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Fundamentals can include many things: Forecasts of the economy in general, and/or forecasts of the economy of the stock’s particular sector or industry are considered fundamentals. Corporate reports, statistics, and anecdotal information are considered fundamentals, such as a company’s financial data , including earnings reports , quarterly and annual reports , and balance sheet . (Recall that publicly traded companies must periodically file financial reports and data with the SEC.) Other things that fundamental analysts may study are a company’s assets (what it owns), business plan , strength and strategies of the management , pending lawsuits , earnings , debt and expenses , products in R&D , marketing strategies , and whether its particular industry is in a growth phase or struggling. Downgrades and Upgrades We live in a ratings-crazy world. Almost everything is rated: movies, cars, colleges, restaurants, boyfriends... So it should come as no surprise that stocks are also rated for quality . There are many ratings firms with different systems and terminology. With regard to stock, commonly used ratings are strong buy, buy, hold and sell . Some ratings systems use the terms outperform and underperform . If there is a positive event in a company, such as an increase in earnings, a favorable resolution of a lawsuit, or the launch of a new product, its shares may be upgraded . If there is a negative event, such as the resignation of a popular CEO, the discovery of a product defect, or the company’s earnings are not as strong as predicted, its stock may be downgraded . Two widely known rating analysts are Merrill Lynch and Wachovia. (Recall in the last lesson, student’s learned about bonds, which are debt securities.) The ratings system for bonds is different. Bonds receive a letter grade . There are several levels of ratings from AAA which is also called a triple A rating , the highest rating possible, down through B and C ratings. A rating of C means that the bond is a very poor quality investment called a junk bond . A rating of D means there has been a default on the bond. Like stock, bonds can be upgraded and downgraded. Two well known bond rating agencies are Standard and Poor, and Moody’s. Higher risk bonds carry higher interest rates to attract investors. Low risk bonds pay a lower interest rate. Risk determines the rating and dictates the return. The Big Picture An institutional investor is a professionally managed fund that pools and invests members’ money. Many factors go into analyzing a stock for value. Technical data about a stock is provided in a stock table. Stock tables look complicated but are actually easy to read, and are full of important information enabling the comparison of stock values. Stock fundamentals are also indicators of value. They include such things as economic forecasts, earnings reports, annual reports, sector and industry growth outlook, management strengths and weaknesses, and a company’s pending products. The investment quality of stocks and bonds is professionally rated. To be financially literate in the 21st century you should understand basic stock valuation methods, and that stock markets are powerful engines driving the economy, as well as avenues to building personal wealth. SLIDE 15L SLIDE 15 M PRODUCT PREVIEW
291 THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
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