WSO - Stocks Flashcards
Company XYZ released increased quarterly earnings yesterday, but their stock price still dropped, why?
There are two main reasons that this could occur. First, the entire market could have been down on the day (or the industry to which XYZ belongs), which had more of an impact than the company’s positive earnings. More likely however, is that even though they released increased earnings, the figures were not as high as the Wall Street analyst estimates therefore creating disappointment.
What does it mean to short a stock?
Short selling a stock is essentially the opposite of going long in a stock. When an investor buys a stock, they believe they will be able to sell the stock for a higher price in the future. When short-selling, the investor sells a stock they don’t actually own, under the belief they will be able to purchase it for a lower price in the future.
What is liquidity?
Liquidity is how easily an asset can be bought and sold by an investor. Some examples of liquid assets include money market accounts, large-cap stocks, etc. Some non-liquid assets include many micro-cap stocks, or in the example of a large corporation a large, specialized factory or production plant which could take years to convert into cash.
Is 15 a high P/E (Price to Earnings) Ratio?
This depends on the industry of the company you are looking at. A P/E ratio of 15 in an industry like basic materials may be considered a bit high, but if this company is a high-growth tech company, 15 may be considered rather low.
If you read that a given mutual fund has achieved 50% returns last year, would you invest in it?
You should do more research because past performance is not an indicator of future results. A mutual fund full of Mortgage Backed Securities could have been up 50% a few years ago and then been down 90% last year due to the market for MBSs collapsing. To make an investment decision you need to research more in depth into the fund’s holdings, management, fee structure, etc.
If a company’s stock has gone up 20% in the last 12 months, is the company’s stock in fact doing well?
This depends on a number of different factors including the beta of the company and the performance of the market. If the stock’s beta is 1 (meaning that 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 poorly.
What is Insider Trading and why is it illegal?
Insider Trading is the action of buying or selling stock in a company based on information that is not publicly available. For example, if a CEO of a pharmaceutical company knows that a drug is going to be pulled from the shelves by the FDA, he cannot sell his stock until that information has been released to the public.
Who is a more senior creditor, a bondholder or stockholder?
A bondholder is always a more senior creditor than a stockholder. In the event of bankruptcy/liquidation the bondholder will be paid first. Additionally, interest payments are paid to bondholders before equity holders receive any profits in the form of dividends.
How can a company raise its stock price?
Any type of positive news about the company could potentially raise the stock price. If the company repurchases stock, it lowers the shares outstanding, raised the EPS which will raise the stock price. A repurchase is also seen as a positive signal in the market. A company could also announce a change to its organizational structure like cost-cuts or consolidations or they could announce an accretive merger or acquisition that will increase their earnings per share. Any of these occurrences would most likely raise the company’s stock price.
A stock is trading at $5 and a 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 share outstanding, the $50 stock would actually most likely have higher growth potential.
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?
Since the return on a stock is the Sale Price plus Dividends minus the Purchase Price, all divided by the Purchase Price, for Stock X it would be 15 plus 5 minus 10, which is 10, divided by 10, meaning I would have made 100% return on my investment.
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, the other will go up. 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.
What is diversification?
Diversification is the process of creating a portfolio of different types of investments. It means investing in stocks, bonds, alternative investment etc. It also means investing across different industries. If an investor is properly diversified, they can essentially eliminate all unsystematic risk from their portfolio, meaning that they can limit the risk associated with one individual stock and their portfolio will only be affected by factors affecting the entire market.
If you add a risky stock to a portfolio, what happens to the overall risk of your portfolio?
It depends on the correlation of the new investment to the portfolio. It could potentially lower the overall risk of the portfolio.
What is the difference between the technical analysis and fundamental analysis?
Technical Analysis is the process of picking stocks based on historical trends and stock movements mainly based on charts. Fundamental analysis is examining a company’s fundamentals, financial statements, industry, etc. and picking stocks that are “undervalued.”
