Lesson 17 – Computing Investment Returns
Investment does not necessarily mean an increase in your returns
1. Dollar Return – 639- = Income received + (Ending Value of an Investment – Beginning Value of an Investment) or INC + (P1 – P0).
2. Holding Period Return (HPR) – 640 – The return earned over the period of time that an investment is held.
3. Dividend Yield – 640 – The part of the total return associated with the dividends paid by the firm.
4. Capital Gain or Loss – 640 – A change in the market value of a security.
5. Simple Arithmetic Average Return – 641 – A technique for computing the average return on an investment that sums each return and divides the number of returns; does not include compounding.
6. Market Capitalization – 648 – The total market value of a company’s stock which is computed by multiplying the number of shares outstanding by the market price per share.
7. Bull and Bear Markets – 650 – bull is a rising market, while bear is a falling market.
8. Buy and Hold Strategy – 651 – When investors purchase securities with the intention of holding them for a number of years.
9. Margin Trading – 651 – Incredibly, although greatly modified after the Great Depression of 1929, was still a major factor in the Global Financial Crisis. Additional modifications have been made to reduce the impact of this practice. It is the practice of borrowing from a broker a portion of the funds needed to purchase an investment.
10. Hypothecation Agreement – 651 – A contract that assigns securities as collateral for a margin loan.
11. Margin Call – 653 – A call from the broker to add more funds to a margined account.
12. Maintenance Margin – 653 – The lowest actual margin that the broker will permit margined investors to have at any time.
13. Broker Loan Rate – 652 – The rate charged by brokers to borrow funds for margin trading.
14. Sort Selling – 654 – A situation in which an investor borrows the stock of another investor and then sells it, but promises to replace the stock at a later date. (This is another risky practice).
15. Downticks and Upticks – 655 – The decrease or increase of a stock price from one trade to another. A small tick either way can make the difference of thousands of dollars in a large order.
16. Zero-Plus tick – 655 – A situation in which the price of the latest trade equals the price of the previous trade, but exceeds the price from one trade to another. (this is an assumption to the uptick)
17. Shorting Against the Box – 655 – When an investor short sells a stock that he or she also owns. This is a form of betting against yourself.
ICA and HW 17
Investing is a gambling game best left to professionals
Answer the following essay questions:
1. Why is past performance of a stock no guarantee that it will continue to rise?
2. Why is market capitalization one of the most important variables for you to consider before investing in a stock?
3. How can margin buying be a dangerous practice?
4. Why is the buy and hold strategy not a foolproof method of investing?
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