Mod 2 Lec 6

# Mod 2 Lec 6 - Spring 2011 Module 3 Accounting Finance...

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David Robinson © D. Robinson, 2011 Spring 2011 Module 3 Lecture 6: What Investors Want Introduction to Stock Markets & Indices

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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) Feb 2010 for \$48.98 You could sell it Feb 2010 for \$62.25, a profit of \$13.27 [1. appreciation] In the meantime, you would have received \$2.44 in dividends [2. dividend] [1] + [2] = \$15.71 \$15.71 / S48.98 = 32 % 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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## This note was uploaded on 04/13/2011 for the course UGBA 10 taught by Professor Xuanmingsu during the Spring '08 term at Berkeley.

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Mod 2 Lec 6 - Spring 2011 Module 3 Accounting Finance...

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