Chapter 1

• A portfolio is collection of assets and securities within the framework of an investment

account.

• A financial asset represent represents a financial claim on an asset documented by legal

representation.

• A real asset is an actual tangible asset that can be touched.

• Direct equity claims are ownership interests that include common stock and other instruments
that can be used to purchase common stock.

• Indirect equity can be acquired by placing funds in an investment company like a mutual fund.

• Creditor claims include debt instruments that are offered by financial institutions, industrial
corporations, and governments.

• Preferred stock is a hybrid security combining elements of equity ownership and and creditor
claims.

• Commodity futures are contracts to buy or sell a certain commodity in the future at a given
price; they may include wheat, produce, metals, and even financial instruments.

• Liquidity is measured by investor ability to convert an investment in cash in a relative short

period of time with little cost. Stocks and bonds offer highest liquidity.

• Market strategies may be long term or short term in scope.

• Those using short term investment strategies are known as traders, buy and selling assets the
very second a certain market condition is met; they face higher commission costs.

• Long term investors acquire assets using a buy and hold approach, usually selling their assets
once they feel market cyclical conditions have been met.

• Investors in high tax brackets have different objectives than those in lower brackets.

• High tax bracket investors may prefer municipal bonds where interest is not taxable, or other
investments that provide tax shelters.

• Tax Relief Act of 2003 changed the way dividends were taxed; prior to act dividends were
taxed as ordinary income at a rate up to 38.8%.

• After tax refer act gains on securities held over a year (long term) were cut back to 20%.

• An IRA allows a qualifying tax payer to deduct an allowable amount of taxable income and
invest the funds.

• A defined benefit plan specifies an amount of a retirement benefit based based on income and
years of service; most common with public employees.

• Returns received from investments are subject to two variables; capital gains and losses and
current income.

• Desired rate of return is generally related to amount of risk associated with the investment.

• IRA investors must consider tax issues; though they may have less taxes on account of less
income that was set aside for retirement.

• However, the tax conditions may be more severe when they are ready to use their IRA fund.

• Operating risk focuses on the volatility of operating costs; subject to economic cycles of
industry.

• Financial risks are related to firms that take on too much financial leverage that could lead to
bankruptcy.

• Managerial risks are related to the quality of leadership and capabilities found within a
business or financial institution.

• Real rate of return is return required by investors to allow others to use their money for a given
time period.

• One challenge investors face in determining required rates of return is the correct forecasting
of interests rates and inflation, which are factors that are involved in calculating required rates
of return.

• With risk premium, this is an added risk factor that this added on to the risk free rate of return
(consisting real rate plus expected inflation).

• Geometric rate of return is compound of annual rate of return while arithmetic return is simple
average of all yearly returns.

• Arithmetic is based toward the upside as it considers negative returns in absolute values,
which are in positive; this does not reflect reality.

• Capital Asset Pricing Model looks at required rate of return by dividing risk into company risk
and market risk.

• Market risk is measured by a factor called beta, which measures how sensitive an asset is to
changes in market conditions, it is considered a systemic risk that cannot be covered by
portfolio diversification.

• Another risk factor is known as equity risk premium, which is a risk factor associated with the
stock market.

• This is the extra return stock markets must provide compared with rate of return as compared
with the rate of return an investor can earn on Government securities (a risk free rate).

 Chapter 2
• A market is a way of exchanging assets for something of value.

• An efficient market occurs when prices respond to changing market information.

• Markets also allow for competition, where investors can compare prices of assets and
compare them with their perceived risks and expected returns.

• Secondary markets are markets for existing assets that are currently traded between investors.

• In primary markets, buyers purchase assets directly from the source of the asset.

• Investment bankers act as middlemen in the process of raising funds and assume risk in the
IPO process by underwriting the securities.

• Underwriting is a guarantee that that investment banking firms make to selling firms to
purchase their IPO securities, eliminating risks of not selling the whole issue of securities being
offered.

• Some investment firms will share risk and burden of distribution by forming a group called a
syndicate.

• Investment banker will agree to buy issued IPO shares at x-y, and then try to sell them on the
market at x.

• If stock price of IPO goes below y, investment bankers may lose money.

• By taking much risk, investment bankers enable firms to to obtain capital and also allow other
investors an opportunity to purchase new equity.

• SEC rule allows firms to register future issued shares with SEC and then sell them to
investment bankers in the future as funds are needed; when this occurs, they purchase these
newly issued shares and then sell them at higher prices to institutional investors.

• A firm can only trade its securities on an exchange is if the firm meets the stock exchange’s
listing listing requirements.

• On the NYSE, there are two types of members; floor brokers and specialists.

• Floor brokers act as agents for clients and execute buy and sell orders on the floor of the
exchange.

• They are divided into two groups: house brokers and independent brokers; house brokers
represent NYSE member firms, usually investment houses.

• Independent brokers work for smaller brokerage firms while also offering trade execution
services to member brokerage firms if they need extra trading support.

• Specialist brokers consist of firms that have been assigned stocks by the NYSE; their
responsibilities include 1) manage auctions, 2) execute special orders for floor brokers, 3) serve
as catalysts, 4) provide capital, 5) stabilize prices.

• Essentially, they maintain continuous, liquid, and orderly markets in their assigned stocks.

• NASDAQ is an electronic stock exchange known for its trading technology and list many of the
world largest technology firms.

• NASDAQ prides itself on its views of corporate governance standards, and requires firms that
want to be listed on it to meets strict corporate governance requirements, to include
adherence to the Sarbanes Oxley Act of 2002.

• Electronic Communications Networks (ECN’s) are electronic trading systems that automatically
buy and sell orders at specific prices.

• BATS is another electronic exchange formed in 2005 recognized by the SEC.

• The primary exchange that handles call options is the Chicago Board Options Exchange.

• A call option gives potential owners the right to buy 100 shares of a stock at a set price for a
certain period; one can also do the same for shares in stock market exchanges.

• The Intercontinental Exchange was founded in 2000 to create a 24 hour electronic exchange
for energy contracts.

• Futures markets have been associated with commodities and financial instruments;
purchasers of the commodity futures own the right to buy and sell a certain amount of a
commodity at a set price for a certain period of time.

• An unofficially recognized over the counter markets is known as a over the counter bulletin
market board; companies that use this exchange do file regulatory reports with the SEC.

• Companies that do not want to files reports with the SEC are called “pink sheets.”

• Bonds of state and local governments are sold over the counter by specialized dealers.

• Organized security markets are regulated by the SEC and self-regulation of the exchanges.

• Because of 1987 market crash, the SEC put into effect circuit breakers that would shut the
markets down for a period of time if there is a dramatic drop in market values.

• Securities Act of 1933 called for, amongst other things, that all government bonds and stocks
that were sold in more than one state much be SEC registered and all issues of securities must
include a prospectus.

• The Securities Exchange Act of 1934 called for, amongst other things, the control over insider
trading and that all securities exchanges register with SEC.

• The Securities Acts Amendments of 1975 enabled the SEC to supervise the development of a
national securities market, however it developed.

• SEC assumed that it would evolve heavily relying on the use of computers, also prohibited
banks, insurance companies, and other big stock buyers exchange memberships to avoid
commission costs.

• Investment Advisor Act of 1940 set up to regulate against unethical financial advisors.

• Securities Investor Protection Act of 1970 established the Securities Protection Investor
Corporation that was reimburse investor accounts up to $50,000 if a brokerage firm folded.

 Chapter 3
• Margin accounts allow investors to borrow funds to finance stock purchases. Percentage
costs that an investor must pay to finance an equity purchase is called the margin, and it is
establish by the Federal Reserve Board.

• Long Positions: where investors purchase security for long term with intention to sell it at a
point where price is higher than what was paid when they bought it.

• With short positions, one borrows a security from a broker with expectation that it is sold back
to the broker at a lower value.

• Limit orders limits prices at which you are willing to buy or sell the security.

• Stop orders execute trades at price point that this very close to a price point that is set by the
investor.

• Online trading is an effective way to avoid commissions, but it is not ideal for those who do
not have advanced understandings of markets or are not proficient with computers.

• In making investment choices, investors must give important considerations to tax

consequences.

• A capital gains or loss tax occurs when an asset held for investment purposes is sold.

• Tax Relief Act of 2003 has lowered taxes on dividends to 15%.

• If assets are not held for more than 12 months, sales represent short term capital gain or loss,
and is treated like ordinary income.

• Dow Jones industrial average is an average that consists of 30 large industrial companies and
is considered a blue-chip index. 

• Blue-chip stocks are stocks that are considered to be very high-quality.

• Dow Jones industrial average is a price weighted average, meaning each stock in the average
is waited by price.

• Standard & Poor’s 500 stock index is an index followed by professional money managers and
security market researchers as a measure of broad stock market activity.

• The S&P 100 mid-cap index consists of 400 middle sized average firms that have total market
values ranging between 200 million and 6.7 billion.

• Standard & Poor’s 600is small-cap index consisting of stocks that are smaller in value then
those firms that are listed under the mid-cap index.

• Standard & Poor’s 1500 stock index combines the S&P 500, the S&P 400 mid cap, and the
S&P small cap 600.

• The Standard & Poor’s 100 index is composed of 100 blue-chip stocks which the Chicago
Board of Options Exchange has individual option contracts.

• Value Line Average index represent 1700 companies from the New York and American stock
exchanges as well as the NASDAQ market.

• The Value Line Average is an equal waited index, meaning each of the 1700 stocks, regardless
of market price for total market value, is weighed equally.

• The Wilshire 5000 Equity Index is the most comprehensive index and represents the total dollar
volume of all US equity issues with readily available price data from the New York Stock
Exchange, the American Stock Exchange, and the NASDAQ stock exchange markets.

• The Russell 3000 index comprises of 3000 US stocks as measured by market capitalization.
Market capitalization equals market value times shares outstanding.

• The Russell 1000 index includes only the largest 1000 firms in the Russell 3000.

• The Russell 2000 specifically includes the smallest 2000 out of the Russell 3000 exchange.

• Bonds are most affected by interest rate movements. Rising rates means falling bond prices,
while falling rates cause bond prices to rise.

• Investors usually judge bond market performance by yield curve changes, risk characteristics,
and interest rate spreads between various risk classes.

• The directions of the various indexes are closely related but they do not necessarily move
together.

Understanding Short Selling | by Wall Street Survivor

https://www.youtube.com/watch?v=Z1LctxzEREE

Shorting stock | Stocks and bonds | Finance & Capital Markets | Khan Academy

https://www.youtube.com/watch?v=-IDmLERenrU

 Chapter 4

• Some of the advantages that mutual funds provide include diversification, professional
management, and time savings, especially related to market research.

• Mutual funds however do not outperform the market. Mutual fund investors must be sensitive
to excessive claims made by mutual fund salesman.

• A closed end fund has a fixed number of shares and purchasers and sellers of shares conduct
transactions with each other.

• And open ended fun stands allows you to purchase new shares or buy back your old shares.

• Net asset value is equal to the current value of the securities owned by the fund, minus any
liabilities, divided by the number of shares outstanding.

• Some mutual funds are traded at a discount from the NAV because they have no record of
performance, I have only invested in on popular industries, or are not liquid.

• Exchange traded funds are designed to imitate performance of a specific index.

• More than 95% of the investment funds in the United States are open ended.

• Mutual funds designated as load funds require a commission to be paid in association with the
purchase of the fund shares.

• Low load funds are mutual funds that have commissions ranging from 2 to 3%. The average
commission for a load type mutual fund is 5%.

• A mutual fund that charges you for withdrawing funds charges you a back end load which is
about 2 to 3% of the selling price.

• No load mutual funds do not request any sales commission to buy their shares.

• Many employers use mutual funds to provide pension plans for employees,  where plan
participants buy directly from the fund using paycheck withdrawals, avoid brokerage fees.

• Money market funds invest in short term securities such treasury bills, commercial paper, and
re-purchase agreements.

• The pursuit of capital appreciation is the emphasis with growth funds.

• Growth with income funds are designed to pay study dividends. Their stocks are attractive to
investors interested in capital growth with some dividend or interest income.

• Balanced funds combine investments, common stock, and bonds, and often include preferred
stock. They try to provide income plus some capital appreciation.

• Income seeking investors have always been attracted to bonds because they represent a
contractual obligation on the part of the issuer, where to the bondholder receives a certain
return.

• Returns from bonds are historically lower than those from stocks; bond mutual funds are no
exception.

• Sector funds exist for economic market areas like energy, medical technology, computer
technology, and defense.

• The mutual fund industry has made overseas investing convenient with foreign fun mutual
funds, whose policies foster investing on an international basis.

• Some mutual funds have specialized approaches and don’t fit neatly into any other category;
these are called specialty funds.

• There is also a fund of funds that manages a portfolio of different mutual fund shares.

• Mutual funds that automatically adjust the risk profile of the fund as the investor gets older is
referred to as a target fund or lifecycle fund.

• Aggressive growth stock funds provide the highest return; they also have the biggest risk.

• If investors need income, bond funds provide the highest annual current yield.

• Growth income and balanced funds are most appropriate for those wanting growth of
principal and moderate current income.

• The prospectus contains information deemed essential by the SEC to provide full disclosure
to investors; this includes funds investment objectives, policies, risk, management, and
expenses.

• A fund that distributes at least 90% of its net investment income and capital gains is not
subject as in handy to federal income tax. Most funds operate this way.

• Though the mutual fund may not be subject to taxation, its shareholders are.

• When you own a mutual fund, the manager decides when to buy and sell, so you end up with
a capital gain or loss at the managers discretion.

• Mutual funds can provide the following services: automatic investment, safekeeping, exchange
privilege, a pre-authorized check plan, systematic withdrawal plan, and checking privileges.

• With Dollar cost averaging, the investor buys a fixed dollars worth of a given security at regular
time intervals, regardless of its price or the current market outlook.

• By using such a strategy, investors are conceding they cannot always accurately predict the
market; the intent of the strategy is to avoid buying high and selling low. 

• When prices are high, relatively few were shares are bought, when prices are low,
accumulation of shares increases.

• Unit investment trusts are investment companies designed for purchasing a pool of securities
which usually consist of tax exempt municipal bonds.

• Unit investment trusts (UIT’s) are usually passive investments, normally purchasing assets and
holding them for the benefit of owners for a specific period.

• Since UIT’s are formed with the intention of keeping all the initially purchased assets until
maturity, there is little interest rate risk associated with them.

• Investors in unit investment trusts can be assured of recovering initial investments, plus
interest.

 Chapter 5

• Top down overview of the valuation process consists of an economic analysis, an industry
analysis, and then a company analysis.

• Government economic policy has been guided by the Employment Act of 1946, and has been
modified by position statements issued from the Federal Reserve Board, the President’s
Council of Economic Advisers, another Congressional acts.

• Some of the objectives of the Employment Act of 1946 include maintaining stable prices with a
low inflation rate, business stability at high levels of production, sustain real gross and gross to
Mestic product, and a balance and international payments.

• Fiscal policy includes all the government taxing and spending policies.

• When the government receives less than what it spends the government runs into a deficit
which must be financed by the treasury department.

• A surplus occurs where revenues exceed expenditures.

• Monetary policy determine appropriate levels for the money supply and interest rates that
accomplish the economic goals of the employment act of 1946.

• Reserve requirements represent the percent of total deposits at the bank must hold his gas in it
small or as deposits in federal reserve banks.

• The discount rate is the rate the Federal Reserve charges commercial banks on short term
loans.

• In open market operations, the Fed sell securities in the open market and purchasers write
checks to pay for their securities which causes a contraction in the money supply.

• As a consequence of the process above the increase in the supply of treasury bills sold forces
the prices down while pressuring interest rates on the securities to go up, enticing buyers to
purchase more of them.

• The troubled as it relief program allowed the US treasury to purchase or insured up to 700
billion worth of troubled assets that were primarily subprime mortgage or securities
collateralized by mortgages.

• Determine acid back securities loan facility allowed the federal reserve to buy acid back
securities back by student loans auto loans loans to small businesses guaranteed by the small
business and ministration and credit cards.

• These funds are not managed by the US treasury and therefore are under the soul jurisdiction
of the federal reserve.

• Gross domestic product measurement measures only output from US factories in consumption
within the United States.

• Since really gross domestic product is the measure of economic output in real terms, it is in the
best interest to stimulate the economy in such a way so that all gains made do not end up
eroded by inflation.

• Consumer expectations are leading indicator of economic activity; when increases this bodes
well for spending and when it decreases this indicate a possible contraction in spending.

• The components of gross domestic  product include personal consumption, gross private
domestic investment, net exports of goods and services, and government consumption and
gross investment.

• When the economy expands and contracts this is known as a business cycle process.

• Hey try represents the end of every session in the beginning of an expansion, while a peak
represents the end of an economic expansion in the beginning of a recession.

• Leading indicators change direction advance of  General business conditions and are at prime
importance to the investor who wants to anticipate rising corporate profits and possible price
changes in the stock market.

• Coincident indicators moved approximately what the general economy while lagging indicators
change directions after business conditions of turned around.

The 10 most important leading indicators include:

Average weekly hours, manufacturing

Initial claims for unemployment insurance

Manufactures new orders, consumer goods and materials

Manufactures new orders, non-defense capital goods

Index of supplier deliveries, avenger performance

Building permits, new private housing units

Stock prices, 500 common stocks

Money supply, M2

Interest rates bread, 10 year treasury bonds last federal funds

Index of consumer expectations

 Chapter 6

• When using a top down approach analysis you are going from the macroeconomic view point
to the individual company.

• The opposite is the bottom up approach which starts from picking individual companies and
then looking at the industry in general and then the economy to see if there is a reason to not
invest in the company.

• People who favor the bottom up approach are referred to as stock pickers. Those who use the
opposite approach are considered industry analysts.

• Industry life cycles are generated because of economic growth patterns, competition,
availability of resources, and the resultant market saturation by the particular goods and
services offered. These cycles influence many variables considered in stock valuation
processes.

• In the development stage, companies are getting started in business with a new idea, product,
or production technique that makes them unique.

• The growth stage represents an industry or company that has achieved a degree of market
share for its products.

• In the expansion stage, sales process and earnings continue but at a decreasing rate. As
industries crossed from the growth stage to the expansion stage, growth slows.

• The above point is known as the crossover point and is important to the analyst who will be
evaluating declining returns on their investment in a particular company. It is at this point that
more competition enters the market and attempts to take away market share from the pre-
existing firm.

• Maturity occurs when an industry’s sales grow at a rate equal to economic growth as
measured by the long-term trends in the gross domestic product.

• Analyst will also compare the growth rate of a mature firm to the growth rate of the  S&P 500
index since this index consists of mature companies.

• In decline stages, industries suffer sales losses since product innovation has not increased the
product base over a few years.

• Monopolies occur when a market is controlled by a single firm.

• They are usually broken up by government antitrust laws, but when the government allows
them to exist, such as in the utility industries, the government reserves the right to regulate
these firms.

• Oligopolies have few competitors and require high entry barriers to overcome if one wants to
start a new business in a market dominated by oligopolies.

• Pure competition is an economic system where there is no dominant market actor and
absolutely no government regulation.

Porters five competitive forces include:

Threat of entry by new competitors

Threat of substitute goods

Bargaining power of buyers

Bargaining power of suppliers

Rivalry among existing competitors

• Rotational investing involves moving in and out of various industries over the business cycles.

 Chapter 7

• Valuation of firms is based on economic factors, industry variables, analysis of financial statements,
and the outlook for the individual firm.

• Valuation process determines the long run fundamental economic value of a company’s common
stock.

• Models that rely on expected dividend earnings in future are referred to as dividend valuation models.

• Earnings valuation models substitute income stream for the basis of valuation, rather than dividend
expectations.

• The risk-free rate is a function of the real rate of return and expected rate of inflation.

• Beta is a measure of an individual  company’s risk against the market risk. It is usually compared
against the S&P 500 index.

• Equity risk premium involves the extra return or premium the the stock market must provide
compared with the rate of return  on US government treasury securities.

• One deficiency of the beta variable is that it has a tendency to revert to 1.0, which is considered
stable, over time, even if they are not really stable stocks.

• High betas tend to move down while low beta stocks tend to move up; when put together an in large
portfolio of stocks,  they balance out.

• With equity risk premium, it jumps around with investors changing attitude toward risk aversion; in
markets that are strong and where investors are greedy they may reduce equity risk premiums; they
do the exact opposite in bear markets.

• In the short term, stockholders may be influenced by changing earnings of the stock, but the ultimate
value of any holding rests with the distribution of earnings in the form of dividend payments.

• Most analysts do not except the premise of a constant growth rate in dividends or earnings; they
recognize that all firms and industries are subject to life stage cycles.

• Financial analyst who wants to value a company without assuming constant growth like to identify
specific growth periods with a present value.

• Sustainable growth model is looking at how much growth a firm can generate by maintaining the
same financial relationships as the year before.

• Equity is usually defined as being equal to the firm’s assets minus its liabilities, it’s net worth, and it’s
book value.

• With retention ratio, the more earnings a firm retains, the higher the growth rate for that firm.

• The growth stock is defined as the common stock of the company that generally grows faster than
the economic and market norm.

• Growth companies generate returns on assets on a yearly basis and have sales that are growing at an
increasing rate. Many of these companies are found in stage one or stage two of the lifecycle curve.

• Price to earnings ratios is the price per share divided by earnings per-share, and is ultimately set by
investors in the market as they bid the price of the stock up or down in relation to its earnings.

• The overall market price to earnings ratio is the collective average individual price to earnings ratio‘s,
those factors that influence the market price to earnings ratio do not necessarily affect price to
earnings ratios for individual companies.

• In the least squares trend analysis, a trend line is fitted to a timeline covering a series of historical
earnings;  this line is usually a straight line that minimizes the distance of the individual observations
from a line.

• Hidden assets are not readily apparent to investors in the traditional sense but add substantial value
to the firm.

 Chapter 8
• Income statement is used for measuring the profitability of a firm over a period of time; 

• Income statements records earnings and expenditures for a firm in a specified time segment.

• Balance sheets indicate what the firm’s assets and how these assets are financed; either in the form
of liabilities or ownership interest.

• The purpose of the statement of cash flows is to emphasize the critical nature of cash flow to the
operations of the firm.

• Cash flow represents cash or cash equivalent items that can be converted easily into cash within 90
days.

• The income statement and balance sheet are normally based on the accrual method of accounting,
where revenues and expenses are recognized as they occur.

• Primary advantage of accrual accounting is that it allows investors to match revenues and expenses
in the period in which they occur to more accurately measure profit.

• Statement of cash flows  translates the income statement and balance sheet’s data into cash flow
information.

• The three primary sections of the statement of cash flow‘s include:  cash flows from operating
activities, cash flows from investing activities, cash flows from financing activities.

• Three variables mentioned above are added up to determine the net increase or decrease in cash for
the firm.

Financial ratios are used to weigh in evaluate the operating performance and capital structure of a firm.

• Z score was developed to predict potential failure of firms.

It considers the following set of variables:

Retained earnings in total assets

Standard deviation operating income and total assets during the last 10 years

Earnings before interest and taxes and total assets

Current assets and current liabilities

Market value of common stock and the book value of equity

Total assets in general

• There are 20 significant ratios  that are divided into six primary groupings:

Profitability ratios

Assess utilization ratios

Liquidy ratios

Debt utilization ratios

Price ratios

Other ratios

• For investors, the most sensitive ratios are profitability and debt utilization ratios.

• For bankers and trade creditors, the most sensitive variables are related to the firm’s ability to meet
debt obligations.

• For bondholders, the most sensitive consideration would be debt to total asset ratios.

• Profitability ratios measure the ability of a firm to generate adequate return on sales, total assets, and
invested capital.

• One method of determining profitability is the DuPont analysis system. This system emphasizes
sources of a company‘s profitability.

• It also stresses that the return on equity stems from the return on assets, adjusted for the amount of
financial leverage, using total debt to asset ratios.

• Asset utilization ratios measure the speed at which a firm is turning over accounts receivable,
inventory, and longer term assets.

• Asset utilization ratios relate the sales on income statements to the various assets on the balance
sheet.

• Liquidity ratios determine a firm’s ability to pay off short term obligations as they come due.

• Debt utilization ratios indicate the way to firm is financed between debt and equity and therefore
helps analyst determine the amount of financial risk present in the firm.

• Price ratios relate the internal performance of firms to the external  judgment of the marketplace in
terms of value.

• Dividend yields are part of the total return the investor receives along with capital gains or losses
associated with a stock share.

• Dividend payout ratio provides data concerning the firm’s reinvestment strategies. It represents
dividend per-share divided by earnings per share.

• Over the course of business cycles, sales and profitability may expand or contract, leaving ratio
analysis for any one year non representative of the total long-term performance of the firm.

• In a trend analysis, ratio based performance analysis is conducted over a number of years to
determine a firm’s long-term performance.

• Inflation may cause unexplained profit increases that may mislead analysts.

• Profits may be more of a function of increasing prices, or inflation, rather than satisfactory
performance.

• With inflation adjusted accounting, the effects of inflation on the financial statements of firms are
factored in.

• Extraordinary gains and losses may occur from sales of assets, lawsuits, or similar isolated events
that would not be expected to occur and would not be expected to occur often.

• Some analysts think that these events should be included in computing current income of a firm,
while others choose to leave these events out when assessing operating performance.

• Financial analysts are usually assigned specific industries that they learn inside and out, as it would
be unrealistic for analysts to master a transient cycles of numerous industries.