Stocks

Question 1

Definition: Primary Market

Answer 1

Market where new securities are sold by corporations. E.g. Company A sells their shares to Investor B.

Question 2

Definition: Secondary Market

Answer 2

Market where previously issued securities are traded among investors. E.g. Shareholder B sells his shares which he has previously bought from Company A to Investor C.

Question 3

Definition: Initial Public Offering (IPO)

Answer 3

First offering of stock to the general public.

Question 4

Definition: Primary Offering

Answer 4

When a corporation sells shares within the firm.

Question 5

Definition: Bid Price

Answer 5

The prices at which investors are willing to buy shares.

Question 6

Definition: Ask Price

Answer 6

The prices at which current shareholders are willing to sell their shares.

Question 7

Definition: Market Cap

Answer 7

The total value of a company’s outstanding shares. This is according to the market value of the company. E.g. If a company has 100 outstanding shares at $5 per share its market cap = 100*5 = $500

Question 8

Definition: P/E Ratio

Answer 8

The ratio of stock price to earnings per share. Current stock price (P0)/EPS

Question 9

Definition: Earnings Per Share (EPS)

Answer 9

The net income of a firm/total number of shares outstanding.

Question 10

Definition: Dividend Yield

Answer 10

The ratio of dividends paid and share price. This ratio tells the Investor how much dividend income they can expect for every $1 invested in the stock.

Question 11

Definition: Book Value

Answer 11

Here the balance sheet is used to determine the net worth of a firm. The total equity is divided by the number of outstanding shares.

Question 12

Definition: Market Value

Answer 12

This can be interpreted as the price of a share. The market value tells us how much the market thinks the firm is worth. It differs the book value in the sense that the firm tends to be worth more than the book value due to a unique UVP or another intangible advantage that it has, which isn’t yet reflected in the books. This difference is called the going concern value

Question 13

Definition: Going-Concern Value (3)

Answer 13

The nominal difference between the book and market value. This difference is caused due to three factors:

1) Extra earning power
2) Intangible assets
3) Value of future investments