Stock Market Terms

Question 1

Bull Market

Answer 1

When the market is on the rise and Investors expect that stock prices will go up.

Question 2

Bear Market

Answer 2

Prices fall steadily for a sustained period of time. (Technically at least a 20% decline in any of the major market indexes that last for at least 60 days.

Question 3

Balance Sheet

Answer 3

snapshot of the corporation on the last day of the fiscal year. Shows the company’s assets, liabilities, and equity: what they own, what they owe, and their net worth.

Question 4

Income Statement

Answer 4

Shows you the company’s profitability over the year. Starts with revenues, then subtracts costs and expenses to get to the net profit or loss, the bottom line.

Question 5

Cash Flow Statement

Answer 5

Tracks how much cash has moved in and out of the company during the year. Tells you where the money is coming from, very important when considering buying a stock.

Question 6

10-K and 10-Q

Answer 6

These documents contain a wealth of information about the company, including an overview of the business, financial statements and disclosures, and a look at the corporate management team.

In these docs it is Important to look at:

· Comparing this year to last

· Comparing actual profits to expectations

· Read through “Management Discussion” (lets investors know what is going on behind those numbers, things that are changing, and what management expects to happen)

Question 7

Form 8-K

Answer 7

When a major issue comes up that doesn’t quite fit into the standard reporting timetable.

· Also can include things like selling major assets, replacing CEO, or plans to acquire another company.

Question 8

Short Selling

Answer 8

Short Sellers- Sellers that are betting that the share price of the stock they just sold will decline, hopefully far and fast

· Short selling is selling shares you don’t already own

· Ex.) You sell them first, then plan to buy them when the price drops. In the middle is your broker, who loans you the shares to sell, and whom you pay back with the shares you buy. When you place the original order, you must be explicit. When you short a stock, you also must use a margin account. That account must be worth 1

Question 9

Fundamental Analysis:

Answer 9

Fundamental Analysis: Studying the company itself, with a focus on financial statements and performance. This is most common for beginning investors.

Question 10

Ticker Symbols

Answer 10

Ticker Symbols represent the name of the corporation, and the company usually creates its own stock symbol.

· Companies listed on the NYSE use 3 letters for their ticker symbol

· Companies lists on the NASDAQ use four letters

· Shares traded over the counter (OTC) typically have 5 letters

· Shares traded on pink sheets are always followed by “PK”

· Shares traded on the OTCBB (Over the Counter Bulletin Board) will be followed by OB.

Question 11

Why they change tiker symbol

Answer 11

Two Main reasons a company would change its own symbol

1. It has merged with or been acquired by another company
2. Name change

Question 12

Earnings Per Share

Answer 12

(EPS) For most investors, earnings are the number one criterion by which to judge a company

· EPS lets you know how much of the company’s total earnings (also called profits or net income) is earmarked for each individual share of the corporation’s stock.

· The companies’ reported net income divided by the number of common shares outstanding.

Earnings are calculated by subtracting a company’s costs and expenses from their revenue.

Question 13

Price to Earnings Ratio (PE Ratio)

Answer 13

To get the PE Ratio of a company, divide the per share stock price by the current earnings per share (EPS). This basically tells you how much you’ll be paying for one dollar of the corporation’s current earnings. AVERAGE PE IS 10-17?

· For example, a P/E Ratio of 20 means that investors are willing to pay twenty times more for a stock than that stock’s related earnings per share.

· It is important to find out why a company has an exceptionally high or low PE compared to others in the industry.

· A low PE ratio could indicate that the company’s growth has been stagnant, the company is buried with excessive debt, or that the stock could be undervalued, making it a great value play.

· A high PE ratio could mean overpriced, or it could have dependable future earnings growth brought on by a recent expansion, acquisition, or new product line, good for growth investors

· Earnings Per share and PE ratio measure what happened in the corporation’s past.

Question 14

PEG Ratio

Answer 14

(Price to Earnings Growth)

· Divide the PE Ratio by the annual EPS Growth rate. This will give you an indication of the market’s expectations of the company’s future earnings.

· Good to compare to other stocks to see which one you can buy for cheaper, but more growth potential

Question 15

What Is The SEC?

Answer 15

· SEC- Strives to ensure fairness for individual investors

· Oversees FINRA

Question 16

NYSE (the big board) Listing Requirements

Answer 16

· Must have at least 1.1 million publicly traded shares of stock outstanding

· Market cap of $100 million

· Show pretax income of at least $10 million over the three most recent fiscal years

· Earnings of at least $2 million in the 2 most recent years

Question 17

NASDAQ

Answer 17

· Opened as the first fully electronic stock market in the world

· Fastest growing stock exchange in the United States

· Host the most initial public offerings (IPOs) and continually drawing companies

· Attractive to new companies because the listing requirements are less than those of the NYSE

· Cost of listing can be considerably lower

Question 18

The Dow Jones Industrial Average:

Answer 18

· Charles H. Dow created the index in 1896.

· Follows 30 of the largest and most influential corporations in the U.S.

· Stocks that compromise the Dow are considered blue chip stocks

· Uses a “point “system to indicate the changes in the index. While the points are connected to dollars, it is not a simple one-to-one ratio, and that is largely because of the way the Dow gets calculated, which is the Dow Divisor

· The media talks about the Dow in points rather than dollars because it is more dramatic to say “the Dow is up 500 points” rather than to say “the down rose by 3%”

· The Dow is a price weighted index. Its value is based on the current share price of each stock in the index.

Question 19

Standard and Poor’s 500 (S&P 500)

Answer 19

· Officially launched in March 1957

· Considered to be the benchmark for the stock market as a whole

Question 20

S&P 500 Requirements

Answer 20

· At least $5.3 billion total market cap

· Positive earnings over the most recent consecutive four quarters

· U.S. companies only

Question 21

NASDAQ 100

Answer 21

· Launched January 1985

· Included the largest a (based on market cap) and most actively traded 100 corporations (technically, it now includes 108 companies) listed on the NASDAQ stock exchange

Question 22

Russell 2000

Answer 22

· Created in 1984 by Frank Russell Company

· Follows 2,000 of the smallest companies by market cap listed on the stock exchange

· Small cap meaning ranging from $300 million- $2billion

· The Russell 2000 is one of the most volatile indexes covering the U.S. Stock Market

· Virtually covers every industry

Question 23

Market Capitalization (Market Cap)

Answer 23

Market value of all of the company’s outstanding shares.

· To calculate market cap, multiply current market price of a stock by the number of outstanding shares. (the number of outstanding shares refers to the number of shares that have been sold to the public) Ex. A stock that has 30 million shares outstanding that are currently trading for $20 each would have a market cap of $600 million.

Question 24

Market Sectors

Answer 24

A group of industries with a similar purpose

· Industry- refers to a group of companies that are in the same line of business. Sectors have a broader scope, capturing larger sections of the economy. Ex) insurance is an industry, and that industry falls in the financial sector, along with banks and brokerage firms.

Question 25

11 General Market Sectors

Answer 25

1. Basic Materials
2. Capital Goods
3. Communications
4. Consumer cyclical
5. Consumer staples
6. Energy
7. Financial
8. Healthcare
9. Technology
10. Transportation
11. Utilities

Question 26

Board of Directors

Answer 26

· Communicating directly with corporate executives

· Framing and tracking high level corporate strategies

· Making sure the corporation and its management operate with integrity

· Approving the overall corporate budget

· Hiring the corporation’s upper management team

Question 27

When a Company Goes Bankrupt

Answer 27

1. Firm must sell all of its assets. With those proceeds, company pays off all debts owed to the U.S. Government. (usually back taxes, interest, and penalties)
2. Pay bondholders (if they have any)
3. Preferred stockholders
4. Common stockholders (usually end up with nothing)

Question 28

Value Stocks

Answer 28

Described as the type of stock that you’re getting more than what you paid for, which makes it a good value.

· Good to think about is to look with solid companies that are trading at no more than three times their book value per share.

· Value investors often ignore share prices because they have nothing to do with the companies worth.

Question 29

Identify Value stocks by:

Answer 29

1. Low PE/Ratio
2. Price to sales ratio
3. Lower than average growth rates
4. PEG (Price-to-earnings growth)

Question 30

Income (Dividend) Stocks

Answer 30

Provides steady income for investors

· Solid play if generating income is your primary goal

· High dividend yield does not be reliable dividend payout

· Taxed as ordinary income

· Some people are able to live on their dividends

Question 31

Growth Stocks

Answer 31

· Very strong Growth Potential

· Sales, earnings, and market share that are growing faster than the overall economy

· Usually represent companies that are big in research and development

· Earnings in these companies are usually put right back into the business instead of paid out to shareholders in dividends

· Best perform during bull markets

· Investors pay very close attention to earnings

Question 32

Penny Stocks

Answer 32

· Stocks that trade for $5 or less

· Typically more risky

· Market cap usually low

Question 33

Dividends

Answer 33

When a company is operating profitably and ends a fiscal period with plenty of cash on hand, its directors need to decide what to do with that money. They can reinvest the cash into the business, pay down corporate debt, buy up another company, or pay dividends.

· To find the dividend yield, divide the annual dividend per share by the stock’s share price.

· Ex.) Apple pays a dividend of 50 cents per share, and the stock is trading at $25 per share. The dividend yield would be 2%. (.50/25=0.02)

· Important dividend dates

1. Declaration date
2. Ex-dividend Date
3. Date Of record
4. Payable date

Question 34

Declaration Date

Answer 34

the day the corporate board of directors announces the dividend will be paid

Question 35

The ex-dividend date-

Answer 35

if you are buying the stock during this period you will not receive the dividend

Question 36

Date of Record

Answer 36

the day when the corporation figures out who is getting the dividend

Payable date- the date when the dividend will be. Distributed

Question 37

Stock Dividends

Answer 37

are paid out of a corporation’s treasury stock, which refers to shares of its own stock that the corporation holds. If the corporation does not have any treasury stock, it cannot pay out a stock dividend.

Question 38

Stock Splits

Answer 38

When the corporation increases the total number of shares on the market without changing its total market capitalization.

· Primarily do this to lower the share price and increase liquidity

Question 39

Mergers

Answer 39

When two companies come together as one.

· Shareholders of each original company would now own shares in the newly formed company

3 Types Of Mergers

1. Horizontal Merger
2. Vertical Merger
3. Circular Merger

Question 40

Horizontal Merger-

Answer 40

involves the blending of two companies in the same industry. Before they combined they were originally competitors

Question 41

Vertical Merger-

Answer 41

when two corporations that operate in different parts of the same business come together. Aims to bring together companies that can operate more effectively as one company.

Question 42

Circular Merger

Answer 42

aim to bring a broader range of products and services to their customers, sometimes mixing quite disparate companies

Question 43

IPO

Answer 43

Initial Public Offering, this marks the first time when stock in the corporation is made available to the public.

· Companies usually IPO because it helps small, young, privately owned companies obtain the financing they need to expand their business

· Underwriter- raises investment capital on behalf of the company that is issuing an IPO. Typically, these underwriters are banks or large financial institutions.