Chapter 11 - Investing in stocks

Question 1

Full-Service Broker

Answer 1

can provide you with investment advice and executes transactions.

Question 2

Market order

Answer 2

An order to buy or sell stock at its prevailing market price

Question 3

Limit Order

Answer 3

An order to buy or sell a stock only if the price is within limits that you specify

Question 4

what are the 6 things to know about a company?

Answer 4

1) Financial performance
2) Company’s track record
3) Business costs
4) Leadership
5) Risk factors
6) Dividend history

Question 5

Current ratio

Answer 5

Current ratio = Current assets/ current liabilities

Question 6

Quick Ratio

Answer 6

Current assets - Inventory/Current liabilities

Question 7

Receivables turnover

Answer 7

(Credit) Sales/Accounts Receivable

Question 8

Inventory turnover

Answer 8

cost of goods sold divided by average daily inventory

Question 9

Total asset turnover

Answer 9

sales divided by average total assets

Question 10

Net profit margin

Answer 10

net profit as a percentage of sales

Question 11

Return on assets

Answer 11

Net profit divided by total assets

Question 12

Return on equity

Answer 12

net profit divided by the owners’ investment in the firm (Shareholders’ equity)

Question 13

Technical analysis

Answer 13

The valuation of stocks based on historical price patterns using various charging techniques (price action)

Question 14

Fundamental analysis

Answer 14

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

Question 15

Dividend discount model

Answer 15

A method of valuing stocks in which a firm’s future dividend payments are discounted at an appropriate rate of interest

Question 16

what are the limitations of the DDM Method

Answer 16

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

Question 17

Earnings per share

Answer 17

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

Question 18

P/E

Answer 18

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.

Question 19

Efficient stock market

Answer 19

a market in which stock prices fully reflect information that is available to investors

Question 20

Inefficient stock market

Answer 20

A market in which stock prices do not reflect all public information that is available to investors.

Question 21

How to assess a stock’s performance?

Answer 21

1) Find out your rate of return
2) Assess your progress towards your goals
3) Measure your results against other investments

Question 22

Venture capital

Answer 22

refers to investors funds destined for risky, generally new businesses with tremendous growth potential

Question 23

Market makers

Answer 23

Securities dealers who are required to trade actively in the market so that liquidity is maintained when natural market forces cannot provide sufficient liquidity

Question 24

Discount brokerage firm

Answer 24

executes transactions but does not offer investment advice cheaper than a full-service brokerage