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High School Financial Education Program Florida International University College of Business

High School Financial Education Program Florida International University College of Business Capital Markets Lab http://business.fiu.edu/cml 305-348-1542. Stocks and Bonds. What is a Stock?. What is a Stock. Ownership interest Equity Securities, Shares, Common Stock, Publically Traded

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High School Financial Education Program Florida International University College of Business

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  1. High School Financial Education Program Florida International University College of Business Capital Markets Lab http://business.fiu.edu/cml 305-348-1542

  2. Stocks and Bonds

  3. What is a Stock?

  4. What is a Stock • Ownership interest • Equity Securities, Shares, Common Stock, Publically Traded • Proportion of Assets, Profits, and Dividends • Keeps investors concerned with: • Business model, Earnings potential, Debt structure, Product line, etc.

  5. How does a Stock differ from a Bond?

  6. Debt v. Equity • Creditors, Equity Investor • Entitlements: fixed income versus earnings, guarantees and expectations • Rights • Contract connected to bond • Shareholder voting power on firm’s decision • Board, M&A, conflicts of interest

  7. Risks • Both affected by financial health and survival • Bankruptcy claims, downside risk • Returns • Bonds • Specified interest rate to lend, adjusted by market (yield) • Stocks • Speculated yield, not promised • Risk/Reward

  8. Why do Investors Purchase Stock?

  9. Capital Appreciation • “Buy low, Sell High” • Infinite amount of variables to move stocks and change businesses

  10. What are the downside risks to investing in stocks?

  11. Return on stocks have higher degree of uncertainty • Bonds can be held to maturity. • Returns are path dependent for stocks • Systematic and Unsystematic risk • Firm Specific • Market • Burger King v. McDonalds

  12. What is the relationship between risk and expected return?

  13. Risk-free securities • Why Risk Free? • Capital Asset Pricing Model (CAPM).

  14. How does a risk-averse investor feel about risk and expected return? • Risk Tolerance depends on: • Lifestyle • Age • Young v. Old • Income • Low Income v. High Income • Health • Sickly (high medical costs)v. Healthy • Expectations • Safe v. Risky Investments

  15. How can diversification reduce risk?

  16. “Don’t put your eggs in one basket” • Unsystematic risk reduction through diversification • Burger King v. McDonalds example

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