Chapter 12 investing in stocks answers to the impossible quiz

Thus, the investor decreases the investment account when a dividend is received if the equity method is applied. No additional income is recorded. Companies are also allowed to report such investments as if they were trading securities. However, few have opted to make this election. If chosen, the investment is reported at fair value despite the degree of ownership with gains and losses in the change of fair value reported in net income.

Question: In applying the equity method, income is recognized by the investor when earned by the investee. Subsequent dividend collections are not reported as revenue by the investor but rather as a reduction in the size of the investment account to avoid including the income twice. No evidence is present that provides any indication that Big lacks the ability to exert significant influence over the financing and operating decisions of Little. Thus, application of the equity method is appropriate.

What recording is appropriate for an investor when the equity method is applied to an investment? Answer: The purchase of 40 percent of Little Company for cash is merely the exchange of one asset for another. Thus, the investment is recorded initially by Big at its historical cost. Figure Thus, according to U. GAAP, the equity method is applied. Because earning this income caused Little Company to grow, Big increases its investment account to reflect the change in the size of the investee.

Consequently, any eventual dividend received from Little is a reduction in the investment in Little account rather than a new revenue. The investee company is smaller as a result of the cash payout. This total does not reflect fair value as with investments in trading securities and available-for-sale securities. It also does not disclose historical cost. Under the equity method, the asset balance is a conglomerate of numbers. When the equity method is applied to an investment, what is the appropriate recording of an eventual sale?

Answer: An investment reported using the equity method quickly moves away from historical cost as income is earned and dividends received. All investments in the stock of another company—where ownership is no more than 50 percent—must be accounted for in one of three ways depending on the degree of ownership and the intention of the investor. Use of the equity method then becomes appropriate.

Significant influence is difficult to gauge so ownership of 20—50 percent of the outstanding stock is the normal standard applied in practice. However, if evidence is found indicating that significant influence is either present or does not exist, that takes precedence regardless of the degree of ownership.

Under the equity method, income is recognized by the investor as soon as earned by the investee. The investment account also increases as a result of recognizing this income. Conversely, dividends are not reported as income but rather as reductions in the investment balance. Unless a permanent decline occurs, fair value is not taken into consideration in accounting for an equity method investment.

When sold, the book value of the asset is removed so that any difference with the amount received can be recognized as a gain or loss. Both are discussed in greater detail in Chapter 15 "Owning Stocks" and Chapter 16 "Owning Bonds" , but a brief introduction is provided here to give you the basic idea of what they are and how they can be used as investments. In the United States, 47 percent of the adult population owns stocks or bonds, most through retirement accounts.

Bonds and Bond Markets Bonds Publicly issued and traded long-term debt used by corporations and governments. The bond issuer borrows by selling a bond, promising the buyer regular interest payments and then repayment of the principal at maturity. If a company wants to borrow, it could just go to one lender and borrow. But if the company wants to borrow a lot, it may be difficult to find any one investor with the capital and the inclination to make large a loan, taking a large risk on only one borrower.

In this case the company may need to find a lot of lenders who will each lend a little money, and this is done through selling bonds. A bond is a formal contract to repay borrowed money with interest often referred to as the coupon at fixed intervals.

Corporations and governments e. The interest rate on the bond may be a fixed interest rate A bond interest rate that does not change over time, from issuance to maturity. Underlying interest rates include the prime rate that banks charge their most trustworthy borrowers and the target rates set by the Federal Reserve Bank. There are many features of bonds other than the principal and interest, such as the issue price The original market price of a bond at issuance.

Bonds may also be issued with various covenants A condition placed on bond issuers borrowers to protect bondholders lenders. For example, the borrower, the bond issuer, may be required to keep a certain level of cash on hand, relative to its short-term debts, or may not be allowed to issue more debt until this bond is paid off.

Because of the diversity and flexibility of bond features, the bond markets are not as transparent as the stock markets; that is, the relationship between the bond and its price is harder to determine. The U. Treasury bonds are auctioned regularly to banks and large institutional investors by the Treasury Department, but individuals can buy U. Treasury bonds directly from the U. To trade any other kind of bond, you have to go through a broker.

The brokerage firm acts as a principal or dealer, buying from or selling to investors, or as an agent for another buyer or seller. When you buy a share of stock, you buy a share of the corporation. The size of your share of the corporation is proportional to the size of your stock holding. Since corporations exist to create profit for the owners, when you buy a share of the corporation, you buy a share of its future profits.

You are literally sharing in the fortunes of the company. Unlike bonds, however, shares do not promise you any returns at all. If the company does create a profit, some of that profit may be paid out to owners as a dividend A share of corporate profit distributed to shareholders, usually as cash or corporate stock. But even if the company is profitable, the value of its shares may not rise, for a variety of reasons having to do more with the markets or the larger economy than with the company itself.

Corporations issue shares to raise capital. When shares are issued and traded in a public market such as a stock exchange An organized market for the trading of corporate shares conducted by members of the exchange. Only members of an exchange may trade on the exchange, so to buy or sell stocks you must go through a broker who is a member of the exchange.

Brokers also manage your account and offer varying levels of advice and access to research. Most brokers have Web-based trading systems. Some discount brokers offer minimal advice and research along with minimal trading commissions and fees. Commodities and Derivatives Commodities Raw materials—natural resources or agricultural products—used as inputs in processing goods and services.

As farming and food production became mechanized and required a larger investment of capital, commodity producers and users wanted a way to reduce volatility by locking in prices over the longer term. The answer was futures and forward contracts.

Futures A publicly traded contract to buy or sell an asset at a specified time and price in the future. For example, suppose it is now July If you know that you will want to have wheat in May of , you could wait until May and buy the wheat at the market price, which is unknown in July Doing so would remove your future price uncertainty, but you would incur the cost of storing the wheat.

Alternatively, you could buy a futures contract for May wheat in July You would be buying May wheat at a price that is now known to you as stated in the futures contract , but you will not take delivery of the wheat until May The value of the futures contract to you is that you are removing the future price uncertainty without incurring any storage costs.

In July the value of a contract to buy May wheat depends on what the price of wheat actually turns out to be in May Buying it now, you avoid any uncertainty about the price, which may change. Likewise, by writing a contract to sell future wheat, you lock in a price for your crop or a return for your investment in seed and fertilizer. More kinds of derivatives have been created as well, such as options.

Options The right but not the obligation to buy or sell at a specific price at a specific time in the future; commonly written on shares of stock as well as on stock indices, interest rates, and commodities. Options are commonly written on shares of stock as well as on stock indices, interest rates, and commodities.

Derivatives such as forwards, futures, and options are used to hedge or protect against an existing risk or to speculate on a future price. For a number of reasons, commodities and derivatives are more risky than investing in stocks and bonds and are not the best choice for most individual investors. Mutual Funds, Index Funds, and Exchange-Traded Funds A mutual fund A portfolio of investments created by an investment company such as a brokerage or bank.

It is financed as the investment company sells shares of the fund to investors. For investors, a mutual fund provides a way to achieve maximum diversification with minimal transaction costs through economies of scale. The fund thus allows you to own the performance of many investments while actually buying—and paying the transaction cost for buying—only one investment. Mutual funds have become popular because they can provide diverse investments with a minimum of transaction costs.

In theory, they also provide good returns through the performance of professional portfolio managers. An index fund A mutual fund designed to track the performance of an index for investors who seek diversification without having to select securities. An index fund is a mutual fund invested in the same securities as the index and so requires minimal management and should have minimal management fees or costs.

Mutual funds are created and managed by mutual fund companies or by brokerages or even banks. To trade shares of a mutual fund you must have an account with the company, brokerage, or bank. Mutual funds are a large component of individual retirement accounts and of defined contribution plans. Mutual fund shares are valued at the close of trading each day and orders placed the next day are executed at that price until it closes. An exchange-traded fund ETF A fund that tracks an index or a commodity or a basket of assets but is traded like stocks on a stock exchange.

The ways that capital can be bought and sold is limited only by the imagination. When corporations or governments need financing, they invent ways to entice investors and promise them a return. The last thirty years has seen an explosion in financial engineering The use of mathematical modeling to create and value new financial instruments and markets.

This explosion has coincided with the ever-expanding powers of the computer, allowing professional investors to run the millions of calculations involved in sophisticated pricing models. The Internet also gives amateurs instantaneous access to information and accounts. Much of the modern portfolio theory that spawned these innovations i. This has been very valuable for institutional investors e. For most individual investors, however, most portfolio theory may present too much risk or just be impractical.

You have only a comparatively small amount of time to create wealth and to enjoy it. For individual investors, investing is a process of balancing the demands and desires of returns with the costs of risk, before time runs out. Key Takeaways Bonds are a way to raise capital through borrowing, used by corporations and governments; an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity; traded on bond exchanges through brokers.

Stocks are a way to raise capital through selling ownership or equity; an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains losses in corporate value; traded on stock exchanges through member brokers. Derivatives are instruments based on the future, and therefore uncertain, price of another security, such as a share of stock, a government bond, a currency, or a commodity.

Mutual funds are portfolios of investments designed to achieve maximum diversification with minimal cost through economies of scale. An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index.

An exchange-traded fund is a mutual fund whose shares are traded on an exchange. Institutional and individual investors differ in the use of different investment instruments and in using them to create appropriate portfolios. Exercises In My Notes or your personal finance journal, record your experiences with investing. What investments have you made, and how much do you have invested? What stocks, bonds, funds, or other instruments, described in this section, do you have now or had in the past?

How were the decisions about your investments made, and who made them? If you have had no personal experience with investing, explain your reasons. What reasons might you have for investing or not in the future? About how many stock exchanges exist in the world? Which geographic region has the greatest number of exchanges?

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Lots of do not. You pay far less attention to a business's book value, dividends, or PE ratiowhich for the last years have actually had little predictive value in spotting America's most successful companiesand focus instead on essential traditionally tested factors such as strong revenues and sales development, rate and volume action, and whether the business is the primary revenue leader in its field with a remarkable new item.

All these wise actions are totally contrary to humanity! In reality, the stock exchange is human nature and crowd psychology on daily screen, plus the olden law of supply and need at work. Due to the fact that these 2 factors remain the very same over time, it is amazing however real that chart patterns are just the very same today as they were 50 years ago or years back.

All of these stocks had spellbinding rate moves. Charts plus profits will help you tell the very best stocks and general markets from the weaker, riskier stocks and markets that you need to prevent completely.

That's why I put all these impressive chart examples in Chapter 1, with notes marked on each chart to help you discover a skill that might simply alter your entire life and let you live much better and far smarter. These examples are simply a little sample of what you have actually been missing out on for several years.

We have designs of more than 1, fantastic stock exchange winners over the last years. It takes just one or more to make your year or your future. However you have to get major and work at actually discovering and understanding what you're doing when you invest.

You can definitely discover to invest sensibly. This book will offer you with the investment understanding, skills, and methods you need to become a more successful investor, if you want to operate at it. I believe many people in this country and throughout the complimentary world, whether young or old, despite their profession, education, background, or financial position, must discover to conserve and purchase typical stocks.

You are never too old or too young to begin investing wisely. Mike Webster is one of our in-house managers who also began small. Mike sold personal valuables, including his music CD collection, to raise money for investing. He made the most of the roaring booming market of the late s and safeguarded most of his gains by going generally to cash in the bearishness.

Both Mike and Steve have had their rough years, however they have actually gained from their many errors, which all of us make, and have gone on to achieve substantial efficiency. Stalin's old Soviet Union killed 20 countless its own people.

Our system of liberty and chance works as a design of success for most countries in the world. Today it's not enough for you to just work and earn a wage. To do the things you desire to do, go where you wish to go, and have the important things you wish to have in your life, you must conserve and invest intelligently. This book can change your whole life. No one can hold you back however yourself. Think positive. Key aspects you'll discover include what the quarterly profits of these business were at the time, what the yearly earnings histories of these companies had been in the prior three years, what amount of trading volume was present, what degree of relative strength there was in the rates of the stocks prior to their massive success, and the number of shares of typical stock were outstanding in the capitalization of each company.

It's easy to perform this kind of practical, commonsense analysis of all previous effective leaders. I have currently finished such a detailed study. In our historical analysis, we picked the greatest winning stocks in the stock market each year in terms of portion increase for the year , spanning the previous years. House Depot was among the all-time terrific performers, leaping fold in less than two years from its preliminary public offering in September and then climbing another 10 times from to All of these companies offered interesting new entrepreneurial items and ideas.

In total, we in fact have 10 different model books that cover America's ingenious and highly effective companies. Each letter in the words CAN SLIM represents among the seven chief attributes of these greatest winning stocks at their early developing stages, right before they made big earnings for their shareholders and our country business and workers all pay taxes as well as assisting to improve our standard of life.

As you study these charts you'll see there specify chart patterns that are repeated over and over once again whether in or This will offer you a substantial benefit once you find out to, with practice, acknowledge these patterns that in impact inform you when a stock is under expert accumulation.

The very best professionals utilize charts. You too can discover this important skill. This book is all about how America grows and you can too. The American dream can be yours if you have the drive and desire and comprise your mind to never ever give up on yourself or America. The same is true in investing. Financial indications are plotted on charts to help in their analysis. A stock's rate and volume history are taped on charts to assist financiers identify whether the stock is strong, healthy, and under accumulation or whether it's weak and behaving unusually.

Would you permit a physician to open you up and carry out heart surgical treatment if he had not used the vital essential tools? Naturally not. However, numerous investors do exactly that when they buy and offer stocks without first consulting stock charts. Just as doctors would be irresponsible not to use X-rays, feline scans, and EKGs on their patients, investors are simply plain foolish if they don't discover to translate the cost and volume patterns found on stock charts.

Individual investors can lose a great deal of cash if they don't know how to acknowledge when a stock tops and starts into a significant correction or if they have been depending upon another person who likewise does not know this. Chart Reading Basics A chart records the factual rate efficiency of a stock. Financiers who train themselves to translate price motions on charts have a massive advantage over those who either decline to discover, simply do not understand any better, or are a bit lazy.

Would you fly in a plane without instruments or take a long cross-country journey in your automobile without a plan? Charts are your financial investment roadway map. Chart patterns, or bases, are simply locations of price correction and consolidation after an earlier rate advance. The skill you require to learn in order to evaluate these bases is how to identify whether the rate and volume movements are normal or unusual. Fortunes are made every year by those who make the effort to learn to interpret charts appropriately.

Specialists who do not use charts are confessing their lack of knowledge of extremely important measurement and timing mechanisms. When this occurs, their bad records are typically a direct result of not knowing quite about market action and chart reading. Universities that teach finance or financial investment courses and dismiss charts as irrelevant or unimportant are showing their complete lack of understanding and understanding of how the marketplace really works and how the very best specialists operate.

However, lots of investors don't know where to turn, whom to trust, or what they should stop carrying out in order to achieve true superior financial investment performance. You don't need to offer your cash to a Bernie Madoff, who'll take it but will not inform you precisely what he's doing with it.

At the minimum, you need to discover and comprehend well the sound concepts, proven guidelines and techniques that can secure and construct your financial investment portfolio with time. Half of all Americans conserve and invest; now it's time to find out to do it wisely with vital knowledge.

When I began investing, I made most of the very same mistakes you have actually probably made. You buy stocks when they're nearer to their highs for the year, not when they have actually sunk lower and look low-cost. You purchase higher-priced, much better quality stocks rather than the lowest-priced stocks.

Lots of do not. You pay far less attention to a company's book worth, dividends, or PE ratiowhich for the last years have had little predictive value in finding America's most effective companiesand focus rather on important traditionally proven elements such as strong earnings and sales development, rate and volume action, and whether the business is the primary profit leader in its field with a remarkable brand-new item.

All these wise actions are absolutely contrary to humanity! In truth, the stock market is humanity and crowd psychology on everyday screen, plus the age-old law of supply and demand at work. Due to the fact that these 2 factors stay the exact same gradually, it is amazing however true that chart patterns are just the very same today as they were 50 years ago or years earlier.

All of these stocks had spellbinding price moves. Charts plus revenues will assist you inform the finest stocks and basic markets from the weaker, riskier stocks and markets that you need to prevent altogether. That's why I put all these impressive chart examples in Chapter 1, with notes marked on each chart to assist you find out a skill that could simply alter your entire life and let you live much better and far smarter.

These examples are just a little sample of what you've been missing for many years. We have designs of more than 1, great stock exchange winners over the last years. It takes just one or 2 to make your year or your future. However you need to buckle down and work at really learning and understanding what you're doing when you invest.

You can definitely find out to invest sensibly. This book will offer you with the investment understanding, abilities, and methods you need to become a more successful investor, if you're willing to work at it. I believe many people in this nation and throughout the totally free world, whether young or old, despite their profession, education, background, or economic position, need to discover to save and invest in typical stocks. You are never ever too old or too young to start investing intelligently.

Mike Webster is one of our in-house supervisors who likewise began little. Mike sold individual valuables, including his music CD collection, to raise money for investing. He made the most of the roaring booming market of the late s and safeguarded most of his gains by going primarily to money in the bear market. Both Mike and Steve have actually had their rough years, however they've gained from their many mistakes, which we all make, and have actually gone on to accomplish substantial efficiency.

Stalin's old Soviet Union eliminated 20 countless its own people. Our system of flexibility and chance acts as a design of success for the majority of countries on the planet. Today it's not enough for you to simply work and earn an income. To do the things you wish to do, go where you wish to go, and have the things you wish to have in your life, you should conserve and invest smartly.

This book can alter your whole life. No one can hold you back but yourself. Think favorable. Key aspects you'll find include what the quarterly profits of these business were at the time, what the annual profits histories of these organizations had been in the previous three years, what quantity of trading volume existed, what degree of relative strength there was in the costs of the stocks prior to their massive success, and the number of shares of common stock were impressive in the capitalization of each business.

It's simple to conduct this kind of useful, commonsense analysis of all previous successful leaders. I have currently finished such a detailed research study. In our historical analysis, we selected the best winning stocks in the stock market each year in regards to percentage boost for the year , covering the past years. Home Depot was among the all-time fantastic entertainers, leaping fold in less than 2 years from its going public in September and after that climbing another 10 times from to All of these companies offered interesting new entrepreneurial products and concepts.

In overall, we actually have 10 various model books that cover America's ingenious and highly successful companies. Each letter in the words CAN SLIM represents among the seven chief qualities of these biggest winning stocks at their early developing phases, prior to they made huge profits for their shareholders and our nation business and workers all pay taxes as well as assisting to improve our standard of life.

As you study these charts you'll see there are particular chart patterns that are duplicated over and over once again whether in or This will give you a big advantage once you learn to, with practice, recognize these patterns that in impact inform you when a stock is under professional build-up. The very best professionals use charts. You too can discover this important skill. This book is all about how America grows and you can too. The American dream can be yours if you have the drive and desire and make up your mind to never quit on yourself or America.

The same is true in investing. Economic indications are outlined on charts to help in their interpretation. A stock's rate and volume history are tape-recorded on charts to assist investors identify whether the stock is strong, healthy, and under accumulation or whether it's weak and behaving unusually. Would you permit a doctor to open you up and carry out heart surgery if he had not made use of the vital needed tools? Obviously not. Numerous financiers do exactly that when they buy and offer stocks without first consulting stock charts.

Just as medical professionals would be irresponsible not to use X-rays, feline scans, and EKGs on their clients, investors are simply plain foolish if they don't discover to analyze the rate and volume patterns found on stock charts. Individual investors can lose a lot of cash if they do not understand how to recognize when a stock tops and starts into a significant correction or if they have been depending on someone else who also does not understand this.

Chart Reading Essentials A chart records the factual cost efficiency of a stock. Financiers who train themselves to decode rate motions on charts have a massive advantage over those who either decline to find out, just don't understand any much better, or are a bit lazy.

Would you fly in an airplane without instruments or take a long cross-country journey in your automobile without a roadway map? Charts are your investment road map. Chart patterns, or bases, are merely locations of price correction and debt consolidation after an earlier price advance. The ability you require to learn in order to evaluate these bases is how to detect whether the cost and volume movements are regular or irregular.

Fortunes are made every year by those who take the time to find out to interpret charts appropriately. Specialists who don't use charts are admitting their lack of knowledge of extremely important measurement and timing systems. When this occurs, their poor records are frequently a direct result of not knowing very much about market action and chart reading. Universities that teach finance or financial investment courses and dismiss charts as irrelevant or unimportant are demonstrating their complete absence of understanding and understanding of how the market really works and how the very best professionals operate.

Lots of financiers do not understand where to turn, whom to trust, or what they need to stop doing in order to attain true remarkable investment performance. You don't need to provide your cash to a Bernie Madoff, who'll take it however will not inform you exactly what he's finishing with it. At the really least, you require to find out and understand well the sound concepts, tested guidelines and approaches that can protect and develop your investment portfolio in time.

Half of all Americans conserve and invest; now it's time to discover to do it wisely with critical knowledge. When I started investing, I made many of the exact same mistakes you have actually probably made.