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Stocks > Beginner's Guide > Flashcards

Beginner's Guide Flashcards

1
Q

A stock is…

A

A share of ownership in a company.

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2
Q

Market cap or market capitalization is…

A

The number of stocks times the price per stock

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3
Q

What does it mean to day the Stock Market is a forward looking mechanism?

A

The stock market tries to figure out what is most likely to happen in the next 3 to 6 months and price the stock accordingly.

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4
Q

What does it mean if a stock “ gaps up”?

A

It opens much higher than where it was trading the previous day.

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5
Q

Why does a higher than expected earnings report take several days or even weeks to complete the resulting move up?

A

Because big institutional players (mutual funds, pensions, hedge funds) are buying more shares of the stock driving it closer to its “ fair value” price based on the new info. When one is buying millions of dollars worth of stock as these players can do it takes hours, days, or even weeks.

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6
Q

What is the difference between traders and investors?

A

Traders hold stocks for only an hour, week, or month.

Investors hold stocks for many years.

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7
Q

What is a stock exchange?

A

A place where buyers and sellers show up and exchange their shares for money, or their money for shares.

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8
Q

What are the two most well-known exchanges in the U.S.?

A

The New York Stock Exchange ( NYSE) and the Nasdaq.

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9
Q

What is the NYSE?

A

The New York Stock Exchange which is know for its blue chip ( high quality) stocks like Coca-Cola and McDonalds. NYSE stocks are usually identified by a two letter identifier like KO for Coca-Cola.

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10
Q

What is the Nasdaq?

A

The Nasdaq is a stock exchange best know for tech stocks like Netflix and Apple. Nasdaq stocks usually have 4 letter tickers like AAPL for Apple, but occasionally have 2 letter tickers like FB for Facebook.

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11
Q

What is a broker or brokerage account?

A

A middleman that gives people access to the Stock Market.

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12
Q

What are some well-known brokers in the U.S.?

A

Charles Schwab, Interactive Brokers, TD Ameritrade, TradeStation, Fidelity, and E*Trade.

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13
Q

What is a broker that does not charge a commission fee?

A

Robinhood.com

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14
Q

What are the two types of stock orders?

A

Market order and a limit order.

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15
Q

What is the bid price?

A

The bid is the price someone is willing to pay for a stock.

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16
Q

What is the offer or “ask”?

A

The price at which someone is willing to sell the stock.

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17
Q

What is the important phrase about bid and ask?

A

You sell to the bid, and you buy from the ask.

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18
Q

What is the “ bid-ask spread”?

A

The distance between the bid and the ask.

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19
Q

What is a liquid stock?

A

A stock where you can buy or sell a lot of shares without moving the stock too much. They usually have a bid-ask spread of only a penny ir two.

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20
Q

Why is it usually OK to do a market order on a liquid stock?

A

A market order will tell the broker you want to buy from the ask. Since it is just a penny ir so away from the bid price, your order will usually be filled close to where you are currently seeing the stock trade.

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21
Q

What is a market order?

A

An order to the broker to buy the stock at the the ask, and to get you into the stock as quickly as possible, regardless of the price. Only safe with liquid stocks due to the low bid-ask spread.

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22
Q

What is an illiquid stock?

A

A stock with a high bid-ask spread. If bought with a market order, the price could be far away from the current market or from where it last traded.

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23
Q

What is a limit order?

A

A limit order specifies the price you are willing to pay. If no seller willing to sell at that price, your order will never be filled.

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24
Q

What are the two time options for a stock purchase?

A

A Day order or a GTC (Good ‘Till Canceled) order.

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25
Q

What is a Day order?

A

An order that will only be executed during regular market hours (9:30-4) that day. If the order has not been filled by the closing time, it will be automatically canceled by the broker.

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26
Q

What is a GTC order?

A

A Good ‘Till Canceled order. It will be good for that day’s market hours and the following days and weeks until it is canceled. Some brokers automatically cancel a GTC order after a month or more if it has not been filled.

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27
Q

What are normal trading hours for the US Stock exchanges?

A

9:30 EST to 4:00 EST

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28
Q

What is a pre-market trading session?

A

Trading stocks between 4 am and 9:30 am EST.

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29
Q

What is a post-market trading session?

A

Trading stocks between 4 and 8 pm EST.

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30
Q

What type of order should you use in pre- or post- market trading?

A

A limit order because even normally liquid stocks can be volatile during those times.

31
Q

What can make a stock volatile?

A

A stock with a lower trading volume is usually volatile and is usually paired with a wide bid-ask spread that also bounces around

32
Q

What order type should NEVER be used with an IPO?

A

A market order due to the inherent volatility of an IPO.

33
Q

What is an index?

A

A collection of stocks.

34
Q

What are some well known indices?

A

S&P 500, Dow Jones Industrial Average, Nasdaq 100

35
Q

What is the S&P 500?

A

The 500 U.S. Stocks with the largest market caps. It is market- cap weighted, meaning the companies with the largest market caps are given higher weightings and thus have a greater influence on the index. If a large company has a bad day the index will go down more than if a smaller company has a bad day.

36
Q

What is a market-cap weighted index?

A

In a market- cap weighted index the companies with the largest market caps are given higher weightings and thus have a greater influence on the index. If a large company has a bad day the index will go down more than if a smaller company has a bad day.

37
Q

What is the DJIA?

A

The Dow Jones Industrial Average. It is collection of 30 large, mature, profitable, fairly stabke and well known companies, eg, blue chip stocks.

38
Q

What is an ETF?

A

An exchange traded fund. It is a way to buy into an index without having to buy one of every stock in the index.

39
Q

What is the ticker SPY?

A

The ETF for the S&P 500.

40
Q

What is the ticker DIA?

A

The ticker for the ETF for the Dow Jones Industrial Average.

41
Q

What is the ticker QQQ?

A

The ticker for the ETF for the Nasdaq 100.

42
Q

What is indexing?

A

Buying an index and holding it for the long-term as a form of “passive” investing.

43
Q

Why is indexing less profitable than before?

A

In the old days, very few people practiced indexing, which guaranteed pretty good returns. Nowadays, 50-70% of the money in the stock market is tied to indexing, resulting in lower investment returns.

44
Q

Why is indexing still recommended?

A

Because most people lose money when they try to trade or invest on their own because active investing strategies are more difficult.

45
Q

How do you invest in indexing?

A

By investing the same dollar amount into an index every month so you never buy all your stock at the top of the market. This way you end up with a pretty good average price. This practice is called “cost averaging”.

46
Q

What is “cost averaging”?

A

Buying a stock or index/ ETF at different times so you do not buy all your stock at the top of the market and get a more average price.

47
Q

What is a mutual fund?

A

A pooled collection of assets that invests in stocks, bonds, and other securities. This is often referred to as a portfolio. Mutual fund investors do not own the securities in which they invest–they only own shares in the fund itself. They are managed by a professional who is reviewing the portfolio on an ongoing basis. Mutual funds allow you to buy or sell your fund shares once a day at the close of the market at the funds NAV, or Net Asset Value.

48
Q

What is NAV?

A

Net Asset Value. The price of a mutual fu d determined by the total value of securities in the portfolio divided by the number of fund’s outstanding shares.

49
Q

What is asset allocation?

A

The practice of spreading your investments out (diversifying) among different types of investments with the goal of minimizing risk while making the most of investment growth.

50
Q

What is a good expense ratio for a fund?

A

1% max

51
Q

What significance does large- medium- and small- cap mean?

A

Large cap companies carry low risk but make less money. Medium- cap are moderately risky, and small-cap are the riskiest but have the biggest payoffs.

52
Q

What is performance?

A

Rate of return

53
Q

What significance does a fund’s turnover ratio have?

A

A low turnover ratio of 10% or less shows the management team has confidence in its investments and isn’t trying to time the market for a bigger return.

54
Q

What is a portfolio?

A

The investments the mutual fund makes including stocks, bonds, etc.

55
Q

What are sectors?

A

Types of businesses the fund invests in such as financial services or Healthcare. You want a well- diversified fund usually.

56
Q

What is the Vanguard 500?

A

A low-cost mutual fund which only charges an expense ratio ( annual fee) equal to 0.04% of your investment.

57
Q

How should one invest in SPY?

A

Buy some and keep 30 years. Don’t check daily stock or index prices. Note: If stock prices have been falling for 6 months or more and there is pessimism in the air…that might be a good time to invest in index funds because lower stock prices allow you to buy more shares of stock for the same dollar that you could if stocks were higher.

58
Q

What should one buy if stock prices have been falling 6 months and pessimism in air?

A

Index funds since you can get more for your buck then in normal times.

59
Q

How often does a dividend stock pay into your brokerage account?

A

Every 3 months (quarterly).

60
Q

What is “dividend yield”?

A

The dividends received in a year divided by the price you paid for the stock.

61
Q

What is a Dividend Aristocrat?

A

A company like McDonalds, Coca Cola, Colgate-Palmolive or Johnson & Johnson that has raised dividends for past 25 years.

62
Q

What is NOBL?

A

The ProShares S&P 500 Dividend Aristocrat ETF.

63
Q

Why are Dividend stocks often good investments?

A

To make dividends the company is making money.

64
Q

What is a good way to use Warren Buffet’s stock list?

A

To buy them when price goes below what he paid gor them. To get this price, take the cost for each stock and divide by the number of shares. Or buy a basket of stocks Buffett owns and only sell when you hear he has exited.

65
Q

What is BRK-B?

A

B shares of Berkshire Hathaway that are managed by Warren Buffett, Charlie Mu ger, and their successors.

66
Q

Why are financial institutions good stocks?

A

They are highly leveraged and make a lot in good times and get bailed out by the government in bad times.

67
Q

What is the significance of pricing power?

A

You want to own businesses with good pricing power meaning they can raise prices without losing customers. If Coke raises their price 10 cents you barely notice, but if the gas station raises prices 10 cents you might go to competitor if they are less. Price competitive businesses like corn, oil, or generic clothing have a lot if competition and razor thin margins and poor pricing power.

68
Q

What is the problem with price competitive businesses?

A

They have poor pricing power, razor thin margins, and a lot of competition.

69
Q

What is value investing?

A

Buying something for less than it’s worth, like looking for a company with net cash of $20 per share and trying to buy shares of its stock for $15 dollars. Or buying stock in a company that had a P/ E of just 5 or 6. Warren Buffett used this strategy in early years, but it no longer works.

70
Q

What is P/E?

A

Price to earnings ratio.

71
Q

What is TTM P/E and how do you calculate it?

A

Trailing Twelve Month Price to Earnings Ratio. Take stock price and divide by amount of earnings per share (EPS) over the past twelve months.

72
Q

What significance is P/E?

A

Companies that are growing revenues or earnings quickly (“growing stocks”) have P/E’s above 25. Companies in trouble often have P/E’s below 10. Don’t ever buy a stock with a P/E of 10 or less until you become an advanced investor.

73
Q

What is the problem with “bargain stocks” or “cheap stocks”?

A

When the P/ E of a company hits a 5 year low and gets such a label, they are being priced in future bad news and often crash. Also a low or falling stock price makes it difficult for the company to attract top talent.

74
Q

What is the advantage of growth and momentum stocks?

A

A company with a high or rising stock price can use that stock to buy out competitors and pay for top talent.

Stocks (1 decks)

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