General Financial Knowledge - Part 1

Credit Rating Agencies

• Major credit rating agencies include Standard and Poor's, Moody's, and Fitch Group.
• They assess the creditworthiness of borrowers and use a standardized rating scale to evaluate potential investor losses if defaults occur.
• Moody's rating scale ranges from Aaa (highest quality) to C (lowest quality).

Initial Public Offering (IPO)

• An IPO is the inaugural sale of a private company’s stock to the public.
• Underwriting firms (e.g., Barclays, Credit Suisse, Morgan Stanley) assist in determining the type of security to issue, pricing, number of shares, and timing.
• Investing in IPOs carries risks due to limited historical data for evaluation, making price predictions challenging.

Retirement Plans

• Defined Benefit Plan: Guarantees a specified retirement pension amount, regardless of current cash availability (impacting states like Illinois).
• Defined Contribution Plan: Requires the employer to have sufficient cash to fund the retirement plan directly.
• Cash Balance Plan: A hybrid plan that combines elements of defined benefit and 401(k) plans, with a minimum annual return of 3%.

Types of Orders for Trading Shares

• Four main types of orders: Market, Limit, Stop Loss, and Stop Limit.

Market Order

• Guarantees transaction at the current market price.
• Ideal for immediate asset trading.

Limit Order

• Does not ensure immediate execution; sets a price for buying (below market) or selling (above market).
• Executes only when the stock reaches the specified price.

Stop Loss Order

• Protects against significant losses; transforms into a market order once a predetermined price is reached.
• Sell Stop Loss Order: Triggers a sale at market price if the stock dips below a set limit.
• Buy Stop Loss Order: Converts to a market order for purchase when the stock hits a specified high.

Stop Limit Order

• Combines features of stop orders and limit orders.
• Triggers a trade once the stock reaches a specific "stop" price but does not exceed a set "limit" price.
• Useful for entering markets during price recoveries while avoiding overpaying.

Example of Stop Limit Order

• An investor places a stop-limit order for a stock at $45 stop price and $46 limit price.
• Once the stock price hits $45, the order becomes a limit order; however, it may become void if the limit can't be fulfilled promptly.