s tocks chapter 9 study guide answers. common stock vs. preferred stock
TRANSCRIPT
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STOCKSChapter 9
Study Guide Answers
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Common Stock Vs. Preferred Stock
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Securities – all the investments, including stocks, bonds, mutual funds, options and commodities that are traded – on the securities exchanges or the over the counter market
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Private corporation- shares are owned by small group of people – not traded on the stock market. Ex. VonMaur)
Public corporation –shares are traded on the open markets- anyone can buy them (ex. IBM, Deere)
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Stock split –your profits will increase.
The company divides the number of shares outstanding into a larger number of shares –
Usually 2 for 1 split (if you owned 100 shares before – you now will have 200) The value of the shares reduces in ½ also. They do it b/c they want to make it more attractive and affordable for others to buy.
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Par value- an assigned dollar value that is printed on the stock certificate (par value * dividend rate= dividend in dollar form per share)
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Bull Market – a market that is rising – people are optimistic- buy stocks- the overall stock market value increases.
Bear Market- a falling market – people are generally pessimistic that the economy is doing poorly, earning are down, etc.- people are selling stocks
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Earnings per share- Measures the amount of corporate profit assigned to each share of common stock- shows profitability (see pg 289)
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Dividend-distribution of money, stock or property a corporation pays to stockholders (not guaranteed – based on corporate earnings)
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Price-earnings ratio (P/E)- used frequently to compare companies in the same industry (ex. Compare Wells Fargo to Bank of America) Low PE indicates a good investment – the company has lots of earnings per share of stock.
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Initial Public Offering (IPO)- occurs when a company sells shares of stock for the first time to public investors. Used to fund new start up companies
Over-the-counter market- a network of dealers who buy and sell securities not listed on the exchanges. (must match the buyer and seller) NASDQ
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STOCK TYPESBlue Chip
Description attracts conservative investors- issued by
strong/respected companies (GE, AT&T)Advantage relatively safe / stable earnings /consistent
dividendsDisadvantage Can still lose money. (amount invested) / Slower
growth
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INCOME
Description Good for investors looking for income producing
investments / Pays steady dividends / Drug and G&E companies
Advantage Pays higher than average dividends / Predictable
dividendsDisadvantage Not a ton of growth- but consistent
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GROWTHDescription Issued by a company whose potential earnings
may be higher than average than for all firms in the U.S. / Tech stocks/ companies
Advantages Potential for growth in value/price of stock and
can sell for quick profitDisadvantages Generally do not pay dividendsPotentially more risky
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CYCLICAL
Description Stock reflects the state of the economyJohn Deere, Auto makersAdvantagesWhen economy is good – stock value is up Disadvantage When economy is bad – stock value is downPotential for economy to remain poor
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DEFENSIVE
Description One that remains stable during declines in
economy(many blue chip and income stocks fall in this
category – Proctor & Gamble and Kellogg)Advantages Steady earnings / Continue to pay dividends even
if decline in economyDisadvantages Growth is slower than that of “growth stocks”-
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LARGE CAP
Description Stock of a company that has issued a large
number of shares of stock and has large capitalization / Typical DOW 30 stocks
Advantages For conservative investors - more secure/ less riskDisadvantages Steady growth – not a quick money maker
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SMALL CAPDescription Stock issued for companies with less that $150
million in capitalizationAdvantages Value may appreciate fasterDisadvantages Higher risk investment – may be newer companies
– not a proven track record
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PENNY STOCK
Description Typically sell for less than $1Advantages Cheap investment – low money inDisadvantages Very risky/ No track record of performance
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LONG TERM STRATEGIES
Buy-and-Hold- long tern investment strategy, buy and hold for a number of years- generally increase in value over time.
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LONG TERM STRATEGIES
Dollar cost Averaging – put an equal amount of money into an investment an equal period of time. Example: Buy 100 shares of IBM at $50 per share January 1st and put in $5000 each month into IBM stock – theory is that over time the price you pay will average out over time- see top of pg 299
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LONG TERM CONT…
Direct Investment and Dividend Reinvestment- buy directly from the company and use DRIP (dividend reinvestment plan)- dividends paid from the company will be used to purchase more shares of the stock. Good plan for those that don’t have a lot of $$ to invest
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SHORT TERM STRATEGIES
Buying Stock on Margin- borrow money against your other investments from the brokerage house to buy more stocks – can be risky – if the overall market value of your investments goes down – you may have a “margin call” and be expected to put in cash to cover the declining value.
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SHORT TERM STRATEGIES
Selling Short selling of stock that you have borrowed from the brokerage house – you are betting against or for the market. Make money if stock price goes down – you can buy the stock you need to replace back at a cheaper price and you keep the difference. See page 301 for steps. Very risky – if stock price increases – you must replace it at a higher price and therefore lose money.