m3l2 - Spring 2008 Module 3 Accounting Finance Lecture 2...

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David Robinson © D. Robinson, 2008 Spring 2008 Module 3 Accounting & Finance Lecture 2: What Investors Want Introduction to Stock Markets & Indices
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Accounting & Finance Accounting Finance Managerial Financial Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Lecture Outline Earning a “good return” What investors are looking for An introduction to stock markets An introduction to stock indexes
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What Investors Want They want “a good return”
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Two parts of “return” Total Return Interest or Dividend Appreciation Savings and bonds pay “interest”, stocks pay dividends
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Definition: Return “Return” is how much you earn from an investment Example: Put $100 in a Money Market account paying 3.7 % interest. In one year you will receive $103.70: your ” $100 + $3.70 interest Your return is 3.7 percent
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Definition: “Appreciation” Buy a baseball signed by Barry Bonds for $200 Sell it one year later for $250, you have made a “return” of $50 on your $200 investment, due to appreciation
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Definition: Total Return is interest (or dividend) earned plus appreciation Buy a single share of GE (General Electric) October 2006 for $35.50 You could sell it October 2007 for $40.04, a profit of $4.54 [1. appreciation] In the meantime, you would have received $1.12 in dividends [2. dividend] [1] + [2] = $5.66 $5.66 / $35.50 = 16 % Total Return
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In general, investors want 1. Safety: “ Security of principal (Even if people will tolerate risky returns, they still hope to get their original investment back) 2.
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