Ch 13 & 14 Review
Wednesday, May 6, 2026 3:07 PM
Ch. 13 & 14 Detailed Review Sheet – Investing Fundamentals & Investing in Stocks
Chapter 13 – Investing Fundamentals
Preparing for Investment Programs
Establishing Investment Goals
Goals should always be:
• Written
• Specific
• Measurable
Questions to ask before investing:
1. How much money do you need?
2. How long will it take to reach the goal?
3. How much risk can you handle?
4. What economic or personal changes could affect your goal?
5. Are you willing to sacrifice spending now?
6. What happens if you fail to reach the goal?
7. Are your goals realistic based on your finances?
Main Reasons People Invest
Emergency Fund
• Money set aside for unexpected expenses
• Recommended: at least 3 months of living expenses
Short-Term Goals
• Achieved within 1 year
Intermediate Goals
• Achieved within 1–5 years
Long-Term Goals
• Achieved in 5+ years
Retirement
• Investments designed to provide income after working years
Performing a Financial Checkup
Importance of Paying Bills on Time
Consequences of missed payments:
• Repossession of merchandise
• Lawsuits from businesses
• Lower credit score
• Higher interest rates in the future
Balancing Your Budget
• Avoid investing if debt payments exceed 20% of after-tax income
• High credit card usage creates financial instability
Helpful budgeting apps:
• Quicken
• YNAB (You Need A Budget)
• EveryDollar
Credit Card Management
Problems caused by overusing credit:
• Large debt balances
• High finance charges
• Dependency on minimum payments
Ways to avoid credit problems:
• Pay full balance monthly if possible
• If not, pay weekly toward balance
• Avoid cash advances
• Limit yourself to 2 credit cards
• Avoid using credit for small purchases
Economic Factors Affecting Investments
Economics
Study of how wealth is created and distributed
Fiscal Policy
Government changes taxes and spending to influence the economy
Monetary Policy
Federal Reserve controls interest rates and money supply
Purpose:
• Stabilize the economy
• Encourage economic growth
Business Cycle
The rise and fall of economic activity over time
During Economic Crisis:
1. Increase savings
2. Know your debts
3. Reduce unnecessary spending
4. Contact lenders if unable to pay
5. Monitor investments and retirement accounts
Getting Money for Investing
Questions to ask yourself:
• Can you sacrifice spending today?
• Can you consistently save money?
• Can you control unnecessary spending?
Retirement plans:
• 401(k)
• 403(b)
Employer matching:
• Some companies contribute extra money toward retirement savings
Time Value of Money
Money invested earlier has more time to grow.
Basic idea:
Investment Growth = (Amount Invested Each Year × Number of Years)
Factors Affecting Investment Choices
Safety vs. Risk
Safety
• Minimal chance of loss
• Examples:
○ Savings accounts
○ CDs
○ Government securities
Risk
• Possibility investment loses value
Speculative Investments
High-risk investments made hoping for large profits quickly
Examples:
• Cryptocurrency
• Options
• Commodities
Risk-Return Trade-Off
• Higher potential returns usually mean higher risk
• Safer investments usually earn lower returns
Types of Investment Risks
Inflation Risk
Investment growth may not keep up with inflation
Interest Rate Risk
Bond values change when interest rates change
Business Failure Risk
Company may fail and investment may lose value
Market Risk
Systematic Risk
Affects the entire market:
• Recession
• Inflation
• Political events
• Natural disasters
Unsystematic Risk
Affects one company or industry only
Global Investment Risk
Foreign markets may rise while U.S. markets fall
Investment Objectives
Income Investments
Focus on steady income
Examples:
• Bonds
• Preferred stocks
• Dividend stocks
Growth Investments
Focus on increasing value over time
Examples:
• Tech companies
• Growth stocks
Usually pay little or no dividends
Liquidity
Ability to quickly convert investment into cash without major loss
Asset Allocation & Diversification
Asset Allocation
Spreading money among different investments to reduce risk
Examples:
• Large-cap stocks
• Mid-cap stocks
• Small-cap stocks
• Foreign stocks
• Bonds
• Cash
• Mutual funds
Factors Affecting Asset Allocation
• Age
• Goals
• Risk tolerance
• Income
• Savings
• Economic outlook
Age & Investing
Younger Investors
• Usually take more risks
• Focus on growth
Older Investors
• More conservative
• Focus on safety and income
Rule:
100 – Your Age = % recommended in growth investments
Investment Alternatives
Stocks (Equity Financing)
Corporations raise money by selling ownership shares
Important Facts:
• Companies do not repay stock purchases
• Dividends are not guaranteed
Types of Stocks
Common Stock
Most basic form of ownership
Benefits:
• Dividends
• Potential price growth
• Voting rights
Preferred Stock
• Receive dividends before common stockholders
• Less risky
• Usually slower growth
Bonds
Corporate Bonds
Company promises to repay borrowed money with interest
Government Bonds
Government promises repayment with interest
Maturity Date
Date principal is repaid
Formula:
Annual Interest = Face Value × Interest Rate
\text{Annual Interest} = \text{Face Value} \times \text{Interest Rate}
Mutual Funds
Pools money from many investors
Expense Ratio
Fees charged for managing the fund
Lower expense ratios are generally preferred
Real Estate Investing
Property purchased for profit or rental income
Questions to evaluate property:
1. Is pricing competitive?
2. Is financing available?
3. Property taxes?
4. Repairs needed?
5. Neighborhood condition?
6. Why is owner selling?
7. Will value increase or decrease?
Other Investments
• Options
• Commodities
• Cryptocurrency
• Precious metals
• Antiques & collectibles
Reducing Investment Risk
Evaluate Investments Carefully
Investment should help support future goals
Keep Accurate Records
Track:
• Purchases
• Dividends
• Interest
• Rental income
• Commissions
Sources of Investment Information
• Bloomberg
• CNBC
• FINRA
• Barron’s
• Money Magazine
• Corporate Reports
Chapter 14 – Investing in Stocks
Why Corporations Issue Common Stock
Purpose:
• Raise money for startups and expansion
• Equity financing
Equity Financing
Money raised through selling ownership shares
Common Stock
Most basic form of ownership in a corporation
Key Features
• Voting rights
• Possible dividends
• Price changes based on company performance
Dividends
Payments corporations distribute to shareholders
Can be:
• Cash
• Additional stock
• Property
Record Date
Date shareholder must officially own stock to receive dividend
Ex-Dividend Date
Stock trades without dividend rights
Seller keeps dividend payment
Why Investors Buy Stocks
Investors want:
• Higher returns
• Dividend income
• Long-term growth
Psychology of Stock Investing
Before investing:
• Research company
• Study finances
• Monitor economy
• Review products
• Be patient
Dollar Appreciation
Profit earned when selling stock above purchase price
Formula:
Profit = Selling Price – Purchase Price
\text{Profit} = \text{Selling Price} - \text{Purchase Price}
Stock Split
Existing shares divided into more shares
Important:
• Total company value does NOT change
• No guarantee stock price will rise afterward
Preferred Stock
Hybrid between:
• Stocks
• Bonds
Advantages:
• Dividend priority
• Lower risk
Disadvantages:
• Less growth potential
Evaluating Stocks
Earnings Per Share (EPS)
After-tax income divided by number of shares
EPS = \frac{\text{After-Tax Income}}{\text{Number of Shares}}
Price-Earnings Ratio (P/E Ratio)
Stock price divided by earnings per share
P/E\ Ratio = \frac{\text{Stock Price}}{EPS}
Dividend Yield
Annual dividend divided by current stock price
\text{Dividend Yield} = \frac{\text{Annual Dividend}}{\text{Current Share Price}}
Total Return
Includes:
• Dividends earned
• Capital gains/losses
Beta
Measures stock volatility compared to market
Higher beta = more volatility/risk
Investment Theories
Fundamental Analysis
Stock value based on company earnings and future growth
Looks at:
• Financial strength
• Industry
• Products
• Economic growth
Technical Analysis
Stock prices based on supply and demand patterns
Uses charts and trends
Efficient Market Hypothesis (EMH)
Stock prices move randomly and already reflect information
Markets for Stocks
Primary Market
New securities sold for first time
IPO (Initial Public Offering)
First public sale of stock
Secondary Market
Existing securities traded between investors
Security Exchanges
NYSE
Traditional stock exchange
NASDAQ
Electronic marketplace known for technology companies
Examples:
• Microsoft
• Amazon
• Intel
Brokerage Firms
Full-Service Brokers
Best for beginners
Provide:
• Advice
• Research
• Investment planning
Higher commissions
Discount Brokers
Lower fees
Less advice
Online Brokers
Self-directed investing online
Stock Orders
Market Order
Buy/sell immediately at current price
Limit Order
Buy/sell only at specified price
Stop-Loss Order
Automatically sells stock when price drops to certain level
Long-Term Investment Strategies
Buy and Hold
Keep investments long term for:
• Growth
• Dividends
Dollar-Cost Averaging
Invest fixed amounts regularly regardless of price
Dividend Reinvestment Plan (DRIP)
Dividends automatically buy more shares
Short-Term Investment Strategies
Day Trading
Buying and selling stocks quickly for short-term profit
Very risky
Buying on Margin
Borrowing money to buy stocks
Higher gains possible, but also higher losses
Selling Short
Borrow stock and sell it hoping price falls
Profit comes from buying it back cheaper later
Options
Option
Contract giving right to buy/sell stock at set price
Call Option
Right to buy stock at guaranteed price
Put Option
Right to sell stock at guaranteed price
Sources used from your uploaded notes:
Wednesday, May 6, 2026 3:07 PM
Ch. 13 & 14 Detailed Review Sheet – Investing Fundamentals & Investing in Stocks
Chapter 13 – Investing Fundamentals
Preparing for Investment Programs
Establishing Investment Goals
Goals should always be:
• Written
• Specific
• Measurable
Questions to ask before investing:
1. How much money do you need?
2. How long will it take to reach the goal?
3. How much risk can you handle?
4. What economic or personal changes could affect your goal?
5. Are you willing to sacrifice spending now?
6. What happens if you fail to reach the goal?
7. Are your goals realistic based on your finances?
Main Reasons People Invest
Emergency Fund
• Money set aside for unexpected expenses
• Recommended: at least 3 months of living expenses
Short-Term Goals
• Achieved within 1 year
Intermediate Goals
• Achieved within 1–5 years
Long-Term Goals
• Achieved in 5+ years
Retirement
• Investments designed to provide income after working years
Performing a Financial Checkup
Importance of Paying Bills on Time
Consequences of missed payments:
• Repossession of merchandise
• Lawsuits from businesses
• Lower credit score
• Higher interest rates in the future
Balancing Your Budget
• Avoid investing if debt payments exceed 20% of after-tax income
• High credit card usage creates financial instability
Helpful budgeting apps:
• Quicken
• YNAB (You Need A Budget)
• EveryDollar
Credit Card Management
Problems caused by overusing credit:
• Large debt balances
• High finance charges
• Dependency on minimum payments
Ways to avoid credit problems:
• Pay full balance monthly if possible
• If not, pay weekly toward balance
• Avoid cash advances
• Limit yourself to 2 credit cards
• Avoid using credit for small purchases
Economic Factors Affecting Investments
Economics
Study of how wealth is created and distributed
Fiscal Policy
Government changes taxes and spending to influence the economy
Monetary Policy
Federal Reserve controls interest rates and money supply
Purpose:
• Stabilize the economy
• Encourage economic growth
Business Cycle
The rise and fall of economic activity over time
During Economic Crisis:
1. Increase savings
2. Know your debts
3. Reduce unnecessary spending
4. Contact lenders if unable to pay
5. Monitor investments and retirement accounts
Getting Money for Investing
Questions to ask yourself:
• Can you sacrifice spending today?
• Can you consistently save money?
• Can you control unnecessary spending?
Retirement plans:
• 401(k)
• 403(b)
Employer matching:
• Some companies contribute extra money toward retirement savings
Time Value of Money
Money invested earlier has more time to grow.
Basic idea:
Investment Growth = (Amount Invested Each Year × Number of Years)
Factors Affecting Investment Choices
Safety vs. Risk
Safety
• Minimal chance of loss
• Examples:
○ Savings accounts
○ CDs
○ Government securities
Risk
• Possibility investment loses value
Speculative Investments
High-risk investments made hoping for large profits quickly
Examples:
• Cryptocurrency
• Options
• Commodities
Risk-Return Trade-Off
• Higher potential returns usually mean higher risk
• Safer investments usually earn lower returns
Types of Investment Risks
Inflation Risk
Investment growth may not keep up with inflation
Interest Rate Risk
Bond values change when interest rates change
Business Failure Risk
Company may fail and investment may lose value
Market Risk
Systematic Risk
Affects the entire market:
• Recession
• Inflation
• Political events
• Natural disasters
Unsystematic Risk
Affects one company or industry only
Global Investment Risk
Foreign markets may rise while U.S. markets fall
Investment Objectives
Income Investments
Focus on steady income
Examples:
• Bonds
• Preferred stocks
• Dividend stocks
Growth Investments
Focus on increasing value over time
Examples:
• Tech companies
• Growth stocks
Usually pay little or no dividends
Liquidity
Ability to quickly convert investment into cash without major loss
Asset Allocation & Diversification
Asset Allocation
Spreading money among different investments to reduce risk
Examples:
• Large-cap stocks
• Mid-cap stocks
• Small-cap stocks
• Foreign stocks
• Bonds
• Cash
• Mutual funds
Factors Affecting Asset Allocation
• Age
• Goals
• Risk tolerance
• Income
• Savings
• Economic outlook
Age & Investing
Younger Investors
• Usually take more risks
• Focus on growth
Older Investors
• More conservative
• Focus on safety and income
Rule:
100 – Your Age = % recommended in growth investments
Investment Alternatives
Stocks (Equity Financing)
Corporations raise money by selling ownership shares
Important Facts:
• Companies do not repay stock purchases
• Dividends are not guaranteed
Types of Stocks
Common Stock
Most basic form of ownership
Benefits:
• Dividends
• Potential price growth
• Voting rights
Preferred Stock
• Receive dividends before common stockholders
• Less risky
• Usually slower growth
Bonds
Corporate Bonds
Company promises to repay borrowed money with interest
Government Bonds
Government promises repayment with interest
Maturity Date
Date principal is repaid
Formula:
Annual Interest = Face Value × Interest Rate
\text{Annual Interest} = \text{Face Value} \times \text{Interest Rate}
Mutual Funds
Pools money from many investors
Expense Ratio
Fees charged for managing the fund
Lower expense ratios are generally preferred
Real Estate Investing
Property purchased for profit or rental income
Questions to evaluate property:
1. Is pricing competitive?
2. Is financing available?
3. Property taxes?
4. Repairs needed?
5. Neighborhood condition?
6. Why is owner selling?
7. Will value increase or decrease?
Other Investments
• Options
• Commodities
• Cryptocurrency
• Precious metals
• Antiques & collectibles
Reducing Investment Risk
Evaluate Investments Carefully
Investment should help support future goals
Keep Accurate Records
Track:
• Purchases
• Dividends
• Interest
• Rental income
• Commissions
Sources of Investment Information
• Bloomberg
• CNBC
• FINRA
• Barron’s
• Money Magazine
• Corporate Reports
Chapter 14 – Investing in Stocks
Why Corporations Issue Common Stock
Purpose:
• Raise money for startups and expansion
• Equity financing
Equity Financing
Money raised through selling ownership shares
Common Stock
Most basic form of ownership in a corporation
Key Features
• Voting rights
• Possible dividends
• Price changes based on company performance
Dividends
Payments corporations distribute to shareholders
Can be:
• Cash
• Additional stock
• Property
Record Date
Date shareholder must officially own stock to receive dividend
Ex-Dividend Date
Stock trades without dividend rights
Seller keeps dividend payment
Why Investors Buy Stocks
Investors want:
• Higher returns
• Dividend income
• Long-term growth
Psychology of Stock Investing
Before investing:
• Research company
• Study finances
• Monitor economy
• Review products
• Be patient
Dollar Appreciation
Profit earned when selling stock above purchase price
Formula:
Profit = Selling Price – Purchase Price
\text{Profit} = \text{Selling Price} - \text{Purchase Price}
Stock Split
Existing shares divided into more shares
Important:
• Total company value does NOT change
• No guarantee stock price will rise afterward
Preferred Stock
Hybrid between:
• Stocks
• Bonds
Advantages:
• Dividend priority
• Lower risk
Disadvantages:
• Less growth potential
Evaluating Stocks
Earnings Per Share (EPS)
After-tax income divided by number of shares
EPS = \frac{\text{After-Tax Income}}{\text{Number of Shares}}
Price-Earnings Ratio (P/E Ratio)
Stock price divided by earnings per share
P/E\ Ratio = \frac{\text{Stock Price}}{EPS}
Dividend Yield
Annual dividend divided by current stock price
\text{Dividend Yield} = \frac{\text{Annual Dividend}}{\text{Current Share Price}}
Total Return
Includes:
• Dividends earned
• Capital gains/losses
Beta
Measures stock volatility compared to market
Higher beta = more volatility/risk
Investment Theories
Fundamental Analysis
Stock value based on company earnings and future growth
Looks at:
• Financial strength
• Industry
• Products
• Economic growth
Technical Analysis
Stock prices based on supply and demand patterns
Uses charts and trends
Efficient Market Hypothesis (EMH)
Stock prices move randomly and already reflect information
Markets for Stocks
Primary Market
New securities sold for first time
IPO (Initial Public Offering)
First public sale of stock
Secondary Market
Existing securities traded between investors
Security Exchanges
NYSE
Traditional stock exchange
NASDAQ
Electronic marketplace known for technology companies
Examples:
• Microsoft
• Amazon
• Intel
Brokerage Firms
Full-Service Brokers
Best for beginners
Provide:
• Advice
• Research
• Investment planning
Higher commissions
Discount Brokers
Lower fees
Less advice
Online Brokers
Self-directed investing online
Stock Orders
Market Order
Buy/sell immediately at current price
Limit Order
Buy/sell only at specified price
Stop-Loss Order
Automatically sells stock when price drops to certain level
Long-Term Investment Strategies
Buy and Hold
Keep investments long term for:
• Growth
• Dividends
Dollar-Cost Averaging
Invest fixed amounts regularly regardless of price
Dividend Reinvestment Plan (DRIP)
Dividends automatically buy more shares
Short-Term Investment Strategies
Day Trading
Buying and selling stocks quickly for short-term profit
Very risky
Buying on Margin
Borrowing money to buy stocks
Higher gains possible, but also higher losses
Selling Short
Borrow stock and sell it hoping price falls
Profit comes from buying it back cheaper later
Options
Option
Contract giving right to buy/sell stock at set price
Call Option
Right to buy stock at guaranteed price
Put Option
Right to sell stock at guaranteed price
Sources used from your uploaded notes:
