m3l6 - David Robinson D. Robinson, 2010 Fall 2010 Module 3...

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Unformatted text preview: David Robinson D. Robinson, 2010 Fall 2010 Module 3 Accounting & Finance Lecture 6: What Investors Want Introduction to Stock Markets & Indices Accounting & Finance Accounting Managerial Financial Finance 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 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 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 Definition: Total Return is interest (or dividend) earned plus appreciation Buy a single share of PM (Philip Morris International) Oct 2009 for $48.36 ou could sell it Oct 2010 for $55.55, 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) . good return ( tal return 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 Investments along the diagonal make sense eturn ( ayoff) speculation Low Risk high Payoff) safe harbor Prudent investors avoid the rest...
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m3l6 - David Robinson D. Robinson, 2010 Fall 2010 Module 3...

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