Investing in Stock Flashcards
Stocks
represent ownership of a company
Privately held company
a relatively small number of stockholders and the stock is not publicly traded
Public company
- Through Initial Public Offering (IPO): a company’s first sale of stock to the public, a private company becomes a public company
- Subsequent sale of stocks through seasoned offering
equity
the value of shares issued by a company
Preferred stock
-A hybrid security carries the characteristics of debt and equity
-Pays a fixed dividend as a percentage of par value
-Has priority over common shares for payment of dividends
-Terms are negotiable
-Carries no voting rights
-Cumulative feature:
Unpaid cash dividends accumulate and must be paid before any cash dividends are paid to the common stock holders.
-Conversion feature:
Can convert for shares of common stock and provide a growth potential
Common Stock
-Distributions by company is discretionary
-Pay dividends as declared by the board of
directors
-Price varies reflecting the value of the company
-Shareholders’ Rights:
@voting rights to elect the board of directors @only a residual claim on assets and earnings
@all other claims must be paid before shareholders can receive any distribution
@Shareholders are the last to receive any money in a bankruptcy
Why company s issue common stock?
- To raise capital
- No need to repay the money
- Dividends are not mandatory
- In return for investing in the company, stockholders have voting rights to select board of directors and decide other major company policies.
Bull Market
A period in which stock prices in general are consistently rising
Bear Market
A period in which stock prices on multiple broad market indexes have decreased 20% or more over at least a two-month period
Market Index
-overall summary of a specific market or sector of a market
-notices trends
-as a benchmark to compare the performance
of other stocks or mutual funds
calculation methods for market indexes
-Price-weighted
-Value-weighted (most used)
-Equal-weighted
Examples:
-Dow Jones Industrial Average (DJIA)
-S&P 500 – Standard & Poor’s 500
-Nasdaq
Market order
Buy or sell stocks at current market price
Limit Order
Lets you set a maximum or minimum price
before your stock trade gets converted to a market order
Day Order
Expires at the end of the trading day if it is not filled
Good-’til-Canceled Order
Your order will not expire for (typically) five days
Extended-Hours Order
Allows you to place orders before or after the market is closed
All-or-None Order
Trade is only executed if the entire order can be done in a single transaction (i.e., buy 500 shares of Disney)
Short-Sell Order
Selling stock that you do not own believing the price will drop and you can buy the stock at a lower price than you sell it later on
Buy-to-Close Order
Closes the transaction of the short- sell order
Buy-to-Close Order
Closes the transaction of the short- sell order
A short sell order means you tell your broker to sell shares of stock that you don’t own. If the stock falls, you can close the transaction with a buy-to-close order, replacing the borrowed stock and pocketing the difference.
To take advantage of the situation, you enter a short sell order for 1,000 shares, borrowing the $10,000 worth of ABC shares (1,000 shares x $10 each) from your broker, selling them on the open market, and pocketing the cash. You hope that the price of ABC common stock will fall, you’ll be able to purchase the shares at a lower price and return them to your broker, pocketing the difference. If, for example, ABC fell to $7 per share, you could repurchase the 1,000 shares for $7K by placing a buy to cover order, return them to your broker and pocket the $3K profit.
Stop and Stop-Limit Order
Buy or sell once the price goes up to reach the “stop price”
Trailing-Stop Order
Will sell your stock only if it falls a specific amount from the highest price
Bracketed order
a trailing-stop order with an upper limit trigger price that places a sell order
Growth Companies
Earnings are expected to grow significantly
more than other companies
Blue Chips
High-quality stocks; low-risk stocks with a relatively constant and good rate of return
Penny stocks
New or erratic companies whose stock typically sells for less than $1 per share.
Income Stocks
A stock that has a relatively high dividend yield. The stock’s issuer is typically a firm having stable earnings and dividends and operating in a mature industry. The price of an income stock is heavily influenced by changes in interest rates.
Large cap stocks
Shares of companies with market value (market capitalization) larger than US$5 billion
Mid cap stocks
Shares of companies with market value between
US$1 billion and US$5 billion.
Small cap stocks
Shares of companies with market value of
US$500 million or less
Cyclical stocks
Follows the business cycle of advances and
declines in the economy
Defensive stocks
Defensive stocks
Dividends
Profits distributed to the stockholders
Dividend yield
The annual return received from dividends if you purchase the stock and the dividend payments remain unchanged
Book value
total assets - liabilities
Book value is the accounting value of a firm. It has two main uses:
- It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.
- By being compared to the company’s market value, the book value can indicate whether a stock is under- or overpriced.
- In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.
P/E ratio
the ratio of a stock’s price (P) to its earnings per share (EPS)
Example:
If P = $50.00 and EPS = $2.50 then P/E = $50.00/$2.50 = 20
Investors are willing to pay $20 for each $1.00 of the company’s earnings.
Market- to-book ratio
This ratio compares the stock price (market value) with its book value to find a relative value.
Example:
If the price of a stock is $40/share and the book value is $10/share, then the market-to-book ratio is 4 ($40/$10)
