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investment chapter 2.2 (globalization of securities market (Use of…
investment chapter 2.2
globalization of securities market
Diversification
the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risks
Use of International Securities Improves Diversification
More industries and securities available
Securities denominated in different currencies
Opportunities in rapidly expanding economies
International Investment Performance
Opportunities for high returns
Foreign securities markets do not necessarily move with the U.S. securities market
Foreign securities markets tend to be more risky than U.S. markets
Indirect Ways to Invest in Foreign Securities
Purchase shares of U.S.-based multinational with substantial foreign operations
Direct Ways to Invest in Foreign Securities
Purchase securities on foreign stock exchanges
risks of international investing
Usual Investment Risks Still Apply
Government Policies Risks
Unstable foreign governments
Different laws in trade, labor or taxation
Different economic and political conditions
Less stringent regulation of foreign securities markets
Currency Exchange Rate Risks
Value of foreign currency fluctuates compared to U.S. dollar
Value of foreign investments can go up and down with exchange rate fluctuations
regulation of securities market
Insider Trading
Use of nonpublic information about a company to make profitable securities transactions
Blue Sky Laws
Laws imposed by individual states to regulate sellers of securities
Intended to prevent investors from being sold nothing but “blue sky”
basic types of securities transactions
Long Purchase
Investor buys and holds securities
“Buy low and sell high”
Make money when prices go up
margin trading
short selling
Investor sells securities they don’t own
Investor borrows securities from broker
Broker lends securities owned by other investors that are held in “street name”
“Sell high and buy low”
Investors make money when stock prices go down
advantages
chance to profit when stock price declines
disadvantages
limited return opportunities
unlimited risks
margin trading
margin formulas
Uses borrowed funds to purchase securities
Currently owned securities used as collateral for margin loan from broker
advantages and disadvantages
advantages
Allows use of financial leverage
Magnifies profits
disadvantages
Magnifies losses
Interest expense on margin loan
Margin calls