ch 14 study questions

how would you define (a) a blue-chip stock, (b) a cyclical stock, (c) a defensive stock, (d) a growth stock, (e) an income stock, (f) a large cap stock, (g) a mid cap stock, (h) a small cap stock, (i) a micro-cap stock, and (j) a penny stock?

a) safe investment that generally attracts conservative investors b) a stock that follows the business cycle of advances and declines in the economy c) a stock that provides consistent dividends and stable earnings during declines in the economy d) a stock issued by a corporation that has the potential of earning profits above the average profits of all firms in the economy e) an investment that pays higer-than-average dividends f) a stock issued by a corporation that has a large market capitalization, in excess of $10 billion g) a stock issued by a corporation that has market capitalization of between $2 and $10 billion h) a stock issued by a company that has a market capitalization of between $300 million and $2 billion i) a stock issued by a company that has a market capitalization of $300 million or less j) the securities and exchange commission now defines a penny stock as a stock that sells fro $5 or less per share

what is the advantage of using dollar cost averaging?

avoid common pitfall of buying high and selling low

which type of stock could help you obtain your investment and financial goals?

blue chip

explain the difference between direct investment plans and dividend reinvestment plans.

direct investment plan allows you to purchase stock directly from a corporation; dividend reinvestment plans allow you to reinvest dividends

what are the formulas for dividend payout, dividend yield, total return, annualized holding period yield, beta, book value, and market-to-book ratio?

dividend payout= annual dividend amount/ earnings per share dividend yield= annual dividend amount/price per share total returns= dividends + capital gain annualized holding period yield= (total return/ original investment) x (1/N) beta= increase in overall market x beta for a specific stock book value= (assets- liabilities)/ (shares outstanding) market-to-book ratio= market value per share/ book value per share

explain the relationship between earnings and a stock's market price.

earnings decline, stock price declines; earnings increase, price of stocks increase

why would an investor buy stock on margin?

financial leverage created by borrowing money can increase the return on an investment

why do corporations split their stock?

firm's management has an ideal price range for stock. if price rises above ideal range a split brings the price back down

assume you want to purchase stock. would you use a full-service broker or a discount broker? would you ever trade stocks online?

i would use a full service broker because i am a beginner with no experiance. i would not trade online

how can an investor make money using the buy-and-hold technique?

if the board of directors approves dividend payments, or the price of the stock may go up

why do corporations issue common stock?

issued to finance their business start-up costs and help pay for expansion

describe the types of orders that are used to buy or sell stocks in the secondary market.

market order is a request to buy or sell a stock at the current market value limit order is a request to buy or sell a stock at a specified price or better

what sources of information would you use to evaluate a corporate stock issues?

market watch (the internet)

what is the most important priority a preferred stockholder has compared to common stockholders?

preferred stockholders receive paid dividends before common stock holders

what is the difference between the primary market and the secondary market?

primary you purchase financial securities; secondary is for existing financial securities that are currently traded among investors

explain how fundamental analysis, technical analysis, or the efficient market hypothesis can be used to describe price movements for the stock market

the assumption of different aspects on the rise and fall of stock prices

describe the two reasons why investors purchase common stock?

they can offer larger returns; despite the risk and potential loss

why are earnings per share and price-earnings calculations important?

to determine the financial health of a corporation, and gives investors an idea of how much they are paying for a company's earning power

why would an investor use the selling-short technique?

to make money when the value of a stock is expected to decrease in value