AP Econ Test Review Omar Hussein 1. Then & Now a. The Dow i. Closed at 9605.

.51 on September 11, 2001 1. This was a result of the terrorist attacks on the world trade center towers. This also kept the economy below the 10,000 mark for two years. ii. Closed at 11,493.57 on September 11, 2011 1. Major American corporations stock prices fell significantly as people were affected by the Great Recession (the drop from 14,000 to ~12000). b. Unemployment i. 4.9% August 2001 1. 226,000 jobs were lost in travel and tourism alone. In the towers themselves, 1,100 businesses were disrupted. ii. 9.1% August 2011 1. Today, 14 million Americans are out of work. In October 2009, the unemployment rate was 10.1%. During the Great Recession of 2008, 2.6 million jobs were lost. c. Gold i. $271.50 an ounce September 10, 2001 1. Gold is considered a hedge against inflation and a weakening dollar. After 9/11 people turned to gold quickly. ii. $1821.00 an ounce September 1, 2011 1. Gold has exploded due to fears of recession and stock market volatility. 2. Scope out the best prospects a. Growth Stocks investors buy these because of their good record of earnings growth and the expectation that they will continue to be profitable in the long haul. b. Blue Chip stocks - Large name companies that generate decent dividend income, some growth and, above all, safety and reliability. c. Income Stocks Pay high dividends. Regular dividends set themselves apart. Retirees and others favor these in need of a relatively high level of income from their stocks. d. Cyclical stocks generally dont do well in recessions. Include airlines, steel, chemicals, and home building. Luxuries. e. Defensive Stocks Commodities. Utilities, companies that sell food, beverages, and drugs fit in here. f. Speculative Stocks- Unproven young stocks. RISKY

3. Equity Funds funds that invest in stocks that represent the largest category of mutual funds. The investment objective is long-term capital growth with some income. These are generally classified by market cap (price x number of shares) STYLE BOX:

The term value refers to a style of investing that looks for high quality companies that are are out of favor with the market. The opposite of value is growth, companies that are expected to have increased earnings. Low P/E and price-to-book ratios characterize these companies. A compromise between value and growth is Blend. 4. Risk vs. Reward its never possible to diversify away all risk. a. Equity Funds = Stocks b. Fixed-income funds = Bonds c. Money Market funds 5. Global/International Funds a. Invests only outside your home country. Its possible that a global fund has some investment in your home country, but that is a rare occasion. 6. Sector Funds a. Target sectors such as technology, health, etc. Sector funds are extremely volatile. 7. Socially Responsible Funds (a.k.a. ethical funds) a. Most socially responsible funds dont invest in industries such as tobacco, alcohol, weapons, or nuclear power. 8. Net Asset Value a. NAV is a funds assets minus liabilities, is the value of a mutual fund. b. When you buy shares, you pay the current NAC per share, plus any sales front-end load. When you sell your shares, the fund will pay you NAV less any back-end load.

9. Strategies for investment a. Aggressive i. 100% invested, on margin. Invested in all small or mid cap common stock. Hoping for a new discovery in the company. ii. 100% invested mixing long and short positions iii. 100% invested. Mutual and/or Sector funds. Tech, Health, etc. b. Moderate i. 100% Invested. No cash balance. Choose fro Blue Chips, mutual funds, large cap stocks, some aggressive growth stocks, some foreign mutual funds. Example 65%/25%/10% ii. 100% invested. More balanced than ^^. Includes bonds, preferred stocks, and common stocks. Example 45%/25%/15%/15%. c. Conservative i. Retain a cash balance. 75% invested. Blue chips, utilities, bonds, cash. 25%/25%/25% ii. Retain a cash balance. 50% invested. Same as ^. Example 10%/15%/15%/10%/50% iii. S%P 500 Index fund 10. Market Indexes a. Dow Jones Industrial Average the most widely quoted and popularly used measure of stock market performance. Consists of 30 large companies representing a variety of industries. This group represents 25% of the market value of NYSE and 2% of the issues. b. Standard & Poors 500 The best-known and most widely followed market indicator. Its a composite of 500 companies representing 80% of the value of the NYSE and 30% of the issues. c. NASDAQ covers 4,500 of the most popular over-the-counter stocks (not listed on the exchange). Many of them are technology stocks. d. Wilshire 5000 The most comprehensive market indicator. Includes the NYSE, AMEX, and the most active on NASDAQ. e. Russell 2000 Consists of 2000 small-cap companies in the U.S. market. Restructured annually so the larger companies dont distort the smaller ones. f. MSCI World Index The benchmark, which measure the performance of global equity markets. Includes 23 developed countries. 11. Exchange Traded Funds a. ETFs are emerging at a rate of one per day. You can choose from over 750 ETFs. Their total assets are approaching $1 trillion. b. The main advantage of investing in these is their cost. This is because ETFs keep costs down, keeping money in your pocket. c. The first one available to U.S. investors was a quick way to buy and sell the S&P 500.

d. The largest group consists of income funds that invest in Treasury, corporate, municipal, and foreign-government bonds. These ETFs can be a great deal for investors looking for broad diversification in income-producing investments at a low cost. e. Holdings - typically, an ETF holds a basket of securities that track a specific stock index, bond index, or benchmark. f. Pricing The price changes throughout the day, like a common stock. As opposed to a mutual fund, which is traded at the end-of-day price. g. Examples: i. SPY largest ETF tracks S&P 500 ii. GLD gold bullion stored in bank vaults iii. JNK high-yield junk bonds that pay interest every month iv. QQQQ- cubes/ 100 largest stocks listed on NASDAQ v. DVY 100 highest-yielding stocks on the Dow. Heavy concentration on utility and consumer goods. 12. The crash of 2000-2002 a. Caused the loss of $5 trillion in the market value of companies. b. The attack of 9/11 halted trades for 4 sessions c. In-depth analysis showed that 50% of dot-coms survived through 2004. d. It is safe to say that the assets lost from the Stock Market do not directly link to the closing of firms. e. Small players that were thought to be too weak to survive did survive the destruction of the crash. f. The crash also caused people to become more careful investors. University degree programs for computer-related careers saw a noticeable drop in new students 13. Avoiding the next Dotcom Bomb a. Social Networking Stocks- Invest in the theme, not the IPOs. Sites that tie communities and consumers together probably represent the future of the Internet. b. The Googles of China 2/3 of this years tech IPOs have originated abroad, many in the emerging markets. In China, 450 million people are online, but thats just a third of the country. The issue with the Chinese internet/tech market is the censorship imposed by the government. Avoid these investments until things shake out. c. E-Commerce Stocks The Internet has proved to be an efficient place to sell your stuff. More and more people are spending time online shopping instead of going to malls and open markets. You should explore this group, carefully. Prices may seem too high or too low, but you must judge for yourself if you think that the service is worth the price you pay.

14. Reasons to Invest in a stock a. Management/Labor the age, vigor, creativity, openness, ability, and organizational style of the operating executives is important considerations when analyzing a corporation. A key way for a firm to increase productivity is to invest in human capital. b. Competition requires managing, marketing, advertising, and efficient use of productive resources to maintain a healthy market share and earnings. c. New technology a firm must be willing to use new human and capital resource management techniques to sold business challenges. d. Safety this criterion refers to the financial safety of the principal and risk involved in investing. Risk is the likelihood of a loss or an expected return. There is a direct relationship between risk and reward. e. P/E Ratio- the number of times greater the stock price is as compared to the corporate earnings. f. Price History current price compared to past price. g. Beta # - the risk measurement or volatility of a stock (the percent of chance for the stocks return compared to the change in return of the market). Example: 1.35= x/10 percent X= 13.5% h. Trading Volume the number of shares traded in a day i. Listed Exchange where the stock is being traded 15. IMPORTANT CONCEPTS: a. Supply and demand in the market determines stock price. b. Price times the number of share outstanding is the value of a company. c. Earnings are what affect investors valuation of a company. There are also things such as the investors sentiments, attitudes and expectations. d. There is no one concept to explain how and why stocks move the way they do.

RATINGS CHART

Moody's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C / /

S&P AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C D

Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B B-

Prime High grade

Upper medium grade

Lower medium grade Non-investment grade Speculative Highly speculative Substantial risks Extremely speculative

CCC

In default with little Prospect for recovery In default

DDD DD D