Midterms

Question 1

It is the buying shares in a company with the goal of making profit in a firm of dividends.
It refers to acquisition of shares of stocks of other corporations to realize profit upon their sale and for periodic income (in the form of dividends).

Answer 1

Stock Investment

Question 2

It is a unit of ownership in a corporation so that stock investment is in effect an investment in a portion of the equity in a corporation. Thus, it is generally in the form of common stock which carries with it the right to vote and to share in corporate earnings after providing for preferred stock.

Answer 2

Shares of Stocks

Question 3

Stocks Classified Based on Rights of Stockholders

Answer 3

1. Common stock
2. Preferred stock

Question 4

This represents the basic ownership in a corporation.
It carries with it the right to vote on corporate matters, shares in profits after providing for the shares of preferred stock therein, and absorbs corporate losses before any portion thereof is charged to preferred stock. The percentage of ownership in a corporation is measured based on common shares owned.
As an example, Jack Vinluan owns 30,000 shares of the common stock of XYZ Corporation. If the latter has 100,000 common shares outstanding, Jack Vinluan must have 30% interest in the corporation. With this percentage of interest in XYZ Corporation, he has significant influence in its administration and can elect his own men to at least 30% of the board seats.

Answer 4

Common Stock

Question 5

This refers to that portion of owner’s equity that enjoys preferences over common stock.
These may be in the distribution of earnings and/or distribution of assets in case of liquidation. Preferred stock as to dividends may be further classified into cumulative,
participating, and cumulative and participating.

Answer 5

Preferred stock

Question 6

Classification of Preferred stocks

Answer 6

1. Cumulative
2. Participating
3. Cumulative and Participating

Question 7

Classification of Preferred stocks that received past dividends

Answer 7

Cumulative

Question 8

Classification of Preferred stocks that received extra dividends

Answer 8

Participating

Question 9

Receiving past dividends and extra dividends

Answer 9

Cumulative and Participating

Question 10

Stocks classified based on the nature of Business

Answer 10

1. Banks and Financial services
2. Industrial and Commercial
3. Mining and oil

Question 11

Stocks Classified Based on Risk and Earnings Potential

Answer 11

1. Blue chips
2. Growth stocks
3. Cyclical socks
4. Defensive stocks
5. Speculative stocks

Question 12

Shares of big companies with high market value.
These belong to large companies which have a long record of earnings and dividend payments. They are also known as value stocks.
Although returns are moderate, they are low-risk and are dependable.
Examples are San Miguel Corporation,
PLDT, MERALCO and AYALA Corporation.
Investment in this kind of stocks is called value investment.

Answer 12

Blue Chips

Question 13

Shares of a company that are growing faster.
These belong to corporations with growth rate faster than that of the general economy. The growth may be in terms of revenue, net income and productive assets. At the time of this writing,an example is Globe Telecom with its fast increasing subscribers and consequently, revenue.Another is Filinvest Land, Inc. with its increasing land bank.

Answer 13

Growth of Stocks

Question 15

Shares of a company that rises and fall depending in the economy. Their earnings and prices move with the changes in the national economy.
Examples are those of corporations engaged in high-cost real estate (Ayala Land Corp.) and in recreation and amusements (BW resources).

Answer 15

Cyclical stocks

Question 16

Stocks that remain stable.
Their earnings are not affected so much by changes in the economy. They belong to corporations engaged in foods and public utilities.
Examples are San Miguel Corporation,
Jollibee Corporation, MERALCO, PLDT and Globe Telecom.

Answer 16

Defensive stocks

Question 18

Stocks that are not yet fully operated.
These belong to companies that are not yet operating but are expected to do so in the future.
At the time of this writing,
examples are Omico Corporation and Island Mining Corporation.

Answer 18

Speculative stocks

Question 19

Size of a company based on the stock value.
It refers to the total market value of shares of stock listed in the stock exchanges. Accordingly, stocks are classified as first liners, second liners, and third lines.
Examples of first liners are San Miguel Corporation and Philippine Long Distance Telephone Co.
For second liners, some of these are MUSIC Corporation, IONICS and Filinvest Land, Inc.
For third liners, Omico Corp., Fairmont (formerly, BW Resources, Inc.) and Atlas Mining Corp. are examples.

Answer 19

Market capitalization

Question 20

How easy to buy and sell the stock

Answer 20

Marketability

Question 21

Stocks classified based in Market capitalization

Answer 21

1. First liner
2. Second liner
3. Third liner

Question 22

Stocks classified based on citizenship of investors

Answer 22

1. Class A
2. Class B

Question 23

Stocks may be bought by Filipinos only.

Answer 23

Class A

Question 24

Foreign investors are allowed to buy this stock only due to the prohibition for foreigners to own more than 40% equity in a Philippine corporation. Thus, Class B stocks of a corporation should not exceed 40% of its total number of common shares outstanding. The restriction applies to foreign investors so that a Filipino citizen can buy both Class A and Class B stocks. In case the holder of Class B stock decides to sell his holdings but there is no buyer, they may be sold as Class A.

Answer 24

Class B

Question 25

Stocks Values

Answer 25

1. Par value 2. Book value

Question 26

Minimum price at which a company can issue a share. It is the the nominal value assigned to a share as appearing on the stock certificate. It is minimum amount at which a share of stock may be originally issued.

Answer 26

Par Value

Question 27

It is based on the company's accounting record. It is the value of a stock based on the value of stockholders’ equity per books of accounts. The stockholders’ equity per books is equal to assets at book value minus liabilities. The book value therefore does not reflect the current value of stock because most of the assets per accounting records are stated at historical cost.

Answer 27

Book value

Question 28

Company's net worth per share

Answer 28

Net asset

Question 29

Actual price of a stock when traded in a stock market

Answer 29

Value

Question 30

Parties involved in stock investment

Answer 30

1. Stock market 2. Stock Broker 3. Stock clearing office 4. Stock transfer office 5. The investor

Question 31

It is an organization that facilitates the trading of stocks, warrants and other securities listed therein. As defined in the Revised Securities Act (RSA) an exchange is an organized market place or facility that brings together buyers and sellers and executes trades of securities and/or commodities. Section 32 and 33 require that an exchange must be a stock corporation and be registered with SEC. All stocks listed in the exchange are in the custody of the Philippine Center Depository.

Answer 31

Stock exchange

Question 32

It is where stocks are bought and sold. These may be done in the stock exchange or in the over-the-counter market.

Answer 32

Stock market

Question 33

Private marketplace to buy and sell unlisted sticks. It refers to trading of securities that are not listed in the stock exchange. The securities traded are usually those corporations that are relatively new, those intending to concentrate their ownership to relatively few stockholders, corporations that have not yet qualified for public listing and those that are making their initial public offering (IPO) through the brokers. The volume of over-the-counter trading is relatively thin. This is due to the fact that securities traded therein are not readily marketable because the broker still has to look for buyers or sellers in case an investor desires to sell or buy securities. Daily results of over-the-counter trading are not published.

Answer 33

Over-the-counter market

Question 34

It is an individual or company duly licensed by the SEC to participate in trading in the stock exchange. He should have an adequate understanding of securities, financial statements, periodic reports, and basic economic theory. He must be familiar with financial history and must update on economic and political developments so that he may be in a position to correlate the past with what may happen in the future and consequently anticipate price changes. A stockholder earns commissions on all “buy” and “sell” orders done.

Answer 34

Stock Broker and Stock Dealer

Question 35

It Verify if stock is sold.

Answer 35

Stock clearing office

Question 36

Keep records I'm owners of stocks. Where corporation takes care of the transfer of stocks (covered by stock certificates) from the name of the seller to that of the buyers. It maintains a complete list of the corporation’s stockholders and the number of shares each has. It takes charge of notifying shareholders of stockrights and mailing dividend checks and stock certfiicates.

Answer 36

Stock transfer office/agent

Question 37

Anyone who buys and sells stock to make profit

Answer 37

Investors

Question 38

It refers to the speed at which prices go up and down. The more volatile a market is, the bigger are the potential profits and losses on the short-term. An aggressive stock trader would buy on “lows” and sell on “highs” while a conservative investor would prefer to hold on to his shares as long-term investment.

Answer 38

Price Volatility

Question 39

Over the counter market

Answer 39

1. New companies 2. Companies with limited ownership 3. Companies with their first public offering

Question 40

The range or limit on how stock prices can go up and down or one day. It refers to the range within which the price of a stock may change in one day’s trading. It has been set at 60% to 150% of the previous day’s closing price. In other words, a stock’s price may increase by not more than 50% and may decline by not more than 40% of the previous day’s market price. Example: The market price of XYZ stock on October 1st was at P50. On the next trading day, October 2nd, there is an increase in the demand for the stock so that the market price goes up abruptly. However, once the price reaches P75 (or 150% of P50), the exchange will not allow it to go up further. On the other extreme, if there is a sharp decline in the demand for the stock, the price will not be allowed to go down lower than P30 (or 60% of P50). The price band is adopted by the exchange to protect investors who are apt to the affected by the frenzy in which others buy or sell and consequently buy at very high prices or sell at a significant loss.

Answer 40

Price Band

Question 41

Acts as middleman in stock transactions. It is the entity wherein interbroker payments and transfers of stocks are coursed through so that each broker does not have to deal directly with all the others. At present, the clearing houses of the Makati and Mandaluyong stock exchanges are RCBC and the Security Clearing Corp. of the Philippine (SCCP).

Answer 41

Clearing House

Question 42

Functions of Stock Transfer office/agent

Answer 42

1. Transfers ownership 2. Keep records of stockholders 3. Handles important notices 4. Sends payment and certificates

Question 43

Good time to sell or avoid buying. In cases wherein the price has gone up or has reached an all-time high, that it would be advisable to sell the particular stock or to refrain from buying

Answer 43

Overbought

Question 44

Good time to buy as price drop. When the price of a stock has gone down so low, they are said to be oversold so that it is time to buy.

Answer 44

Oversold

Question 45

Refers to when stock price has gone up to the extent that sellers outnumber buyers. refers to the highest price that a stock can command. It is the price at which sellers exceed buyers so that the tendency of the market price is to go down. In the given example, the first price resistance is P35 and the second, P37. When market price has gone up so much, the stock is considered overbought so that it is time to sell it.

Answer 45

Price Resistance

Question 46

Acts as a safety net for stock price. It refers to the lowest price that a stock can command. In other words, it is the price at which buyers exceed sellers so that the tendency of the price is to go up. In the given example, the price support for X stock is P25 because after reaching this level, it rebounds to P29. The price went down so much so that the stock is considered oversold and it is time for the buyers to come in.

Answer 46

Price Support

Question 47

Happens when the price movement of one stock affects the behavior of the other stock

Answer 47

Domino Effect

Question 48

Prices are rising. It is derived from the coarse and forceful characteristics a bull. A market is said to be bullish when prices increasingly move upwards. In other words, despite some technical corrections arising from profit taking, technical rallies result in higher price resistance. It is associated with investors optimism, economic recovery, government stimuli and political stability.

Answer 48

Bullish markets

Question 49

Prices are falling. is based on the rude and surly characteristics of a bear. In a bearish market, prices are dropping continuously. There may be technical rallies from time to time but both price resistance and support continuously decline. It is associated with pessimism, economic downtrend, government restraints and political instability.

Answer 49

Bearish markets

Question 50

Happens when there is: 1. Strong economy and business growth 2. Government support and good policies 3. Political stability 4. More people investing in stocks

Answer 50

Causes Bullish markets

Question 51

Happens when: 1. Economic recession 2. High inflation 3. Government restrictions 4. Political instability

Answer 51

Causes of Bearish markets

Question 52

4 ways to track the price movement

Answer 52

1. Reading newspapers 2. Watching Tv or business programs 3. Professional advice 4. Attending stock market gathering/meetings

Question 53

Buying more stocks when prices are dropped. It refers to lowering average unit cost by buying more at lower price. As applied to stocks, an investor gradually buys shares at lower prices because no one can definitely state when the lowest price is already reached. It can be identified only after one or two weeks.

Answer 53

Down Averaging

Question 54

Buying when it's low. Some investors buy index stocks when the composite index is low and then sell them when it has gone high enough. Index stocks are those included in the computation of the composite index. The composite index is considered too low when most of the stocks are trading at much lower than book value or the price earnings ratio is too low and vice-versa.

Answer 54

Index investing

Question 55

When stock dividend is declared by a corporation, there are four dates involved. These are the dates of declaration, record, ex-dividend and issuance of the corresponding stock certificates.

Answer 55

1. Date of Declaration 2. Date of Record 3. Date of ex-divided trading 4. Date of issuance

Question 56

When the company officially announced the stock dividends

Answer 56

Date o Declaration

Question 57

Update who qualifies for the stock dividends. This refers to the cut-off date in determining whose names appear in the stock and transfer book of the corporation and are therefore entitled to the stock dividend.

Answer 57

Date of record

Question 58

Traded without dividends. This refers to the date on which the stock is to be traded ex-dividend or as separated from the stock dividend. This is usually two to four days before the official date of record. Due to voluminous transactions affecting the stocks of a listed corporation, a number of days is allowed for the bookkeeping lag. The price of the stock on this date is expected to go down to reflect the decrease in the book value per share. If a 100% stock dividend has been declared and the market price before the stock goes ex-dividend P500, it is expected to go down to p250 (or P500/(1+100%) when traded ex-dividend.

Answer 58

Date of ex-dividend trading

Question 59

Company officially distributes the new shares. This is relevant for a stock investor because of the additional shares he is receiving and the effect of the additional shares on the market price of the stock.

Answer 59

Date of issuance

Question 60

Happens when the company changes it's core values of shares. are changes in par value of corporate stock bringing about the corresponding changes in the number of shares outstanding and market value per share. It may be split-up or splitdown (or reverse split). On the part of the investor, he should bear in mind that a stock split does not affect the total value of his shareholdings and his proportionate interest in the corporation.

Answer 60

Stock splits

Question 61

Types of stock splits

Answer 61

1. Split up 2. Split down

Question 62

This refers to a reduction in par value per share to bring about an increase in the number of outstanding shares and the proportionate decrease in the market value per share. It is undertaken to improve the marketability of the stock.

Answer 62

Split up

Question 63

Trading is based on price trends and the attitude of investors toward a specific stock. The investor keeps track of price changes and may even go to the extent of using graphs. He buys at the “lows” and sells at the “highs”.

Answer 63

Investing based in technical analysis

Question 64

Based in financial strength of a company. This is also called value investing because it is based on the value of the underlying corporation which is measured in terms of book value, net asset value, earnings per share and price-earnings ratio.

Answer 64

Investing based on fundamental analysis

Question 65

When an investor places his “buy” or “sell” order with his stockbroker, he may give the exact price at which to buy or to sell. However, the order might not be carried out because actual price may be one or two fluctuations higher or lower. It is therefore advisable to give the stockbroker some leeway in carrying out clients’ orders by giving him a price range instead of just definite price at which to buy or sell. Sometimes, an investor’s order is “good till cancelled” or in the form of a “stop loss” order.

Answer 65

Nature of instructions to stockbrokers

Question 67

2 nations of instructions

Answer 67

1. Exact Price order 2. Price range order

Question 68

Standing order. Remains valid till cancelled and valid untill 1 week. is one that is to be observed from day to day until it is carried out or until the investor cancels it. Stockbrokers consider a GTC order as valid for a period of one week only. Example: Jose Lopez gave an order to buy for his account 10,000 shares of SM Prime Holdings Corp. at P7.00, GTC, on March 1st. If the broker is unable to buy them on March 1st or on any of the succeeding days, the order is always brought forward to the succeeding trading day until it is carried out within six trading days from March 1st. If the broker is unable to buy for the investor until the sixth day, the investor has to renew or revise his order.

Answer 68

Good till cancelled order

Question 69

Order to sell his shares in a price that dropped in a certain level to reduce loss. refers to an investor’s order to sell his shares if prices go below a certain level in order to minimize his loss. This is done when prices are going down at a very fast rate and are therefore expected to go down further. Example: The stock of XYZ Corp. has been declining for two consecutive days at the rate of 12% to 20% per day so that it is expected to go down further from its current price of P165. A stock trader may order his broker to sell his shares if they go down below say, P151 to avoid further losses. The reason for this is that most traders believe that if market price goes down by 10% in one day’s trading, it is expected to go down further.

Answer 69

Stop Loss order

Question 70

Investor borrows money to stockbroker. means that an investor buys stocks but does not fully pay for them. The amount of liability he incurs is called the margin. This practice is undertaken to earn more in case the market price of the particular stocks bought goes up. It is very risky because in case the market price goes down, the investor’s capital can easily be wiped out. In an extreme case, he may even become insolvent. Example: Juan Pablo who has investable funds of P200,000 buys 20,000 shares of Equitable-PCI Bank stocks at P55.00 or for a total of P1,100,000. He is given three days to pay the full amount. If he cannot pay the full amount, he would be forced to sell the stocks in three days. If the market price of the stock goes up to P60.00 in three days, he stands to gain P100,000. But if it goes down to P50, he loses P100,000 or onehalf of his capital.

Answer 70

Buying on margin

Question 71

Minimizing risks in stock investment

Answer 71

1. Do your homework 2. Diversify your stock investments 3. Bearing the market 4. Avoid trading on margin 5. Know when it is advisable to cut losses 6. Remain focus on long-term objectives