Chapter 1 Flashcards
(51 cards)
represents an ownership interest in the business enterprise
Equities
What is a security?
An investment that represents either an ownership stake or a debt stake.
How does an investor become part owner of a corporation?
By buying shares of the company’s stock.
What is a debt security?
An investment acquired by buying an issuer’s bonds, representing a loan to the issuer.
What is the primary benefit of purchasing stock in a company?
Sharing in earnings through dividends and benefiting from an increase in share price.
Define common stock.
Equity (ownership) in a corporation issued to raise capital.
What do common stockholders receive from a company?
A portion of the company’s earnings, dividends, and a proportionate vote in major management decisions.
What is the role of a board of directors?
To oversee company business and make major management decisions.
If a corporation issues 100 shares of stock, what percentage of ownership does 10 shares represent?
10% ownership.
What are the two types of stock that corporations may issue?
Common and preferred stock.
What is preferred stock?
Equity that usually does not have the same voting rights or appreciation potential as common stock.
What is a key characteristic of preferred stock?
It usually pays a fixed dividend and has priority claims over common stock.
How does preferred stock react to market changes?
Its price fluctuates with changes in interest rates rather than the issuing company’s business prospects.
True or False: Most preferred stock has voting rights.
False.
What is the relationship between preferred stock and interest rates?
Its price is price sensitive to interest rate changes due to fixed dividend payments.
Fill in the blank: Common stockholders do not receive dividends until _______ have been paid theirs.
preferred shareholders
What happens to preferred stockholders in the event of a company’s bankruptcy?
They have a prior claim on any remaining assets.
What is interest rate or money rate risk?
The concept that the rate of return on preferred stock is fixed and its price tends to fluctuate with changes in interest rates.
What is capital appreciation?
An increase in the market price of securities, historically providing returns in excess of the inflation rate.
Why do investors include common stock in their portfolios?
As a hedge against inflation, especially for those with a long-term investment horizon.
Can stock prices decline?
Yes, stock prices can decline, particularly over the short run.
What is an example of capital appreciation?
An investor bought shares of RST for $60 per share and sold them for $90, resulting in a 50% increase in market price.
Example: RST shares increased from $60 to $90.
What are cash dividends?
Regular payments made by corporations to stockholders, which may increase over time as profitability increases.
