Mutual fund: Pool of money to invest in stocks, money market and bond,

professionally managed, produce capital gain

Hedge fund: mutual fund including derivatives, unregulated, generate high return
(compared to market benchmark)
ETF: Security that tracks an index, a commodity, a basket of assets like an index
fund but trade like stock (diversification and ability of stock, except right like voting
right)
Value stocks and growth stocks depend on PE ratio (Dividend-price ratio, see sample
midterm)
Defining Features of Growth and Value Stocks
Growth Stocks

Higher priced than broader market (better than average gain)

High earnings growth records

More volatile than broader market

Value Stocks

Lower priced than broader market (new company / company with

problem)

Currently priced below similar companies in industry

Carry somewhat less risk than broader market (overreact to negative

event, good fundamentals)

Value stock > Growth stock

Small value stock > large value stock (small & large refer to firm size)
Change in housing finance: originators such as banks start to sell mortgage loans to
agency like Fannie Mac and Freddie Mac
1. Historical date from unrepresentative period ( housing boom and an uncommonly
prosperous
and recession-free macroeconomy Federal Reserve aggressively reduces interest rate)

2. Extrapolation of default prob. to new sort of borrower pool one without down
payments, with exploding-payment loans (piggyback loan), and with low- or nodocumentation loans (often called liar
loans) (little or no risk assessment)
3. the power of cross-regional diversification to minimize risk engendered excessive
optimism.
4. The ratings agencies were paid to provide ratings by the issuers of the securitiesnot the
purchasers.(Agency problem)
CDS, is in essence an insurance contract against the default of one or more borrowers.
CDO, structuring products from loan pool.
Specialist:
Narrow bid ask spread: Gain profit from bid ask spread, narrower gap, more competitive
Price continuity to prevent excessive volatility
Inside quote: Best bid ask price
Off exchange = OTC: Direct trade between buyer and sellers without supervision of
exchange

The NYSEs market share measured by trades (all market trades, include both exchange and
OTC) rather than share volume (total volume recorded in the market, include only exchange)
is considerably lower, as smaller retail orders are far more likely to be executed off the
exchange.
Sponsored access: a firm can pay a registered broker to use the brokers computer code to
trade
Naked access (one kind of sponsored access): direct access to their brokers computertrading codes and can execute trades in a little as 250 microseconds (no pretrade checks)
Execute order: buy and sell
Settle: Clearing house, e.g. delivery of stocks
Stock markets vs Electronic trading: Cause local consolidation and globalization
1. Cheaper and more efficient mechanism for trade to be executed and cleared
2. Cross-border trading global alliance
3. 24-hour global market for different security types stocks & derivatives
Short sale (Margin) : [Asset (current holdings: cash + personal asset support)
Liability(varying)] (Equity) / Value of stock owe (Initial Investment)
Percentage return: (Money gain or loss due to change in price Loan interest) / Investors
initial investment
Risk:
- Loss can be unlimited
- Short squeeze can occur to ripe off your profit.
- Even if you're right, it could be at the wrong time.
Buying on margin (Margin) : [Asset (Current stock total value) Liability] (Equity) / Value of
stock
Percentage return: (Money gain or loss due to change in price Loan interest)/ Investors
initial investment
Risk:
- The interest rate can go up The interest rate on your margin account can change at any
time. It may cost you a lot more than you thought to pay back what you borrowed.
- You can lose more than you invested - say that instead of rocketing up 25%, our shares fell
25%. Now your investment would be worth $15,000 (200 shares x $75) (originally 20000).
You sell the stock, pay back your broker the $10,000, and end up with $5,000. That's a 50%
loss, plus commissions and interest, which otherwise would have been a loss of only 25%

May not be equal chance: In some cases, penny stocks companies are either new companies or are
experiencing major difficulties, and maybe even close to bankruptcy.
Low liquidity rate.
Subprime mortgage is normally made out to borrowers with lower credit ratings (hence higher rate
than conventional mortgage)
Lehman Brothers: Borrow short term fund to invest in long term fund by issuing commercial
paper which is bought by many mutual fund. When it goes bankrupt, cause large loss to
both large and small investors.