Module 3 Lecture 6

# Module 3 Lecture 6 - Fall 2010 Module 3 Accounting Finance...

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David Robinson © D. Robinson, 2010 Fall 2010 Module 3 Accounting & Finance Lecture 6: 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
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”
Definition: Return “Return” is how much you earn from an investment Example: Put \$100 in a Money Market account paying 1.2 % interest. In one year you will receive \$101.20: your ” \$100 + \$1.20 interest Your return is 1.2 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
Definitions: Total Return Total Return Interest or Dividend Appreciation Savings and bonds pay “interest”, stocks pay dividends

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Definition: Total Return is interest (or dividend) earned plus appreciation Buy a single share of PM (Philip Morris International) Oct 2009 for \$48.36 You could sell it Oct 2010 for \$55.55, a profit of \$7.19 [1. appreciation] In the meantime, you would have received \$2.56 in dividends [2. dividend] [1] + [2] = \$9.75 \$9.75 / \$48.36 = 20 % Total Return
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. A good return ( total return ) An a reasonable idea of what the return is likely to be 3. A greater rate of return for investing money for a longer period of time 4. A greater return for taking on increased risk More for “lack of liquidity” Risk: The chance of no return or a loss of principal

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Investments along the diagonal make sense Low            Risk               high Return ( Payoff) “safe harbor” speculation
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• Fall '10
• Robinson
• stock markets, market cap

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