Ch. 1 - The Stock Market

Question 1

What is an equity?

Answer 1

Ownership of corporation (stocks)

Question 2

Shares

Answer 2

Portions of a stock

Question 3

What is a dividend? Possible benefit?

Answer 3

The portion of corporate profits paid out to holders

- paid 4 times a year

Question 4

What are capital gains? capital loss?

Answer 4

Gain - sell stock higher than bought

Loss - sell stock lower than bought

Question 5

What are the types of stock?

• by dividend
• by vote

Answer 5

By dividend…

1) Income Stock
2) Growth Stock

By vote…

1) Common Stock
2) Preferred Stock

Question 6

What is an income stock?

Answer 6

Pays dividend regularly (Guaranteed payment)

Question 7

What is a growth stock?

Answer 7

Pay few/no dividend. The reason is that the company reinvests $ into the business so value will go up.

Question 8

What is a common stock?

Answer 8

Voting owners of a stock.

Question 9

What is a preferred stock?

Answer 9

Non voting owners but receive dividends first

Question 10

What is a stock split and why?

Answer 10

The division of a single share of stock into more than one share. Due to high stock price potential investors are discouraged, so divide stock to lower price.

Question 11

Why are stocks riskier than bonds?

Answer 11

Though returns are higher, if there is a bankruptcy then bondholders get money back first

Question 12

Stockbroker?

Answer 12

A person who links buyers and sellers of stock

Question 13

Brokerage firm

Answer 13

A business that specializes in trading stocks.

Question 14

Stock exchange?

Answer 14

A market for buying/selling stock

Question 15

What is the New York Stock Exchange (NYSE)?

Answer 15

The US’s largest/powerful exchange. Handles only the largest and best known companies.

Question 16

What are blue chips?

Answer 16

Refers the the largest and best known companies of NYSE.

Question 17

What is the OTC market?

Answer 17

Electronic marketplace for stock/bond

Question 18

What is the National Association of Securities Dealers Automated Quotations (NASDAQ)?

Answer 18

The American market for OTC securities.

Question 19

What are futures?

Answer 19

Contracts to buy or sell at a specific date in the future at a price specified today. (grain/livestock)

Question 20

What are options?

Answer 20

Contracts that give investors the choice to buy/sell stock for a specified price for an amount of time

Question 21

What is a call option?

Answer 21

The option to buy shares of stock at a specified time in the future.

Question 22

What is a put option?

Answer 22

The option to sell shares of a stock at a specified time in the future.

Question 23

What is daytrading?

Answer 23

Predict minute-by-minute changes based on computer and do a dozen of trades (risky)

Question 24

What is bull market?

Answer 24

A steady rise in the stock market over a period of time

Question 25

What is bear market?

Answer 25

A steady drop in the stock market over a period of time

Question 26

What is the Dow?

Answer 26

An index that shows how certain stocks have traded - 30 largest companies in various industry - changes to represent stock market overall

Question 27

What is the S&P 500?

Answer 27

An index that shows the price changes of 500 different stocks. - mainly NYSE

Question 28

What is the Great Crash?

Answer 28

The collapse of the stock market in 1929.

Question 29

What is speculation?

Answer 29

The practice of making high-risk investments with borrowed money in hopes of getting big returns

Question 30

What is IPO?

Answer 30

Initial Public Offering. First high an investment banking to figure out how much $ can be raised. Then file with SEC (Securities and Exchange Commission) the financial statements.

Question 31

Why do stock prices fluctuate?

Answer 31

Driven by supply/demand. Demand depends on past performance, current profile, industry, upcoming profits, health of economy, and current events. - reflects the worth determined by investors

Question 32

What is yield?

Answer 32

Dividend over the price. Want a higher yield.

Question 33

What is EPS?

Answer 33

Earnings per share. Shows how much each share is worth in relation to how much company is making.

Question 34

What is P/E?

Answer 34

Price to earning. Compares company to competitors. How much an investor is willing to pay for $1 of company earnings. Speaks of demand. Can show over value and under value.

Question 35

What is a cyclical stock?

Answer 35

Luxury industries for good economic times.

Question 36

What is defensive stock?

Answer 36

Necessities for not so good economic times.