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

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