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FIN2303 > Chapter 12: Investing in Stocks > Flashcards

Chapter 12: Investing in Stocks Flashcards

1
Q

Stock Exchanges

A

facilities that allow investors to purchase or sell existing stocks

A stock must be listed on a stock exchange in order to be traded there

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2
Q

Canadian stocks are traded on two markets:

A

1.Toronto Stock Exchange (TSX)
-Where senior equities are traded
TSX Venture Exchange
-Serves the public venture capital market
2.Montreal Exchange
-A derivatives exchange created for investors interested in trading options and futures
-Part of the TMX Group

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3
Q

Venture capital

A

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

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4
Q

To be listed on the TSX, a firm must meet minimum listing requirements in areas such as:

A 
revenue,
cash flow,
net tangible assets,
working capital, and
cash
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5
Q

Other Stock Exchanges

A
  1. NYSE Euronext
    -Resulted from a series of consolidations between seven stock exchanges and six derivatives markets from six countries
    -Includes the New Your Stock Exchange
    -A world leader for listings, stock market, trading, derivatives, bonds, and the distribution of market data
    2 NASDAQ and AMEX
    .refers to the transformation of a firm from a member-owned organization to a publicly owned for-profit organization
    -The National Association of Securities Dealers Automated Quotation (NASDAQ) provides continual market price information on stocks that meet its requirements on size and trading volume
    -The American Stock Exchange (AMEX) lists about 800 stocks that are generally smaller and less actively traded than those on the NYSE Euronext

3.Over-the-Counter (OTC) Market

an electronic communications network that allows investors to buy or sell securities

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6
Q

Demutualization

A

refers to the transformation of a firm from a member-owned organization to a publicly owned for-profit organization

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7
Q

Where can you find stock quotes?

A

Stockbrokers
Financial newspapers (e.g. Globe & Mail)
Business sections of local newspapers
Financial news television networks (e.g. BNN)
Financial websites

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8
Q

Selecting a Broker

A

Analyst Recommendations

   - A full-service broker can provide you with investment advice
    - Some advisers may suggest that you buy or sell securities frequently
    - Recommendations made by brokers or analysts do not necessarily lead to better performance
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9
Q

Discount brokerage firm:

A

: a brokerage firm that execute transactions but does not offer investment advice

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10
Q

Full-service brokerage firm

A

a brokerage firm that offers investment advice and executes transactions
Full-service brokerage firms tend to charge higher fees

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11
Q

Placing an Order

Must specify the following:

A

Name and class of the stock,
Buy or sell,
Number of shares
Market order or limit order

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12
Q

Name and Class of the Stock

Ticker symbol:

A

the abbreviated term used to identify a stock for trading purposes

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13
Q

Number of Shares

Board lot

A

shares bought or sold in multiples of typically 100 shares. The size of the board lot depends on the price of the security

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14
Q

Number of Shares

Odd lot:

A

less than a board lot of that particular stock

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15
Q

Market order

advantage and disadvantage?

A

an order to buy or sell a stock at its prevailing market price
Advantage: you are assured that your order will be executed quickly
Disadvantage: stock price could change abruptly just before you place your order

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16
Q

Limit order:

A

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

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17
Q

Stop Orders:

On-stop order:

A

an order to execute a transaction when the stock price reaches a specified level; a special form of limit order

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18
Q

Stop Orders:

Buy stop order:

A

an order to buy a stock when the price rises to a specified level

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19
Q

Stop Orders:

Sell stop order:

A

an order to sell a stock when the price falls to a specified level

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20
Q

Placing an Order Online

advantages?

A

Advantages:
The commission charged per transaction is very low
Convenience

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21
Q

Buying Stock on Margin

A

On margin:
: purchasing a stock with a small amount of personal funds and a portion of the funds borrowed from a brokerage firm

Enable you to purchase stocks without having the full amount of cash necessary

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22
Q

Margin call:

A

a request from a brokerage firm for the investor to increase the cash in the account in order to return the margin to the minimum level

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23
Q

Analysis of a Firm:Annual Report

A

Includes a corporate profile, a message from the firm’s CEO, and a section summarizing recent performance and expected future performance
Also contains financial statements

24
Q

Analysis of a firm: Balance sheet:

A

a statement that indicates a firm’s sources of funds and how it has invested its funds as of a particular point in time
- assets, liabilities, shareholder’s equity.

25
Q

income statement

A

a financial statement that measures a firm’s revenues, expenses, and earnings over a particular period of time

26
Q

analysis of the firm: firm-specific characteristics

A

Firm-Specific Characteristics

   - Liquidity
           - Shows the firm’s ability to cover expenses
            - Current ratio: the ratio of a firm’s short-term assets to its short-term liabilities
27
Q

Analysis of a firm:Financial leverage:

A

a firm’s reliance on debt to support its operations

Used to determine a firm’s ability to make debt payments

28
Q

Analysis of a firm:Debt ratio

A

a measure of financial leverage that calculates the proportion of total assets financed with debt

29
Q

Analysis of a firm:Times interest earned ratio:

A

a measure of financial leverage that indicates the ratio of the firm’s earnings before interest and taxes to its total interest payments

30
Q

Analysis of a firm:Efficiency

A

A firm that generates a relatively low level of sales and earnings with a large amount of assets is not using its assets efficiently

31
Q

Analysis of a firm:Inventory turnover:

A

a measure of how efficiently a firm manages its inventory; computed as the cost of goods sold divided by average daily inventory

32
Q

Analysis of a firm:Average collection period

A

used to determine the average age of accounts receivable; computed as accounts receivable divided by average daily sales

33
Q

Analysis of a firm:Asset turnover ratio:

A

used to assess how efficiently a firm uses its assets; computed as sales divided by average total assets

34
Q

Analysis of a firm:Operating profit margin:

A

a firm’s operating profit divided by sales

35
Q

Analysis of a firm:Net profit margin:

A

: a measure of profitability that measures net profit as a percentage of sales

36
Q

Analysis of a firm: Return on Assets

A

a measure of profitability; computed as net profit divided by total assets

37
Q

Analysis of a firm: return on equity

A

: a measure of profitability; computed as net profit divided by the owners’ investment in the firm (shareholder’s equity)

38
Q

Analysis of a firm:Focus on Ethics: Accounting Fraud

Motivation for Fraud

A

Stock price helps determine manager compensation

Leads to a short-tem focus

39
Q

Analysis of a firm:Focus on Ethics: Accounting Fraud

Revenue-Inflating Techniques

A

Recognizing revenue before it is earned

Recognizing revenue from orders that are likely to be cancelled

40
Q

Preventing Future Accounting Fraud

A

=Auditor’s may not always be “independent”
=Sarbanes-Oxley Act was created in order to restore investor confidence in the markets and to prevent future occurrences of accounting fraud

41
Q

Economic Analysis of Stocks

A

Involves assessing any economic conditions that can affect a firm’s stock price

42
Q

Economic growth:

A

the growth in a country’s economy over a particular period; commonly measured by GDP

43
Q

Gross domestic product (GDP):

A

the total market value of all products and services produced in a country

44
Q

Fiscal policy:

A

how the government imposes taxes on individuals and corporations and how it spends tax revenues

  • Tax increases, corporate and individual, can have a negative impact on economic growth
  • Taxes may have to be increased to grow an economy, create jobs, and provide services
45
Q

Interest Rates

A

Stocks perform better when interest rates are low
Firms tend to be more willing to expand
The demand for stocks increases

46
Q

Monetary policy:

A

techniques used by the Bank of Canada to affect the economy of the country

47
Q

Inflation:

A

the increase in the general level of prices of products and services over a specified period

48
Q

Consumer price index (CPI):

A

a measure of inflation that represents the increase in the prices of consumer products such as groceries, household products, housing, and gasoline over time

49
Q

Stock Valuation

A

Price of a stock is based on the demand for that stock versus the supply of stock available for purchase
Identify a firm that you think may perform well in the future
Buy a stock when you think that it is undervalued
Value a stock using technical or fundamental analysis

50
Q

Technical analysis:

A

the valuation of stocks based on historical price patterns using various charting techniques

51
Q

Fundamental analysis:

A

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

52
Q

Dividend Discount Model (DDM) Method

A

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

Works best for mature firms that pay a large stable dividend

53
Q

Limitations of the DDM Method

A
  • 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 shareholders
  • Model cannot be applied to firms that do not pay dividends
54
Q

Price-Earnings (P/E) Method

A

Based on the value of the firm’s earnings
a method of valuing stocks in which a specific firm’s earnings per share are multiplied by the mean industry price-earnings (P/E) ratio

55
Q

Limitations of the P/E Method

A

-Forecasting earnings is is difficult
-What is the proper P/E multiple that should be used to value a stock?
-Results will vary depending on the firms selected to derive a mean industry P/E ratio
=Some firms are involved in multiple industries

56
Q

Stock valuation: Stock market efficiency : Efficient stock market:

A

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

57
Q

Stock valuation: Stock market efficiency:Inefficient stock market:

A

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

FIN2303 (11 decks)

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