Investing in Stock

Question 1

Stocks

Answer 1

represent ownership of a company

Question 2

Privately held company

Answer 2

a relatively small number of stockholders and the stock is not publicly traded

Question 3

Public company

Answer 3

• Through Initial Public Offering (IPO): a company’s first sale of stock to the public, a private company becomes a public company
• Subsequent sale of stocks through seasoned offering

Question 4

equity

Answer 4

the value of shares issued by a company

Question 5

Preferred stock

Answer 5

-A hybrid security carries the characteristics of debt and equity
-Pays a fixed dividend as a percentage of par value
-Has priority over common shares for payment of dividends
-Terms are negotiable
-Carries no voting rights
-Cumulative feature:
Unpaid cash dividends accumulate and must be paid before any cash dividends are paid to the common stock holders.
-Conversion feature:
Can convert for shares of common stock and provide a growth potential

Question 6

Common Stock

Answer 6

-Distributions by company is discretionary
-Pay dividends as declared by the board of
directors
-Price varies reflecting the value of the company
-Shareholders’ Rights:
@voting rights to elect the board of directors @only a residual claim on assets and earnings
@all other claims must be paid before shareholders can receive any distribution
@Shareholders are the last to receive any money in a bankruptcy

Question 7

Why company s issue common stock?

Answer 7

• To raise capital
• No need to repay the money
• Dividends are not mandatory
• In return for investing in the company, stockholders have voting rights to select board of directors and decide other major company policies.

Question 8

Bull Market

Answer 8

A period in which stock prices in general are consistently rising

Question 9

Bear Market

Answer 9

A period in which stock prices on multiple broad market indexes have decreased 20% or more over at least a two-month period

Question 10

Market Index

Answer 10

-overall summary of a specific market or sector of a market
-notices trends
-as a benchmark to compare the performance
of other stocks or mutual funds

Question 11

calculation methods for market indexes

Answer 11

-Price-weighted
-Value-weighted (most used)
-Equal-weighted
Examples:
-Dow Jones Industrial Average (DJIA)
-S&P 500 – Standard & Poor’s 500
-Nasdaq

Question 12

Market order

Answer 12

Buy or sell stocks at current market price

Question 13

Limit Order

Answer 13

Lets you set a maximum or minimum price

before your stock trade gets converted to a market order

Question 14

Day Order

Answer 14

Expires at the end of the trading day if it is not filled

Question 15

Good-’til-Canceled Order

Answer 15

Your order will not expire for (typically) five days

Question 16

Extended-Hours Order

Answer 16

Allows you to place orders before or after the market is closed

Question 17

All-or-None Order

Answer 17

Trade is only executed if the entire order can be done in a single transaction (i.e., buy 500 shares of Disney)

Question 18

Short-Sell Order

Answer 18

Selling stock that you do not own believing the price will drop and you can buy the stock at a lower price than you sell it later on

Question 19

Buy-to-Close Order

Answer 19

Closes the transaction of the short- sell order

Question 20

Buy-to-Close Order

Answer 20

Closes the transaction of the short- sell order

A short sell order means you tell your broker to sell shares of stock that you don’t own. If the stock falls, you can close the transaction with a buy-to-close order, replacing the borrowed stock and pocketing the difference.

To take advantage of the situation, you enter a short sell order for 1,000 shares, borrowing the $10,000 worth of ABC shares (1,000 shares x $10 each) from your broker, selling them on the open market, and pocketing the cash. You hope that the price of ABC common stock will fall, you’ll be able to purchase the shares at a lower price and return them to your broker, pocketing the difference. If, for example, ABC fell to $7 per share, you could repurchase the 1,000 shares for $7K by placing a buy to cover order, return them to your broker and pocket the $3K profit.

Question 21

Stop and Stop-Limit Order

Answer 21

Buy or sell once the price goes up to reach the “stop price”

Question 22

Trailing-Stop Order

Answer 22

Will sell your stock only if it falls a specific amount from the highest price

Question 23

Bracketed order

Answer 23

a trailing-stop order with an upper limit trigger price that places a sell order

Question 24

Growth Companies

Answer 24

Earnings are expected to grow significantly

more than other companies

Question 25

Blue Chips

Answer 25

High-quality stocks; low-risk stocks with a relatively constant and good rate of return

Question 26

Penny stocks

Answer 26

New or erratic companies whose stock typically sells for less than $1 per share.

Question 27

Income Stocks

Answer 27

A stock that has a relatively high dividend yield. The stock’s issuer is typically a firm having stable earnings and dividends and operating in a mature industry. The price of an income stock is heavily influenced by changes in interest rates.

Question 28

Large cap stocks

Answer 28

Shares of companies with market value (market capitalization) larger than US$5 billion

Question 29

Mid cap stocks

Answer 29

Shares of companies with market value between

US$1 billion and US$5 billion.

Question 30

Small cap stocks

Answer 30

Shares of companies with market value of

US$500 million or less

Question 31

Cyclical stocks

Answer 31

Follows the business cycle of advances and

declines in the economy

Question 32

Defensive stocks

Answer 32

Defensive stocks

Question 33

Dividends

Answer 33

Profits distributed to the stockholders

Question 34

Dividend yield

Answer 34

The annual return received from dividends if you purchase the stock and the dividend payments remain unchanged

Question 35

Book value

Answer 35

total assets - liabilities

Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.
2. By being compared to the company’s market value, the book value can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.

Question 36

P/E ratio

Answer 36

the ratio of a stock’s price (P) to its earnings per share (EPS)

Example:
If P = $50.00 and EPS = $2.50 then P/E = $50.00/$2.50 = 20
Investors are willing to pay $20 for each $1.00 of the company’s earnings.

Question 37

Market- to-book ratio

Answer 37

This ratio compares the stock price (market value) with its book value to find a relative value.

Example:
If the price of a stock is $40/share and the book value is $10/share, then the market-to-book ratio is 4 ($40/$10)