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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, debt, management, products & competition – 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 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 Increased costs due to commissions – More complex tax filings, higher taxes on short-term gains Uses often-complex tools and methods – Heavy use of charts & pattern recognition – Technical indicators that drive buy/sell decisions
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