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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
income statement
a financial statement that measures a firm’s revenues, expenses, and earnings over a particular period of time
26
analysis of the firm: firm-specific characteristics
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
Analysis of a firm:Financial leverage:
a firm’s reliance on debt to support its operations | Used to determine a firm’s ability to make debt payments
28
Analysis of a firm:Debt ratio
a measure of financial leverage that calculates the proportion of total assets financed with debt
29
Analysis of a firm:Times interest earned ratio:
a measure of financial leverage that indicates the ratio of the firm’s earnings before interest and taxes to its total interest payments
30
Analysis of a firm:Efficiency
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
Analysis of a firm:Inventory turnover:
a measure of how efficiently a firm manages its inventory; computed as the cost of goods sold divided by average daily inventory
32
Analysis of a firm:Average collection period
used to determine the average age of accounts receivable; computed as accounts receivable divided by average daily sales
33
Analysis of a firm:Asset turnover ratio:
used to assess how efficiently a firm uses its assets; computed as sales divided by average total assets
34
Analysis of a firm:Operating profit margin:
a firm’s operating profit divided by sales
35
Analysis of a firm:Net profit margin:
: a measure of profitability that measures net profit as a percentage of sales
36
Analysis of a firm: Return on Assets
a measure of profitability; computed as net profit divided by total assets
37
Analysis of a firm: return on equity
: a measure of profitability; computed as net profit divided by the owners’ investment in the firm (shareholder’s equity)
38
Analysis of a firm:Focus on Ethics: Accounting Fraud Motivation for Fraud
Stock price helps determine manager compensation | Leads to a short-tem focus
39
Analysis of a firm:Focus on Ethics: Accounting Fraud Revenue-Inflating Techniques
Recognizing revenue before it is earned | Recognizing revenue from orders that are likely to be cancelled
40
Preventing Future Accounting Fraud
=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
Economic Analysis of Stocks
Involves assessing any economic conditions that can affect a firm’s stock price
42
Economic growth:
the growth in a country’s economy over a particular period; commonly measured by GDP
43
Gross domestic product (GDP):
the total market value of all products and services produced in a country
44
Fiscal policy:
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
Interest Rates
Stocks perform better when interest rates are low Firms tend to be more willing to expand The demand for stocks increases
46
Monetary policy:
techniques used by the Bank of Canada to affect the economy of the country
47
Inflation:
the increase in the general level of prices of products and services over a specified period
48
Consumer price index (CPI):
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
Stock Valuation
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
Technical analysis:
the valuation of stocks based on historical price patterns using various charting techniques
51
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
52
Dividend Discount Model (DDM) Method
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
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 shareholders - Model cannot be applied to firms that do not pay dividends
54
Price-Earnings (P/E) Method
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
Limitations of the P/E Method
-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
Stock valuation: Stock market efficiency : Efficient stock market:
a market in which stock prices full reflect information that is available to investors
57
Stock valuation: Stock market efficiency:Inefficient stock market:
a market in which stock prices do not reflect all public information that is available to investors

FIN2303 (11 decks)

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