 5% and 10% over the next few months. He
also expects the S&P 500 to end the year at 2,100. It closed on May 18th at 2,047.
Why do these two strategists expect equities to falter over the next few months and beyond?
There are five reasons. (For more, see: Will 2016 Bring a Bear Market?)
The Reasons
The first reason is valuations. There has been a lack of earnings growth, and the Forward P/E for
the S&P 500 currently falls into the 99th percentile on a historical basis. The only way stocks can
sustainably move higher is if earnings surprised to the upside. That might be a lot to ask for in
the current global economic environment.
The second reason is sentiment. According to Goldman Sachss Sentiment Indicator, it currently
stands at 32, which isnt as bullish as during the winter. This factor shouldnt be relied on too
much because sentiment can be taken at face value or looked at from a contrarian viewpoint.
(For more, see: Top 5 Positions in Goldman Sachs' Portfolio.)
The third reason is the Federal Reserve and interest rate expectations. Goldman Sachs expects
two rate hikes this year while most economists and analysts expect zero or one. If Goldman
Sachs is correct, then a hawkish surprise isnt likely to bode well for equities.
The fourth reason is thats its an election year. According to Kostin, the election is a part of
every client conversation. Apparently, clients feel as though the election will have a big impact
on their portfolio. Historically, equities are range-bound in the summer preceding an election, but
the country has rarely seen what is perceived as two (or three) bad choices for presidential
candidates. (For more, see: 4 Ways that the Presidential Election Will Affect Your Portfolio.)
The fifth reason is a slowdown in corporate buybacks. A lot of that financial engineering youve
been hearing about relates to corporate buybacks, which reduces share count and improves
earnings per share. Without those buybacks, demand for those stocks wanes. Buybacks wont
disappear, but
Read more: What Goldman Sees as 5 Biggest Risks for Stocks | Investopedia
http://www.investopedia.com/articles/markets/051916/what-goldman-sees-5-biggest-risksstocks.asp#ixzz4GTJ72WMy
Warren Buffett
Born:
Omaha, Nebraska, in 1930
Affiliations:
Most Famous For:
Buffett-Falk & Company
Graham-Newman Corporation
Buffett Partnership, Ltd.
Berkshire Hathaway, Inc.
Referred to as the "Sage" or "Oracle" of Omaha, Warren Buffett is

widely viewed as one of the most successful investors in history.
Following the principles set out by Benjamin Graham, he has
amassed a personal multibillion dollar fortune mainly through

investing in stocks and buying companies through Berkshire
Hathaway. Shareholders in Berkshire Hathaway who invested
$10,000 in the company in 1965 are above the $50 million mark
today. Now in his 70s, Buffett has yet to write a single book, but
among investment professionals and the investing public, there is
no more respected voice. (To learn more, read Warren Buffett: How
He Does It and What Is Warren Buffett\'s Investing Style?)
In 2006, Buffett announced that he would pledge much of his
reported $44 billion in stock holdings to the Bill and Melinda Gates
Foundation ($31 billion) and four other charities ($6 billion) started
by members of his family. (For more insight, see The Christmas
Saints Of Wall Street.)
Personal Profile
Warren Buffett graduated from the University of Nebraska in 1950 with a Bachelor of Science
degree. After reading "The Intelligent Investor" by Benjamin Graham, he wanted to study under
Graham, and did so at ColumbiaUniversity, obtaining his Master of Science degree in business in
1951.
He then returned to Omaha and formed the investment firm of Buffett-Falk & Company, and
worked as an investment salesman from 1951 to 1954. During this time, Buffett developed a
close relationship with Graham, who was generous with his time and thoughts. This interaction
between the former professor and student eventually landed Buffett a job with Graham's New
York firm, Graham-Newman Corporation, where he worked as a security analyst from 1954 to
1956. These two years of working side-by-side with Graham and analyzing hundreds of
companies were instructive years that formed the foundation for Buffett's approach to successful
stock investing.
Wanting to work independently, Buffett returned home once again to Omaha and started a family
investment partnership at age 25 with a starting capital base of $100,000. From 1956 to 1969,
when the Buffett partnership was dissolved, investors, including Buffett, experienced a thirtyfold gain in their value per share. Prior to the final decision to liquidate the partnership, Buffett
had acquired the unprofitable Berkshire Hathaway textile company in New Bedford,
Massachusetts, in 1965. After acquiring Berkshire, Buffett effected a successful turnaround of
the company, which focused on changing the company's financial framework. Berkshire kept its
textile business, even in the face of mounting pressures, but also used the company as a holding
company for other investments.
It was in the 1973-74 market collapse that Berkshire got the opportunity to purchase other
companies at bargain prices. Buffett went on a buying spree, which included an investment in
The Washington Post. The rest is history and today, Berkshire Hathaway is a massive holdings
company for a variety of businesses with assets and sales totaling, approximately, $240 billion
and $100 billion, respectively, for year-end 2006.
Investment Style
Warren Buffett's investing style of discipline, patience and value has consistently outperformed
the market for decades.
John Train, author of "The Money Masters"(1980), provides us with a succinct description of
Buffett's investment approach: "The essence of Warren's thinking is that the business world is
divided into a tiny number of wonderful businesses well worth investing in at a price and a
large number of bad or mediocre businesses that are not attractive as long-term investments.
Most of the time, most businesses are not worth what they are selling for, but on rare occasions
the wonderful businesses are almost given away. When that happens, buy boldly, paying no
attention to current gloomy economic and stock market forecasts."
Buffett's criteria for "wonderful businesses" include, among others, the following:
They have a good return on capital without a lot of debt.
They are understandable.
They see their profits in cash flow.
They have strong franchises and, therefore, freedom to price.
They don't take a genius to run.
Their earnings are predictable.
The management is owner-oriented.
Publications
Buffett has not, as yet, authored any books. However, his annual letters to the shareholders in
Berkshire Hathaway's annual report are a suitable substitute. Back copies of these 20-page
masterpieces of investing wisdom are available from 1977 through 2006 (updated annually) from
Berkshire's Website.
"Buffett: The Making of an American Capitalist" by Roger Lowenstein (1996).
"Warren Buffett Speaks: Wit And Wisdom From The World's Greatest Investor" (1997)
"The
Warren Buffett Way
" by Robert G. Hagstrom (2005)
Quotes
"Rule No.1 is never lose money. Rule No.2 is never forget rule number one."
"Shares are not mere pieces of paper. They represent part ownership of a business. So, when
contemplating an investment, think like a prospective owner."
"All there is to investing is picking good stocks at good times and staying with them as long as
they remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than
participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't
waste more than ten minutes considering it."
Read more: The Greatest Investors: Warren Buffett | Investopedia
http://www.investopedia.com/university/greatest/warrenbuffett.asp#ixzz4GTJfGK8P
The principle of time value of money - the notion that a given sum of money is more valuable
the sooner it is received, due to its capacity to earn interest - is the foundation for numerous
applications in investment finance.
Central to the time value principle is the concept of interest rates. A borrower who receives
money today for consumption must pay back the principal plus an interest rate that compensates
the lender. Interest rates are set in the marketplace and allow for equivalent relationships to be
determined by forces of supply and demand. In other words, in an environment where the
market-determined rate is 10%, we would say that borrowing (or lending) $1,000 today is
equivalent to paying back (or receiving) $1,100 a year from now. Here it is stated another way:
enough borrowers are out there who demand $1,000 today and are willing to pay back $1,100 in
a year, and enough investors are out there willing to supply $1,000 now and who will require
$1,100 in a year, so that market equivalence on rates is reached.
Exam Tips and Tricks
The CFA exam question authors frequently test
knowledge of FV, PV and annuity cash flow streams
within questions on mortgage loans or planning for
college tuition or retirement savings. Problems with
uneven cash flows will eliminate the use of the
annuity factor formula, and require that the
present value of each cash flow be calculated
individually, and the resulting values added

together.
The Five Components Of Interest Rates

Subscribe to the Financial Advisor newsletter for the latest in practice management:
Enter e-mail address
Read more: What Is The Time Value Of Money? - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/time-valuemoney.asp#ixzz4GTJvVnR3
CFA Institute's LOS 5.a requires an understanding of the components of interest rates from an
economic (i.e. non-quantitative) perspective. In this exercise, think of the total interest rate as a
sum of five smaller parts, with each part determined by its own set of factors.
1. Real Risk-Free Rate - This assumes no risk or uncertainty, simply reflecting differences
in timing: the preference to spend now/pay back later versus lend now/collect later.
2. Expected Inflation - The market expects aggregate prices to rise, and the currency's
purchasing power is reduced by a rate known as the inflation rate. Inflation makes real
dollars less valuable in the future and is factored into determining the nominal interest
rate (from the economics material: nominal rate = real rate + inflation rate).
3. Default-Risk Premium - What is the chance that the borrower won't make payments on
time, or will be unable to pay what is owed? This component will be high or low
depending on the creditworthiness of the person or entity involved.
4. Liquidity Premium- Some investments are highly liquid, meaning they are easily
exchanged for cash (U.S. Treasury debt, for example). Other securities are less liquid, and
there may be a certain loss expected if it's an issue that trades infrequently. Holding other
factors equal, a less liquid security must compensate the holder by offering a higher
interest rate.
5. Maturity Premium - All else being equal, a bond obligation will be more sensitive to
interest rate fluctuations the longer to maturity it is.
Read more: The Five Components Of Interest Rates - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/time-value-moneyinterest-rates.asp#ixzz4GTK18QF8
ere we will discuss the effective annual rate, time value of money problems, PV of a perpetuity,
an ordinary annuity, annuity due, a single cash flow and a series of uneven cash flows. For each,
you should know how to both interpret the problem and solve the problems on your approved
calculator. These concepts will cover LOS' 5.b and 5.c.
The Effective Annual Rate
CFA Institute's LOS 5.b is explained within this section. We'll start by defining the terms, and
then presenting the formula.
The stated annual rate, or quoted rate, is the interest rate on an investment if an institution were
to pay interest only once a year. In practice, institutions compound interest more frequently,
either quarterly, monthly, daily and even continuously. However, stating a rate for those small
periods would involve quoting in small fractions and wouldn't be meaningful or allow easy
comparisons to other investment vehicles; as a result, there is a need for a standard convention
for quoting rates on an annual basis.
The effective annual yield represents the actual rate of return, reflecting all of the compounding
periods during the year. The effective annual yield (or EAR) can be computed given the stated
rate and the frequency of compounding. We'll discuss how to make this computation next.
Formula 2.1
Effective annual rate (EAR) = (1 + Periodic interest
rate)m - 1
Where: m = number of compounding periods in one
year, and
periodic interest rate = (stated interest rate) / m
Example: Effective Annual Rate
Suppose we are given a stated interest rate of 9%, compounded monthly, here is what we get for
EAR:
EAR = (1 + (0.09/12))12 - 1 = (1.0075) 12 - 1 = (1.093807) - 1 = 0.093807 or 9.38%
Keep in mind that the effective annual rate will always be higher than the stated rate if there is
more than one compounding period (m > 1 in our formula), and the more frequent the
compounding, the higher the EAR.
Solving Time Value of Money Problems
Approach these problems by first converting both the rate r and the time period N to the same
units as the compounding frequency. In other words, if the problem specifies quarterly
compounding (i.e. four compounding periods in a year), with time given in years and interest rate
is an annual figure, start by dividing the rate by 4, and multiplying the time N by 4. Then, use the
resulting r and N in the standard PV and FV formulas.
Example: Compounding Periods
Assume that the future value of $10,000 five years from now is at 8%, but assuming quarterly
compounding, we have quarterly r = 8%/4 = 0.02, and periods N = 4*5 = 20 quarters.
FV = PV * (1 + r)N = ($10,000)*(1.02)20 = ($10,000)*(1.485947) = $14,859.47
Assuming monthly compounding, where r = 8%/12 = 0.0066667, and N = 12*5 = 60.
FV = PV * (1 + r)N = ($10,000)*(1.0066667)60 = ($10,000)*(1.489846) = $14,898.46
Compare these results to the figure we calculated earlier with annual compounding ($14,693.28)
to see the benefits of additional compounding periods.
On PV and FV problems, switching the time units - either by calling for
quarterly or monthly compounding or by expressing time in months and
the interest rate in years - is an often-used tactic to trip up test takers who
are trying to go too fast. Remember to make sure the units agree for r and
N, and are consistent with the frequency of compounding, prior to solving.
Present Value of a Perpetuity
A perpetuity starts as an ordinary annuity (first cash flow is one period from today) but has no
end and continues indefinitely with level, sequential payments. Perpetuities are more a product
of the CFA world than the real world - what entity would obligate itself making to payments that
will never end? However, some securities (such as preferred stocks) do come close to satisfying
the assumptions of a perpetuity, and the formula for PV of a perpetuity is used as a starting point
to value these types of securities.
The formula for the PV of a perpetuity is derived from the PV of an ordinary annuity, which at N
= infinity, and assuming interest rates are positive, simplifies to:
Formula 2.2
PV of a perpetuity = annuity payment A
interest rate r
Therefore, a perpetuity paying $1,000 annually at an interest rate of 8% would be worth:
PV = A/r = ($1000)/0.08 = $12,500
FV and PV of a SINGLE SUM OF MONEY
If we assume an annual compounding of interest, these problems can be solved with the
following formulas:
Formula 2.3
(1) FV = PV * (1 + r)N
(2) PV = FV * { 1 }
(1 + r)N
Where: FV = future value of a single sum of money,
PV = present value of a single sum of money, R =
annual interest rate,
and N = number of years
Example: Present Value

At an interest rate of 8%, we calculate that $10,000 five years from now will be:
FV = PV * (1 + r)N = ($10,000)*(1.08)5 = ($10,000)*(1.469328)
FV = $14,693.28
At an interest rate of 8%, we calculate today's value that will grow to $10,000 in five years:
PV = FV * (1/(1 + r)N) = ($10,000)*(1/(1.08)5) = ($10,000)*(1/(1.469328))
PV = ($10,000)*(0.680583) = $6805.83
Example: Future Value
An investor wants to have $1 million when she retires in 20 years. If she can earn a 10% annual
return, compounded annually, on her investments, the lump-sum amount she would need to
invest today to reach her goal is closest to:
A. $100,000
B. $117,459
C. $148,644
D. $161,506
Answer:
The problem asks for a value today (PV). It provides the future sum of money (FV) =
$1,000,000; an interest rate (r) = 10% or 0.1; yearly time periods (N) = 20, and it indicates
annual compounding. Using the PV formula listed above, we get the following:
PV = FV *[1/(1 + r) N] = [($1,000,000)* (1/(1.10)20)] = $1,000,000 * (1/6.7275) =
$1,000,000*0.148644 = $148,644
Using a calculator with financial functions can save time when solving PV and FV problems. At
the same time, the CFA exam is written so that financial calculators aren't required. Typical PV
and FV problems will test the ability to recognize and apply concepts and avoid tricks, not the
ability to use a financial calculator. The experience gained by working through more examples
and problems increase your efficiency much more than a calculator.
Read more: Time Value Of Money Calculations - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/time-value-moneycalculations.asp#ixzz4GTKIDvMC
Chapter 1 - 5
Chapter 6 - 10
Chapter 11 - 15
Chapter 16 - 17
1. 1. Ethics and Standards
1. 2.1 Introduction
2. 2. Quantitative Methods
2. 2.2 What Is The Time Value Of Money?
3. 3. Microeconomics
3. 2.3 The Five Components Of Interest Rates
4. 4. Macroeconomics
4. 2.4 Time Value Of Money Calculations
5. 5. Global Economic Analysis
5. 2.5 Time Value Of Money Applications

6. 2.6 Net Present Value and the Internal Rate of
Return
7. 2.7 Money Vs. Time-Weighted Return
8. 2.8 Calculating Yield
9. 2.9 Statistical Concepts And Market Returns
10. 2.10 Basic Statistical Calculations
11. 2.11 Standard Deviation And Variance
12. 2.12 Skew And Kurtosis
13. 2.13 Basic Probability Concepts
14. 2.14 Joint Probability

15. 2.15 Advanced Probability Concepts
16. 2.16 Common Probability Distributions
17. 2.17 Common Probability Distribution Calculations
18. 2.18 Common Probability Distribution Properties
19. 2.19 Confidence Intervals
20. 2.20 Discrete and Continuous Compounding
21. 2.21 Sampling and Estimation
22. 2.22 Sampling Considerations
23. 2.23 Calculating Confidence Intervals
24. 2.24 Hypothesis Testing
25. 2.25 Interpreting Statistical Results
26. 2.26 Correlation and Regression
27. 2.27 Regression Analysis
This section applies the techniques and formulas first presented in the time value of money
material toward real-world situations faced by financial analysts. Three topics are emphasized:
(1) capital budgeting decisions, (2) performance measurement and (3) U.S. Treasury-bill yields.
Net Preset Value
NPV and IRR are two methods for making capital-budget decisions, or choosing between
alternate projects and investments when the goal is to increase the value of the enterprise and
maximize shareholder wealth. Defining the NPV method is simple: the present value of cash
inflows minus the present value of cash outflows, which arrives at a dollar amount that is the net
benefit to the organization.
To compute NPV and apply the NPV rule, the authors of the reference textbook define a fivestep process to be used in solving problems:
1.Identify all cash inflows and cash outflows.
2.Determine an appropriate discount rate (r).

3.Use the discount rate to find the present value of all cash inflows and outflows.
4.Add together all present values. (From the section on cash flow additivity, we know that this
action is appropriate since the cash flows have been indexed to t = 0.)
5.Make a decision on the project or investment using the NPV rule: Say yes to a project if the
NPV is positive; say no if NPV is negative. As a tool for choosing among alternates, the NPV
rule would prefer the investment with the higher positive NPV.
Companies often use the weighted average cost of capital, or WACC, as the appropriate discount
rate for capital projects. The WACC is a function of a firm's capital structure (common and
preferred stock and long-term debt) and the required rates of return for these securities. CFA
exam problems will either give the discount rate, or they may give a WACC.
Example:
To illustrate, assume we are asked to use the NPV approach to choose between two projects, and
our company's weighted average cost of capital (WACC) is 8%. Project A costs $7 million in
upfront costs, and will generate $3 million in annual income starting three years from now and
continuing for a five-year period (i.e. years 3 to 7). Project B costs $2.5 million upfront and $2
million in each of the next three years (years 1 to 3). It generates no annual income but will be
sold six years from now for a sales price of $16 million.
For each project, find NPV = (PV inflows) - (PV outflows).
Project A: The present value of the outflows is equal to the current cost of $7 million. The
inflows can be viewed as an annuity with the first payment in three years, or an ordinary annuity
at t = 2 since ordinary annuities always start the first cash flow one period away.
PV annuity factor for r = .08, N = 5: (1 - (1/(1 + r)N)/r = (1 - (1/(1.08)5)/.08 = (1 - (1/
(1.469328)/.08 = (1 - (1/(1.469328)/.08 = (0.319417)/.08 = 3.99271
Multiplying by the annuity payment of $3 million, the value of the inflows at t = 2 is ($3
million)*(3.99271) = $11.978 million.
Discounting back two periods, PV inflows = ($11.978)/(1.08)2 = $10.269 million.
NPV (Project A) = ($10.269 million) - ($7 million) = $3.269 million.
Project B: The inflow is the present value of a lump sum, the sales price in six years discounted
to the present: $16 million/(1.08)6 = $10.083 million.
Cash outflow is the sum of the upfront cost and the discounted costs from years 1 to 3. We first
solve for the costs in years 1 to 3, which fit the definition of an annuity.
PV annuity factor for r = .08, N = 3: (1 - (1/(1.08)3)/.08 = (1 - (1/(1.259712)/.08 = (0.206168)/.08
= 2.577097. PV of the annuity = ($2 million)*(2.577097) = $5.154 million.
PV of outflows = ($2.5 million) + ($5.154 million) = $7.654 million.
NPV of Project B = ($10.083 million) - ($7.654 million) = $2.429 million.

Applying the NPV rule, we choose Project A, which has the larger NPV: $3.269 million versus
$2.429 million.
Problems on the CFA exam are frequently set up so that it is tempting to
pick a choice that seems intuitively better (i.e. by people who are
guessing), but this is wrong by NPV rules. In the case we used, Project B
had lower costs upfront ($2.5 million versus $7 million) with a payoff of
$16 million, which is more than the combined $15 million payoff of
Project A. Don\'t rely on what feels better; use the process to make the
decision!
The Internal Rate of Return
The IRR, or internal rate of return, is defined as the discount rate that makes NPV = 0. Like the
NPV process, it starts by identifying all cash inflows and outflows. However, instead of relying
on external data (i.e. a discount rate), the IRR is purely a function of the inflows and outflows of
that project. The IRR rule states that projects or investments are accepted when the project's IRR
exceeds a hurdle rate. Depending on the application, the hurdle rate may be defined as the
weighted average cost of capital.
Example:
Suppose that a project costs $10 million today, and will provide a $15 million payoff three years
from now, we use the FV of a single-sum formula and solve for r to compute the IRR.
IRR = (FV/PV)1/N -1 = (15 million/10 million)1/3 - 1 = (1.5) 1/3 - 1 = (1.1447) - 1 = 0.1447, or
14.47%
In this case, as long as our hurdle rate is less than 14.47%, we green light the project.
NPV vs. IRR
Each of the two rules used for making capital-budgeting decisions has its strengths and
weaknesses. The NPV rule chooses a project in terms of net dollars or net financial impact on the
company, so it can be easier to use when allocating capital.
However, it requires an assumed discount rate, and also assumes that this percentage rate will be
stable over the life of the project, and that cash inflows can be reinvested at the same discount
rate. In the real world, those assumptions can break down, particularly in periods when interest
rates are fluctuating. The appeal of the IRR rule is that a discount rate need not be assumed, as
the worthiness of the investment is purely a function of the internal inflows and outflows of that
particular investment. However, IRR does not assess the financial impact on a firm; it only
requires meeting a minimum return rate.
The NPV and IRR methods can rank two projects differently, depending on thesize of the
investment. Consider the case presented below, with an NPV of 6%:
Project
Initial outflow Payoff after one year
IRR
NPV
$250,000
$280,000
12%
+$14,151
$50,000
$60,000
20%
+6604
By the NPV rule we choose Project A, and by the IRR rule we prefer B. How do we resolve the
conflict if we must choose one or the other? The convention is to use the NPV rule when the two
methods are inconsistent, as it better reflects our primary goal: to grow the financial wealth of
the company.
Consequences of the IRR Method
In the previous section we demonstrated how smaller projects can have higher IRRs but will
have less of a financial impact. Timing of cash flows also affects the IRR method. Consider the
example below, on which initial investments are identical. Project A has a smaller payout and
less of a financial impact (lower NPV), but since it is received sooner, it has a higher IRR. When
inconsistencies arise, NPV is the preferred method. Assessing the financial impact is a more
meaningful indicator for a capital-budgeting decision.
Project Investment
Income in future periods

t1
$100k
$100k
IRR
NPV
25.0%
$17,925
$0 $0 $0 $200k 14.9%
$49,452
t4
t5
$125k $0 $0 $0
$0
$0
t2
t3
Read more: Net Present Value and the Internal Rate of Return - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/discounted-cashflow-npv-irr.asp#ixzz4GTKThOHE
Chapter 1 - 5
Chapter 6 - 10
Chapter 11 - 15
Chapter 16 - 17
1. 1. Ethics and Standards
1. 2.1 Introduction
2. 2. Quantitative Methods
2. 2.2 What Is The Time Value Of Money?
3. 3. Microeconomics
3. 2.3 The Five Components Of Interest Rates
4. 4. Macroeconomics
4. 2.4 Time Value Of Money Calculations
5. 5. Global Economic Analysis
5. 2.5 Time Value Of Money Applications

6. 2.6 Net Present Value and the Internal Rate of
Return
7. 2.7 Money Vs. Time-Weighted Return
8. 2.8 Calculating Yield
9. 2.9 Statistical Concepts And Market Returns
10. 2.10 Basic Statistical Calculations
11. 2.11 Standard Deviation And Variance
12. 2.12 Skew And Kurtosis
13. 2.13 Basic Probability Concepts
14. 2.14 Joint Probability
15. 2.15 Advanced Probability Concepts
16. 2.16 Common Probability Distributions
17. 2.17 Common Probability Distribution Calculations
18. 2.18 Common Probability Distribution Properties
19. 2.19 Confidence Intervals
20. 2.20 Discrete and Continuous Compounding
21. 2.21 Sampling and Estimation
22. 2.22 Sampling Considerations
23. 2.23 Calculating Confidence Intervals
24. 2.24 Hypothesis Testing

25. 2.25 Interpreting Statistical Results
26. 2.26 Correlation and Regression
27. 2.27 Regression Analysis
Calculating Yield for a U.S. Treasury Bill

A U.S. Treasury bill is the classic example of a pure discount instrument, where the interest the
government pays is the difference between the amount it promises to pay back at maturity (the
face value) and the amount it borrowed when issuing the T-bill (the discount). T-bills are shortterm debt instruments (by definition, they have less than one year to maturity), and there is zero
default risk with a U.S. government guarantee. After being issued, T-bills are widely traded in the
secondary market, and are quoted based on the bank discount yield (i.e. the approximate
annualized return the buyer should expect if holding until maturity). A bank discount yield (RBD)
can be computed as follows:
Formula 2.10
RBD = D/F * 360/t
Where: D = dollar discount from face value, F = face
value,
T = days until maturity, 360 = days in a year
By bank convention, years are 360 days long, not 365. If you recall the joke about banker's hours
being shorter than regular business hours, you should remember that banker's years are also
shorter.
For example, if a T-bill has a face value of $50,000, a current market price of $49,700 and a
maturity in 100 days, we have:
RBD = D/F * 360/t = ($50,000-$49,700)/$50000 * 360/100 = 300/50000 * 3.6 = 2.16%
On the exam, you may be asked to compute the market price, given a quoted yield, which can be
accomplish by using the same formula and solving for D:
Formula 2.11
D = RBD*F * t/360
Example:
Using the previous example, if we have a bank discount yield of 2.16%, a face value of $50,000
and days to maturity of 100, then we calculate D as follows:
D = (0.0216)*(50000)*(100/360) = 300
Market price = F - D = 50,000 - 300 = $49,700
Holding-Period Yield (HPY)
HPY refers to the un-annualized rate of return one receives for holding a debt instrument until
maturity. The formula is essentially the same as the concept of holding-period return needed to
compute time-weighted performance. The HPY computation provides for one cash distribution
or interest payment to be made at the time of maturity, a term that can be omitted for U.S. T-bills.
Formula 2.12
HPY = (P1 - P0 + D1)/P0
Where: P0 = purchase price, P1 = price at maturity, and
D1= cash distribution at maturity
Example:
Taking the data from the previous example, we illustrate the calculation of HPY:
HPY = (P1 - P0 + D1)/P0 = (50000 - 49700 + 0)/49700 = 300/49700 = 0.006036 or 0.6036%
Effective annual yield (EAY)
EAY takes the HPY and annualizes the number to facilitate comparability with other
investments. It uses the same logic presented earlier when describing how to annualize a
compounded return number: (1) add 1 to the HPY return, (2) compound forward to one year by
carrying to the 365/t power, where t is days to maturity, and (3) subtract 1.
Here it is expressed as a formula:
Formula 2.13
EAY = (1 + HPY)365/t - 1
Example:
Continuing with our example T-bill, we have:
EAY = (1 + HPY)365/t - 1 = (1 + 0.006036)365/100 - 1 = 2.22 percent.
Remember that EAY > bank discount yield, for three reasons: (a) yield is based on purchase
price, not face value, (b) it is annualized with compound interest (interest on interest), not simple
interest, and (c) it is based on a 365-day year rather than 360 days. Be prepared to compare these
two measures of yield and use these three reasons to explain why EAY is preferable.
The third measure of yield is the money market yield, also known as the CD equivalent yield,
and is denoted by rMM. This yield measure can be calculated in two ways:
1. When the HPY is given, rMM is the annualized yield based on a 360-day year:
Formula 2.14
rMM = (HPY)*(360/t)
Where: t = days to maturity
For our example, we computed HPY = 0.6036%, thus the money market yield is:
rMM = (HPY)*(360/t) = (0.6036)*(360/100) = 2.173%.
2. When bond price is unknown, bank discount yield can be used to compute the money market
yield, using this expression:
Formula 2.15
rMM = (360* rBD)/(360 - (t* rBD)
Using our case:

rMM = (360* rBD)/(360 - (t* rBD) = (360*0.0216)/(360 - (100*0.0216)) = 2.1735%, which is
identical to the result at which we arrived using HPY.
Interpreting Yield
This involves essentially nothing more than algebra: solve for the unknown and plug in the
known quantities. You must be able to use these formulas to find yields expressed one way when
the provided yield number is expressed another way.
Since HPY is common to the two others (EAY and MM yield), know how to solve for HPY to
answer a question.
Effective Annual Yield EAY = (1 + HPY)365/t - 1 HPY = (1 + EAY)t/365 - 1
Money Market Yield
rMM = (HPY)*(360/t)
HPY = rMM * (t/360)
Bond Equivalent Yield

The bond equivalent yield is simply the yield stated on a semiannual basis multiplied by 2. Thus,
if you are given a semiannual yield of 3% and asked for the bond equivalent yield, the answer is
6%.
Read more: Calculating Yield - CFA Level 1 | Investopedia http://www.investopedia.com/examguide/cfa-level-1/quantitative-methods/discounted-cash-flow-yield.asp#ixzz4GTKa3CNc

Holding Period Return
The holding return period formula was introduced previously when discussing time-weighted
return measurement. The same formula applies when applied to frequency distributions
(descriptions changed slightly):
Formula 2.16
Rt = [(Pt - Pt - 1 + Dt)/ Pt - 1]
Where: Rt = holding period return for time period (t)
and Pt = price of asset at end of time period t, Pt - 1 =
price of asset at end of time period (t - 1),
Dt = cash distributions received during time t
Relative and Cumulative Frequencies
Relative frequency is calculated by dividing the absolute frequency of a particular interval by the
total population. Cumulative relative frequency is a process where relative frequencies are added
together to show the percentage of observations that fall at or below a certain point. For an
illustration on calculating relative frequency and cumulative relative frequency, refer to the
following frequency distribution for quarterly returns over the last 10 years for a mutual fund:
Quarterl Number of Relative Cumulati Cumulati
y return observatio frequenc
ve
ve relative
interval
ns
y
absolute frequency
(absolute
frequency
frequency)
-15% to
-10%
5.0%
5.0%
-10% to
-5%
2.5%
7.5%
-5% to
0%
12.5%
20.0%
0% to
+5%
17
42.5%
25
62.5%
+5% to
10
25.0%
35
87.5%
+10%
+10% to
+15%
5.0%
37
92.5%
+15% to
+20%
7.5%
40
100.0%
There are 40 observations in this distribution (last 10 years, four quarters per year), and the
relative frequency is found by dividing the number in the second column by 40. The cumulative
absolute frequency (fourth column) is constructed by adding the frequency of all observations at
or below that point. So for the fifth interval, +5% to +10%, we find the cumulative absolute
frequency by adding the absolute frequency in the fifth interval and all previous intervals:
2+1+5+17+10=35. The last column, cumulative relative frequency, takes the number in the
fourth column and divides by 40, the total number of observations.
Histograms and Frequency Polygons
A histogram is a frequency distribution presented as a bar chart, with number of observations on
the Y axis and intervals on the X.
The frequency distribution above is presented as a histogram in figure 2.2 below:
Figure 2.2: Histogram

A return polygon presents a line chart rather than a bar chart. Here is the data from the frequency
distribution presented with a return polygon:
Figure 2.3: Return Polygon
Look Out!
You may be asked to describe the data presented for a
histogram or frequency polygon. Most likely this
would involve evaluating risk by indicating that there
are two examples of the most negative outcomes (i.e.
quarters below -10%, category 1). Also you may be
asked how normally distributed the graph appears.
Normal distributions are detailed later in this study
guide.
Central Tendency
The term "measures of central tendency" refers to the various methods used to describe where
large groups of data are centered in a population or a sample. Here it is stated another way: if we
were to pull one value or observation from a population or sample, what would we typically
expect the value to be? Various methods are used to calculate central tendency. The most
frequently used is the arithmetic mean, or the sum of observations divided by the number of
observations.
Example: Arithmetic Mean
For example, if we have 20 quarters of return data:
-1.5%-2.5%+5.6%+10.7%
+0.8%-7.7%-10.1% +2.2%
+12.0%+10.9% -2.6% +0.2%
-1.9%-6.2%+17.1% +4.8%
+9.1% +3.0% -0.2% +1.8%

We find the arithmetic mean by adding the 20 observations together, then dividing by 20.
((-1.5%) + (-2.5%) + 5.6% + 10.7% + 0.8% + (7.7%) + (-10.1%) + 2.2% + 12.0% + 10.9% + (2.6%) + 0.2% + (-1.9%) + (-6.2%) + 17.1% + 4.8% + 9.1% + 3.0% + (-0.2%) + 1.8%) = 45.5%
Arithmetic mean = 45.5%/20 = 2.275%
The mean is usually interpreted as answering the question of what will be the most likely
outcome, or what represents the data most fairly.
The arithmetic mean formula is used to compute population mean (often denoted by the Greek
symbol ), which is the arithmetic mean of the entire population. The population mean is an
example of a parameter, and by definition it must be unique. That is, a given population can have
only one mean. The sample mean (denoted by X or X-bar) is the arithmetic mean value of a
sample. It is an example of a sample statistic, and will be unique to a particular sample. In other
words, five samples drawn from the same population may produce five different sample means.
While the arithmetic mean is the most frequently used measure of central tendency, it does have
shortcomings that in some cases tend to make it misleading when describing a population or
sample. In particular, the arithmetic mean is sensitive to extreme values.
Example:
For example, let's say we have the following five observations: -9000, 1.4, 1.6, 2.4 and 3.7. The
arithmetic mean is -1798.2 [(-9000 + 1.4 + 1.6 + 2.4 + 3.7)/5], yet -1798.2 has little meaning in
describing our data set.
The outlier (-9000) draws down the overall mean. Statisticians use a variety of methods to
compensate for outliers, such as, for example, eliminating the highest and lowest value before
calculating the mean.
For example, by dropping -9000 and 3.7, the three remaining observations have a mean of 1.8, a
more meaningful description of the data. Another approach is to use either the median or mode,
or both.
Weighted Average or Mean
The weighted average or weighted mean, when applied to a portfolio, takes the mean return of
each asset class and weights it by the allocation of each class.
Say a portfolio manager has the following allocation and mean annual performance returns
achieved for each class:
Asset Class
Portfolio
weight
Mean
annual
return
U.S. Large Cap
30%
9.6%
U.S. Mid Cap
15%
11.2%
U.S. Small Cap
10%
7.4%
Foreign (Developed Mkts.)
15%
8.8%
Emerging Markets
8%
14.1%
Fixed Income
(short/intermediate)
12%
4.1%
Fixed Income (long

maturities)
7%
6.6%
Cash/Money Market
3%
2.1%
The weighted mean is calculated by weighting the return on each class and summing:
Portfolio return = (0.30)*(0.096) + (0.15)*(0.112) + (0.10)*(0.074) + (0.15)*(0.088) +
(0.08)*(0.141) + (0.12)*(0.041) + (0.07)*(0.066) + (0.03)*(0.021) = 8.765%
Median
Median is defined as the middle value in a series that is sorted in either ascending or descending
order. In the example above with five observations, the median, or middle value, is 1.6 (i.e. two
values below 1.6, and two values above 1.6). In this case, the median is a much fairer indication
of the data compared to the mean of -1798.2.
Mode
Mode is defined as the particular value that is most frequently observed. In some applications,
the mode is the most meaningful description. Take a case with a portfolio of ten mutual funds
and their respective ratings: 5, 4, 4, 4, 4, 4, 4, 3, 2 and 1. The arithmetic mean rating is 3.5 stars.
However in this example, the modal rating of four describes the majority of observations and
might be seen as a fairer description.
Weighted Mean
Weighted mean is frequently seen in portfolio problems in which various assets classes are
weighted within the portfolio - for example, if stocks comprise 60% of a portfolio, then 0.6 is the
weight. A weighted mean is computed by multiplying the mean of each weight by the weight,
and then summing the products.
Take an example where stocks are weighted 60%, bonds 30% and cash 10%. Assume that the
stock portion returned 10%, bonds returned 6% and cash returned 2%. The portfolio's weighted
mean return is:
Stocks (wtd) + Bonds (wtd) + Cash (wtd) = (0.6)*(0.1) + (0.3)*(0.06) + (0.1)*(0.02) = (0.06) +
(0.018) + (0.002) = 8%
Geometric Mean
We initially introduced the geometric mean earlier in the computations for time-weighted
performance. It is usually applied to data in percentages: rates of return over time, or growth
rates. With a series of n observations of statistic X, the geometric mean (G) is:
Formula 2.1 7
G = (X1*X2*X3*X4 ... *Xn)1/n
So if we have a four-year period in which a company's sales grew 4%, 5%,
-3% and 10%, here is the calculation of the geometric mean:
G = ((1.04)*(1.05)*(0.97)*(1.1))1/4 - 1 = 3.9%.
It's important to gain experience with using geometric mean on percentages, which involves
linking the data together: (1) add 1 to each percentage, (2) multiply all terms together, (3) carry
the product to the 1/n power and (4) subtract 1 from the result.
Harmonic mean is computed by the following steps:
1. Taking the reciprocal of each observation, or 1/X,
2. Adding these terms together,
3. Averaging the sum by dividing by n, or the total number of observations,
4. Taking the reciprocal of this result.
The harmonic mean is most associated with questions about dollar cost averaging, but its use is
limited. Arithmetic mean, weighted mean and geometric mean are the most frequently used
measures and should be the main emphasis of study.
Quartiles, Quintiles, Deciles, and Percentiles.
These terms are most associated with cases where the point of central tendency is not the main
goal of the research study. For example, in a distribution of five-year performance returns for
money managers, we may not be interested in the mean performer (i.e. the manager at the 50%
level), but rather in those in the top 10% or top 20% of the distribution. Recall that the median
essentially divides a distribution in half.
By the same process, quartiles are the result of a distribution being divided into four parts;
quintiles refer to five parts; deciles, 10 parts; and percentiles, 100 parts. A manager in the second
quintile would be better than 60% (bottom three quintiles) and below 20% (the top quintile) (i.e.
somewhere between 20% and 40% in percentile terms). A manager at the 21st percentile has 20
percentiles above, 79 percentiles below.
Read more: Basic Statistical Calculations - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/statistical-returncalculations.asp#ixzz4GTKjPitp
Range and Mean Absolute Deviation
The range is the simplest measure of dispersion, the extent to which the data varies from its
measure of central tendency. Dispersion or variability is a concept covered extensively in the
CFA curriculum, as it emphasizes risk, or the chances that an investment will not achieve its
expected outcome. If any investment has two dimensions - one describing risk, one describing
reward - then we must measure and present both dimensions to gain an idea of the true nature of
the investment. Mean return describes the expected reward, while the measures of dispersion
describe the risk.
Range
Range is simply the highest observation minus the lowest observation. For data that is sorted, it
should be easy to locate maximum/minimum values and compute the range. The appeal of range
is that it is simple to interpret and easy to calculate; the drawback is that by using just two values,
it can be misleading if there are extreme values that turn out to be very rare, and it may not fairly
represent the entire distribution (all of the outcomes).
Mean Absolute Deviation (MAD)
MAD improves upon range as an indicator of dispersion by using all of the data. It is calculated
by:
1. Taking the difference between each observed value and the mean, which is the deviation
2. Using the absolute value of each deviation, adding all deviations together
3. Dividing by n, the number of observations.
Example:
To illustrate, we take an example of six mid-cap mutual funds, on which the five-year annual
returns are +10.1, +7.7%, +5.0, +12.3%, +12.2% and +10.9%.
Answer:
Range = Maximum - Minimum = (+12.3%) - (+5.0%) = 7.3%
Mean absolute deviation starts by finding the mean: (10.1% + 7.7% + 5.0% + 12.3% + 12.2% +
10.9%)/6 = 9.7%.
Each of the six observations deviate from the 9.7%; the absolute deviation ignores +/-.
1st: 10.1 - 9.7 = 0.4 3rd: 5.0 - 9.7 = 4.7 5th: 12.2 - 9.7 = 2.5
2nd: 7.7 - 9.7 = 2.0 4th: 12.3 - 9.7 = 2.6 6th: 10.9 - 9.7 = 1.2
Next, the absolute deviations are summed and divided by 6:(0.4 + 2.0 + 4.7 + 2.6 + 2.5 + 1.2)/6
= 13.4/6 = 2.233333, or rounded, 2.2%.
Variance
Variance (2) is a measure of dispersion that in practice can be easier to apply than mean absolute
deviation because it removes +/- signs by squaring the deviations.
Returning to the example of mid-cap mutual funds, we had six deviations. To compute variance,
we take the square of each deviation, add the terms together and divide by the number of
observations.
Observation
Value
Deviation from +9.7%
Square of Deviation
+10.1%
0.4
0.16
+7.7%
2.0
4.0
+5.0%
4.7
22.09
+12.3%
2.6
6.76
+12.2%
2.5
6.25
+10.9%
1.2
1.44
Variance = (0.16 + 4.0 + 22.09 + 6.76 + 6.25 + 1.44)/6 = 6.7833. Variance is not in the same
units as the underlying data. In this case, it's expressed as 6.7833% squared - difficult to interpret
unless you are a mathematical expert (percent squared?).
Standard Deviation
Standard deviation () is the square root of the variance, or (6.7833)1/2 = 2.60%. Standard
deviation is expressed in the same units as the data, which makes it easier to interpret. It is the
most frequently used measure of dispersion.
Our calculations above were done for a population of six mutual funds. In practice, an entire
population is either impossible or impractical to observe, and by using sampling techniques, we
estimate the population variance and standard deviation. The sample variance formula is very
similar to the population variance, with one exception: instead of dividing by n observations
(where n = population size), we divide by (n - 1) degrees of freedom, where n = sample size. So
in our mutual fund example, if the problem was described as a sample of a larger database of
mid-cap funds, we would compute variance using n - 1, degrees of freedom.
Sample variance (s2) = (0.16 + 4.0 + 22.09 + 6.76 + 6.25 + 1.44)/(6 - 1) = 8.14
Sample Standard Deviation (s)
Sample standard deviation is the square root of sample variance:
(8.14)1/2 = 2.85%.
In fact, standard deviation is so widely used because, unlike variance, it is expressed in the same
units as the original data, so it is easy to interpret, and can be used on distribution graphs (e.g. the
normal distribution).
Semivariance and Target Semivariance
Semivariance is a risk measure that focuses on downside risk, and is defined as the average
squared deviation below the mean. Computing a semivariance starts by using only those
observations below the mean, that is, any observations at or above the mean are ignored. From
there, the process is similar to computing variance. If a return distribution is symmetric,
semivariance is exactly half of the variance. If the distribution is negatively skewed,
semivariance can be higher. The idea behind semivariance is to focus on negative outcomes.
Target semivariance is a variation of this concept, considering only those squared deviations
below a certain target. For example, if a mutual fund has a mean quarterly return of +3.6%, we
may wish to focus only on quarters where the outcome is -5% or lower. Target semivariance
eliminates all quarters above -5%. From there, the process of computing target semivariance
follows the same procedure as other variance measures.
Chebyshev's Inequality
Chebyshev's inequality states that the proportion of observations within k standard deviations of
an arithmetic mean is at least 1 - 1/k2, for all k > 1.
# of Standard
Deviations from
Mean (k)
Chebyshev\'s
Inequality
% of
Observations
1 - 1/(2)2, or 1 1/4, or 3/4
75 (.75)
1 - 1/(3)2, or 1 1/9, or
89 (.8889)
1 - 1/(4)2, or 1 1/16, or 15/16
94 (.9375)
Given that 75% of observations fall within two standard deviations, if a distribution has an
annual mean return of 10% and a standard deviation of 5%, we can state that in 75% of the years,
the return will be anywhere from 0% to 20%. In 25% of the years, it will be either below 0% or
above 20%. Given that there are 89% falling within three standard deviations means that in 89%
of the years, the return will be within a range of -5% to +25%. Eleven percent of the time it
won't.
Later we will learn that for so-called normal distributions, we expect about 95% of the
observations to fall within two standard deviations. Chebyshev's inequality is more general and
doesn't assume a normal distribution, that is, it applies to any shaped distribution.
Coefficient of Variation
The coefficient of variation (CV) helps the analyst interpret relative dispersion. In other words, a
calculated standard deviation value is just a number. Does this number indicate high or low
dispersion? The coefficient of variation helps describe standard deviation in terms of its
proportion to its mean by this formula:
Formula 2.18
CV = s/X
Where: s = sample standard deviation, X = sample
mean
Sharpe Ratio
The Sharpe ratio is a measure of the risk-reward tradeoff of an investment security or portfolio. It
starts by defining excess return, or the percentage rate of return of a security above the risk-free
rate. In this view, the risk-free rate is a minimum rate that any security should earn. Higher rates
are available provided one assumes higher risk.
The Sharpe ratio is calculated by dividing the ratio of excess return, to the standard deviation of
return.
Formula 2.19
Sharpe ratio = [(mean return) - (risk-free return)] /
standard deviation of return
Example: Sharpe Ratio
If an emerging-markets fund has a historic mean return of 18.2% and a standard deviation of
12.1%, and the return on three-month T-bills (our proxy for a risk-free rate) was 2.3%, the
Sharpe ratio = (18.2)-(2.3)/12.1 = 1.31. In other words, for every 1% of additional risk we accept
by investing in this emerging markets fund, we are rewarded with an excess 1.31%. Part of the
reason that the Sharpe ratio has become popular is that it's an easy to understand and appealing
concept, for practitioners and investors.
Read more: Standard Deviation And Variance - CFA Level 1 | Investopedia
http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/standard-deviationand-variance.asp#ixzz4GTKqCrfO

Stocks Basics

Caricato da

Informazioni sul documento

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Stocks Basics

Caricato da

Copyright:

Formati disponibili

1.

The Definition of a Stock

Example stock certificate

Debt vs. Equity

Different Classes of Stock

Read more: Stocks Basics: How Stocks Trade | Investopedia

mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter

Read more: Stocks Basics: How to Read A Stock Table/Quote | Investopedia

Read more: Stocks Basics: Conclusion | Investopedia

BREAKING DOWN 'Pattern'

What is a 'Technical Indicator'

BREAKING DOWN 'Technical Indicator'

Exercising Versus Trading-Out

A stock option contract represents 100 shares of the underlying stock.

Investors use options both to speculate and hedge risk.

The two main classifications of options are American and European.

Long term options are known as LEAPS.

Read more: Options Basics: Conclusion | Investopedia

Omaha, Nebraska, in 1930

Most Famous For:

Buffett-Falk & Company

Buffett Partnership, Ltd.

Berkshire Hathaway, Inc.

Referred to as the "Sage" or "Oracle" of Omaha, Warren Buffett is

amassed a personal multibillion dollar fortune mainly through

They have a good return on capital without a lot of debt.

They are understandable.

They see their profits in cash flow.

They have strong franchises and, therefore, freedom to price.

They don't take a genius to run.

Their earnings are predictable.

The management is owner-oriented.

"Buffett: The Making of an American Capitalist" by Roger Lowenstein (1996).

individually, and the resulting values added

The Five Components Of Interest Rates

Example: Present Value

1. 1. Ethics and Standards

2. 2.2 What Is The Time Value Of Money?

3. 2.3 The Five Components Of Interest Rates

4. 2.4 Time Value Of Money Calculations

5. 5. Global Economic Analysis

5. 2.5 Time Value Of Money Applications

14. 2.14 Joint Probability

2.Determine an appropriate discount rate (r).

NPV of Project B = ($10.083 million) - ($7.654 million) = $2.429 million.

Initial outflow Payoff after one year

Income in future periods

1. 1. Ethics and Standards

2. 2.2 What Is The Time Value Of Money?

3. 2.3 The Five Components Of Interest Rates

4. 2.4 Time Value Of Money Calculations

5. 5. Global Economic Analysis

5. 2.5 Time Value Of Money Applications

24. 2.24 Hypothesis Testing

Calculating Yield for a U.S. Treasury Bill

Using our case:

HPY = rMM * (t/360)

Bond Equivalent Yield

Read more: Calculating Yield - CFA Level 1 | Investopedia http://www.investopedia.com/examguide/cfa-level-1/quantitative-methods/discounted-cash-flow-yield.asp#ixzz4GTKa3CNc

Figure 2.2: Histogram

Figure 2.3: Return Polygon

+9.1% +3.0% -0.2% +1.8%

U.S. Large Cap

U.S. Mid Cap