Personal Finance Investment
What is common stock?
(Stock most people have) The owner shares directly in the success or failure of a business. You profit when the company profits. You have a say in company decisions (or you can proxy).
Why would a company split their stock?
A lower share price makes the stock more affordable for investors. 2for1split (trading at 1=$80, then it's 2=$40) or 1for2split (trading at 2=$30, then it's 1=$60)
Securities Exchange (Stock Exchange)
A market place that brings buyers and sellers of securities (stocks and bonds) together. Each stock has two sides: Buyer and Seller.
Call vs. Put Options
Call= is sold by a stockholder and gives the purchaser the right to BUY 100 shares of stock at a guaranteed price before a specified expiration date. Purchaser is betting the stock will increase Put= the right to SELL 100 shares of stock at a guaranteed price before a specified expiration date. Purchaser is betting the stock will decrease
A public _____ is a company whose stock is traded openly on stock markets or over-the-counter. Also a legal entity separate from shareholders. (In the event of bankruptcy, the financial loss to the shareholders is limited to their investment in stock.)
Corporation
shares do well when the economy is stable or growing, but often poorly during recessions
Cyclical Stock
shares that remain stable and pay dividends during an economic decline. history of stable earnings and not subject to boom and bust of economy. constant demand for these products
Defensive Stock
When the company is profitable, the stockholders often receive a distribution of money called __________
Dividends
Two ways to make money through owning stock?
Dividends and Capital Gain
What is preferred stock?
Dividends are fixed regardless of how the company is doing. Less risky than common. If the company fails, you get paid first. No voting rights, three kinds: Convertible, Participating, and Cumulative.
World's oldest and best known stock index, began July 1884. An index of 30 Large Cap. stocks representing a variety of industries. Gives people a general idea of how the market is doing
Dow Jones Industrial Average (The Dow)
A corporations after-tax earnings divided by the number of shares outstanding. A measure of the companies profitability (most important variable when determining share price)
Earnings Per Share Ratio
Things that Affect Price of Stock
Financial condition of company (earnings=past) Current interest rates Market for a company's products or services Market value reflects the price investors are willing to pay for a share of stock Earnings Per Share Price-Earning Ratio PEG Ratio
Philadelphia Stock Exchange (PHLX)
First stock exchange in North America. The marketplace for the trading of stocks, equity options, index options, and currency options.
Trading In Options
Gives you the right to buy or sell a stock at a predetermined price during a specified period of time. Available for 3,6, or 9 month periods. Call/Put Options
Federal Reserve Bank
Government agency that has four basic functions-- influences the supply of money and credit, regulates and supervises financial institutions, serves as a banker for the government, and supplies payment services to the public through depository institutions. They keep the economy in balance by controlling interest rates and money supply
Stocks in companies that reinvest their profits into the business so that they can grow and expand. They usually pay little or no dividends. Investors buy them for their increase in value
Growth Stocks
Recession
Happens when there is a decline in spending. Two consecutive quarters of decline in the GNP. Causes the Federal Reserve to lower prime rate to increase spending and decrease savings.
Inflation
Happens when there is a rise in spending. Too much money chasing too few goods. Causes the Federal Reserve to increase prime rate rates to decrease spending and increase savings.
Stocks that have a consistent history of paying high dividends
Income Stocks
Ticker Tape (Stock Ticker)
Invented in 1867, this constantly keeps up to date prices of securities. Used to be on paper, now it's on screens.
Dollar-Cost Averaging
Involves the systematic purchase of an equal dollar amount of the same stock at regular intervals
What is a stock split?
It occurs when a company increases shares outstanding, but lowers the selling price in direct proportion. You will see a tiny "s" on listings.
What is capital gain?
It's made when an investor sells a stock for more than was originally paid. A rate of return is how much money you make from the investment.
Who's the chairman of the Federal Reserve Bank?
Janet Yellen
Market Cap sizes
Large= $10 Billion + Mid= $2 Billion-$10 Billion Small= Less than $2 Billion
Market vs. Limit vs. Stop Orders
Market= a request to buy or sell stock at the current market value Limit=a request to buy or sell a stock at a specified price or better Stop Order= an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount
Represents all the stocks that trade on the NASDAQ stock market: 3000+ stocks
NASDAQ Index
Worlds first electronic stock market owned and operated by NASD. Trades with brokers are completed by telephone or computer. Companies must have issued at least 100,000 shares worth $1 million. Several regional locations and created in 1971. Ex: Microsoft, Intel, Dell. Usually have 4 or 5 letter ticker symbols unless previously traded on NYSE.
National Association of Securities Dealers Automated Quotation
The largest organized exchange in the US. Established May 17th, 1792. To have stock listed here, a company must have 1.1 million publicly traded shares with a market value of $9 million. Relied on only open outcry system for awhile, but now over half are conducted electronically.
New York Stock Exchange (Big Board)
A ratio that shows the relationship between the price/earnings ratio and the earnings per share ratio. tells a much more complete story than the P/E on its own. lower the number, the more undervalued (and vise versa)
PEG Ratio
Participating vs. Cumulative vs. Convertible Preferred Stock
Participating= the required dividend is paid to preferred stock holders while a stated dividend is paid to common stock holders. Cumulative= Unpaid dividends accumulate and must be paid to preferred before any cash dividends go to the common Convertible= can be exchanged at the stockholder's option, for a specified number of shares of common stock.
Short-Term vs. Long-Term Stocks
Short= held for less than a year, capital gain is taxed at ordinary income tax rates Long= stock held over a year, capital gain will be taxed at a lower rate with the current maximum being 15%
A transaction occurs when the buyer and seller agree on a price. The difference between the bid and the ask is the _____, and is a key indicator of the liquidity of the asset. (usually smaller the spread, the more liquidity it has)
Spread
Measurement of changes in the stock market conditions based on the average performance of 500 widely held common stocks. Stock market professionals prefer this index because it gives a broader picture of the general movement of stocks
Standard and Poor's 500 (S&P 500)
Rate of Return
Tells the investor the percentage gain or loss on an asset bases upon his purchase price. To calculate, divide the selling value of the position plus any dividends received by its initial cost
What is IPO?
The Initial Public Offering
What is Market Capitalization?
The total dollar market value of all of a company's outstanding shares. Is calculated by multiplying a company's shares outstanding by the current market price of one share. Used to determine a company's size as opposed to sales.
What are stock certificates?
They usually state the number of shares owned, the name of the company, the type of stock, and the par value. (not very common, all electronic now)
Why do corporations issue stock?
To raise capital to finance (raise money). When a company first issues it, it's called "going public"
Gross National Product (GNP)
Total value of the goods/services produced by a nation during a specific period of time, usually a year
American Stock Exchange (AMEX)
Was known for curb exchange- out on the streets yelling and trading- until 1921. Located in Manhattan. Holdings of small to medium size companies 250,000 shares worth $2.5 million.
What is dividend income?
When a company does well, stockholders may receive dividends (part of the profits of a company distributed back to the share holder). Th BOD decides if there will be dividends, how much, and when.
Buy and Hold
When an investor buys a stock and holds on to it for a long period of time
Over the Counter (OTC) Markets
When securities are bought and sold through brokers but not through an exchange, it is called an electronic over-the-counter network. There's no trading floor. This is usually due to a company being small so its stocks are viewed as "unlisted"
What is the role of the shareholder?
When you buy stock, you are buying a piece of a company so you become part owner. Yet, you can never lose more than you invested initially.
Selling Short
selling stock borrowed from a broker that must be replaced at a later time. You borrow a stock certificate for a certain umber of shares from the broker. The you sell short, you sell the borrowed stock know that you must cover your short position at a later date. When the stock price drops, you purchase the stock at a lower price than you sold it for. Then you replace the lower priced stock with the original higher priced stock. There's usually no broker fee when selling short, but you have to pay a commission
Bear Market
stocks are on a downward trend
Bull Market
stocks are on an upward trend
DRIP
when dividends are used to purchase new shares of stock including fractional shares, a method that avoids a broker fee
Short-term Investment Strategies
when you buy and sell stocks for quick profits you are "playing the market" or able a "speculator": Buying On Margin Selling Short Trading In Options (Call/Put Options)
What is stock?
A unit of ownership in a corporation. They are traded in round lots or odd lots and shareholders have to pay a commission when buying AND selling.
What is par value?
An assigned dollar value for preferred stock, usually $25-ish. Just used to determine the dividend, so companies don't try to make this higher. It's also used to compute ratios and as a benchmark for trading.
Index
An index is an average of stocks to see how stocks are performing overall and help investors gauge the market.
A description of a company's business and financial well being. Its purpose is to report on the operations and financial condition of the company. Will discuss the future products and direction of the company.
Annual Report
The ____ price represents the minimum price that a seller or sellers are willing to receive for the security.
Ask
The ______ price represents the max price that a buyer or buyers are willing to pay for a security.
Bid
Companies that are large, well-established and financially solid. Maintain a fairly stable price during ups and downs of the market. Usually pay a small but regular dividend
Blue Chip
A group of people elected by the stockholders to manage a corporation. If the corporation makes a profit they decide whether or not to distribute earnings back to the stock holders in the form of a dividend.
Board Of Directors
Buying on Margin
Borrowing money from your broker to buy stock if you open a margin account and sign a contract called a margin agreement. You are charges interest. Your buying power is increased but this is very short term (1-2 weeks)
stocks that have a traded value of under $5 per share (high risk)
Penny Stock
Long Term Strategies
People who hold stocks for a long period of time are referred to as "investors": Buy and Hold Dollar-Cost Averaging Direct Investment Dividend Reinvestment Program (DRIP)
A ratio of a company's current share price compared to it's per-share earnings. Shows how much investors are willing to pay per dollar of earnings. The lower the number the more undervalued. The higher the number, the more overvalued
Price-Earning Ratio (P/E Ratio)
Chicago Board of Options (CBOE)
Revolutionized options trading by creating standardized, listed options in 1973. Before this, options were individually tailored and traded "over-the-counter" by a few put/call dealers. Worlds largest options exchange.
Round Lot vs. Odd Lot
Round= 100 shares or multiples of 100 Odd= fewer than 100 shares
Government agency established by Congress in 1934 for two reasons-- to provide full disclosure to investors (annual reports) and to prohibit fraud in connection with the sale of securities. They monitor illegal actions like insider trading, manipulation of stock prices, falsification of corporate records, and other ill-gotten gains. They track the market for unexplained price moves. You may receive fines or jail time for illegal activity.
Securities & Exchange Commission (SEC)
Direct Investment
investors buy stock directly form a corporation