Chapter 11 - Investing in stocks Flashcards
Full-Service Broker
can provide you with investment advice and executes transactions.
Market order
An order to buy or sell stock at its prevailing market price
Limit Order
An order to buy or sell a stock only if the price is within limits that you specify
what are the 6 things to know about a company?
1) Financial performance
2) Company’s track record
3) Business costs
4) Leadership
5) Risk factors
6) Dividend history
Current ratio
Current ratio = Current assets/ current liabilities
Quick Ratio
Current assets - Inventory/Current liabilities
Receivables turnover
(Credit) Sales/Accounts Receivable
Inventory turnover
cost of goods sold divided by average daily inventory
Total asset turnover
sales divided by average total assets
Net profit margin
net profit as a percentage of sales
Return on assets
Net profit divided by total assets
Return on equity
net profit divided by the owners’ investment in the firm (Shareholders’ equity)
Technical analysis
The valuation of stocks based on historical price patterns using various charging techniques (price action)
Fundamental analysis
The valuation of stocks based on an examination of fundamental characteristics such as revenue, earnings, and/or the sensitivity of the firm’s performance to economic conditions
Dividend discount model
A method of valuing stocks in which a firm’s future dividend payments are discounted at an appropriate rate of interest
what are the limitations of the DDM Method
Dividend payments may not be stable over time
Growth rate in dividends is difficult to predict
Dividends may not accurately reflect the cash flows available to shareholder
Model cannot be applied to firms that do not pay dividends
Earnings per share
this is the amount of each share would get if a company paid out all of its profit to its shareholders. EPS Is calculated by dividing the company’s total profit by the number of shares
P/E
this measures the relationship between the earnings of a company and its stock price. It’s calculated by dividing the current price per share of a company’s stock by the company’s earnings per share.
Efficient stock market
a market in which stock prices fully reflect information that is available to investors
Inefficient stock market
A market in which stock prices do not reflect all public information that is available to investors.
How to assess a stock’s performance?
1) Find out your rate of return
2) Assess your progress towards your goals
3) Measure your results against other investments
Venture capital
refers to investors funds destined for risky, generally new businesses with tremendous growth potential
Market makers
Securities dealers who are required to trade actively in the market so that liquidity is maintained when natural market forces cannot provide sufficient liquidity
Discount brokerage firm
executes transactions but does not offer investment advice cheaper than a full-service brokerage
