Tobias Chapter Summery

In this chapter of Tobias, he discusses with us many different concepts of the stock market and investment plans. We have a couple main topics to discuss, which include annual reports, stock splits, selling short, Beta, Leverage, Margin, and Hedge Fund. Annual reports are organized very simply. For big companies, sophisticated investors knew everything of any substance contained in the annual report months earlier. Stock splits are when you are exchanged dollars for twice as many half-dollars. For example, if you had 200 shares at $40, now you have 400 shares at $20. An advantage corporations hope to gain from splits is to lower the price of the stock to make it look “cheaper.” Selling Short is when you sell a stock you don’t own. You do this if you think a stock is likely to go down and you wish to profit from its misfortune. To sell a stock short you instruct your broker to borrow it from someone who does own it, sell it, and then buy it back at a lower price than you sold it for. Beta is a measure of a stock’s volatility. If your beta is under 1 means you are playing it safe. If it is over 1, then most likely you are looking for a good run in the market. Leverage is buying a house for $100,000 with $20,000 down with an $80,000 mortgage and then selling it years later for $140,000. Margin is how brokerage firms make it easy for you to overextend yourself with leverage. They do this by lending you the money to buy more stock than you other wise could. Hedge Funds are open only to “accredited investors” who meet certain income requirements and have $1 million or more in assets beyond the value of their homes. The original notion of a hedge fund was to do what mutual funds could not.