Stocks Flashcards
What is liquidity?
- how freely an asset or security can be bought or sold on the open markets
Publicly traded stocks and bonds are very liquid
Stock, bonds, loans, or investments in privately-owned companies could be considered illiquid due to the limited market for them - liquidity also describes how quickly an asset can be converted into cash
Cash is the most liquid asset
A large pharmaceutical production plant is not a very liquid asset because it would take the owner of the plan a long time to sell the plan and convert it into usable cash
Is 15 a high P/E ratio?
- a firm’s P/E ratio must be analyzed in comparison with other companies in its industries
- P/E is how many dollars an investor is willing to pay for one dollar of earnings
- high P/E means you expect a high growth in earnings
- high growth industries, like technology a P/E ratio of 15 may be considered relatively low, since the company is expected to grow its earnings at a high rate, and so deserves a higher valuation relative to current earnings
- but for a large pharmaceutical company, a P/E ratio of 15 may be considered high, since earnings growth may be expected to be slow but steady in future years
What do bankers do during an IPO?
- goal of an IPO is to issue the least amount of shares possible for the highest price per share, therefore raising the most money for the lowest possible ownership percentage of the company
- you do this by selling shares of the company at an attractive valuation
First, meet with client to gather information like historical financials, industry information, customer data, company overview
Then meet with lawyers to do company’s registration documents, S-1, which gives details of the business, its operations, its customers, its financials to potential investors. This goes through many revisions with lawyers and SEC until come into mutual agreement
Then bankers present the company to institutional investors in different cities, after the company has raised capital from the institutional investors the shares of the stock will begin trading on one of the public exchanged
If a company’s stock has gone up 20% in the last 12 months, is the company’s stock in fact doing well?
It depends on the company’s beta and market performance. If the stock’s beta is 1, meaning it should be as volatile as the market and therefore produce market returns, and the market was up 30% over the past 12 months, then the stock is doing relatively bad
How can a company raise its stock price?
- Company can repurchase stock, which lowers the number of shares outstanding so increases the value per share
- Improve operations to produce higher earnings, causing its EPS to be higher than anticipated by industry analysts, which will send a positive signal to the market
- Can announce that it will change its organization structure such as cost-cutting or consolidation, which would lead to increase in earnings
- Increase in existing dividend
- Announce an accretive merger or an acquisition that will increase EPS
Any potential good news about the company can raise stock price
If a stock is trading at $5 and another stock is trading at $50 which has greater growth potential?
It depends
- the stock with the higher growth potential is most likely the stock with the lower market cap, so if the $5 stock has 1 billion shares outstanding and the $50 stock has 10,000 shares outstanding, the $50 stock would most likely have higher growth potential
What is diversification?
- diversification is creating a portfolio of different types of investments. It means investing in stocks, bonds, alternative investments, etc
- it also means investing across different industries
- to diversify you want to pick investments that have low correlation, when economic conditions push one investment to have a good period, the other may be having its down period, and vice versa. So you are always gaining in every period, this is done to maximize your returns
If you add a risky stock to a portfolio, what happens to the overall risk of your portfolio?
It depends on the correlation between the new investment and the rest of the portfolio. It could lower the overall risk of the portfolio, if the new stock has a negative correlation compared to the rest of the portfolio
What is the difference between technical analysis and fundamental analysis?
Technical analysis is the process of picking stocks based on historial trends and stock movements. Fundamental analysis is examining a company’s fundamentals, financial statements, industry, etc, and then picking stocks that are undervalued
Company A released increased quarterly earnings yesterday but the stock price still dropped why?
Two main reasons this might occur:
- the industry to which company A belongs to could have been down on the day, which has more impact than the company’s positive earnings
- increased earnings were not as high as wall street analysts’ expected
What does it mean to short a stock?
- selling a stock that you don’t actually own
- investors short sell a stock because they think they will be able to purchase the stock at a lower price in the future
- short selling involves borrowing the stock from another investor, and then selling it, promising to return the stock to the lender at a later date.
Can you tell me about a recent IPO you have followed
Beyond Meat
- second best performing IPO this year, first one is Shockwave Medical Inc. it went public in May and the stock has more than tripled since going public
- stock has risen more than 240%
- it presents a differentiated product and commitment to innovation
- strong leadership
- looking to expand in Europe, with manufacturing in Neverlands
- both Jefferies and JPMorgan acted as underwriters for Beyond Meat
What is insider trading and why is it illegal?
- insider trading is buying or selling stock based on information that is not piublickly available. For example, if a CEO of a pharmaceutical company knows that one of his or her company’s drugs is going to be pulled from the shelved by the FDA, that CEO cannot sell his or her stock until the information has been released to the public
If you bought a stock X a year ago for $10, sold it today for $15, and received $5 in dividends over the year, what would your overall return be?
return on stock = sale price+dividends-purchase price / purchase price
so 15+5-10/10 = 100%
What is correlation>
correlation is the way that two investments move in relation to one another. If two investments have a strong positive correlation, they will have a correlation near 1 and when one goes up or down, the other will do the same
- when you have two with a strong negative correlation, they will have a correlation near -1 and when one investment moves up in value, the other should move down
