18 Investment - Prentice-Hall, Inc. Investing Versus...

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Prentice-Hall, Inc. 1 Chapter 11 Investment Basics Investing Versus Speculating • __________ -- putting your money into an asset that generates a return – Examples -- stocks, bonds, mutual funds, or real estate • ____________ -- putting your money into an asset that the future value, or return, relies on supply and demand – Examples -- collectors items, gold, baseball cards, or derivative securities What Is Trading? • Buying & selling securities on ____________ basis , hoping to make quick profits • Usually relies on _____________________ – Assumption that future price of a stock can be predicted by historical prices volume and/or other predicted by historical prices, volume and/or other variables – Focuses heavily on charts – Does not consider intrinsic value of security (unlike fundamental analysis ) – Assumes that market psychology influences trading in a way that predicts when a stock rises or falls What Is Investing? • Buying a security with an expectation of favorable future returns over __________ • Usually relies on ___________________ : – Examining company's financials, especially sales, earnings, growth potential, assets, – Only considers variables directly related to company’s operations, not overall state of market or technicals Fundamental? Technical? • Two different approaches to stock market • Some blend both approaches • Some say neither is valid! ____________________________Theory : claims that prices follow random path up and down, without any influence by past price moves – Impossible to predict which direction the market will move at any point – Impossible to outperform market without taking on additional risk – However, some proponents do acknowledge that markets move gradually up in long run Trading vs. Investing ____________________ : requires constant attention • Generates many transactions – Increased costs due to commissions – More complex tax filings, higher taxes on short-term gains • Uses often-complex tools and methods – Technical indicators that drive buy/sell decisions
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Prentice-Hall, Inc. 2 Investing vs. Trading ________________________ : requires minimal time and effort – Few hours for research of new stock – Few hours a quarter for portfolio maintenance • Fewer transactions – 12-20 stocks can make a diversified portfolio – Lower tax rate for long-term capital gains
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This note was uploaded on 06/06/2011 for the course HACE 3200 taught by Professor B during the Spring '09 term at University of Georgia Athens.

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18 Investment - Prentice-Hall, Inc. Investing Versus...

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