Stock Market Quiz

Leverage

The use of borrowed money to buy securities.

Dividend Reinvestment

The use of dividends previously earned on stock to buy more shares.

Defensive

a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market. Stable in good and bad times Provide basic needs via product or service—if people need it, it will do well.

Stock Index

a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

Public Corporations

A company whose stock is traded openly on stock markets.

Earnings per share (EPS)

A corporation's after tax earnings (Net profit) divided by the number of common stock shares outstanding (Shares in the hands of investors).

Securities exchange

A marketplace where brokers who are representing investors meet to buy and sell securities.

Capital gains

A profit from the sale of property or of an investment.

Bear Market

A prolonged Period of falling stock prices and a general feeling of investor pessimism.

Bull Market

A prolonged period of rising stocks prices and a general feeling of investor optimism.

Proxy

A stockholder's written authorization to transfer his or her voting rights to someone else, usually a company manager.

Auction Market

A type of securities exchange where buyers enter competitive bids and sellers enter competitive offers at the same time.

Preferred stock

A type of stock that pays a fixed dividend but has no voting rights.

Common Stock (preferred)

A type of stock that pays a variable dividend and gives the holder voting rights. Stockholders have voting rights Board of directors elected by stockholders Can vote on major issues: issue more stock, sell co, etc. More stock you own, more votes you have—more votes = more influence on corporate policy May or may not pay dividend Share profits with stockholders quarterly, semi or annually Many people Re-invest their dividends— this means the money earned on dividends automatically buys more shares of stock No commission is paid for re-investing dividends

Par Value

An assigned dollar value given to each share of stock.

Stock Split

An increase in the number of outstanding shares of company's stock.

Dollar-Cost averaging

An investment technique that involves the systematic purchase of an equal dollar amount of the same stock at regular intervals, regardless of the share price.

Why is buying on the margin risky?

Because if the money goes down, you have replace the borrowed money. With interest, and pay a commission.

How do you save money by reinvesting dividends

Buy without paying broker fees

Direct Investment

Buying stock directly from a corporation

Be able to calculate the ROI for stock sold with a capital gain (profit).

Capital Gain (make money)/Loss (lose money) Return on Investment (ROI) ROI = (Selling Price - original Cost)/Cost To calculate it, you simply take the gain of an investment (Selling Price - Cost), and divide by the cost of the investment.

In what two ways can you make money from owning stock?

Capital Gains Dividends

Name and explain 3 long term investment stock strategies and 2 short term investment stock strategies. Buy and Hold, Dollar Cost Averaging, Direct investment; Buying on Margin, Selling Short

Dollar-Cost Averaging .Equal dollar amount of the same stock at regular intervals .Result is usually a lower average cost per share .Avoid buying at the highest price—don't have to worry about timing investments perfectly Direct Investment .Buying directly from a corporation (no brokerage fees) .May get for below market value price Reinvesting Dividends .Using dividends earned to buy more shares (avoids fees) Small Buying on Margin .Borrow money from broker to buy stock .Open a Margin account and sign contract .Deposit min. $2,000.00 This is called leverage: use of borrowed money to buy securities .Betting the stock will rise .When you sell the stock you pay interest on the borrowed money plus a commission .If stock goes down, you make up the difference .If market value decreases to ½ of original purchase, the broker can "call the margin" .You need to put up more money in margin account or sell stock Short selling .borrowing stock from the broker and sell borrowed stock .Betting stock will go down in value .Must replace stock you borrowed—so you want stock to go down. This allows you to buy it back at lower rate and make a profit .If stock rises, you lose. You need to buy it back at higher price than you borrowed it.

Stock Indexes

Dow-Jones 30 blue-chip stocks Representative of the US economy as a whole (less the transportation and utility sectors S&P 500 500 large companies many consider it the best representation of the U.S. stock market Nasdaq often used to judge the progress of the technology sector, since NASDAQ has so many tech stocks

Earnings per share

Ex: co profit/# of outstanding shares $100,000/ 100,000 shs = $1.00 $100,000/ 1,000,000 shs = 0.10

How can you save money by direct investment? Is this a good idea for long-term investing?

Good idea because you're buying it at a lower value than others. Usually have to keep it for a long time.

Initial Public Offering (IPO)

IPO occurs when a private company sells stocks to the public for the first time. Where securities are created.

Stock split

Increase in number of shares of a stock Value of stock still same Usually done to make stock more affordable—more people will buy, stock will increase in value

What are factors that affect the price of a share of stock? Explain.

Inflation -We mentioned inflation as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well. Demographics - The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples. Trends - Often a stock simply moves according to a short-term trend. Liquidity - Liquidity is an important and sometimes under-appreciated factor. It refers to how much investor interest and attention a specific stock has.

Secondary market

Known as "the market", defining characteristic is that investors trade among themselves. investors trade previously issued securities without the issuing companies' involvement. Ex: if you buy Microsoft stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft (the company) is in no way involved with the transaction

Dividends

Money paid to stockholders from a corporation's earnings.

Buy and Hold

Most investors purchase stocks as long-term investments Stock go up and down, but over the years, overall trend of non-speculative stock is moderately up. You ride out the down times Earning income through dividends while holding stock

Securities Markets: channels for buying and selling stock. Regulated by SEC (Securities Exchange Commission)

NASDAQ: use 4 letters for ticker symbols Second largest stock market in dollar volume in the United States behind the New York Stock Exchange. It is a completely electronic stock exchange Composite of many stocks—many tech stocks NYSE: largest in US oldest in world Human component as well as computer Historically was an open auction: buy low and sell high is goal

Private Companies

No trading on the open market Ex: M&M Mars

Short selling

Selling stock borrowed from a broker that must be replaced at a later time.

Less Established Stocks

Smaller Corporations, with not well established or solid records of prefitability Traded on lesser known (pink) markets Inexpensive/risky

Type of Companies

Sole-proprietorship Partnership Corporations

Public Companies

Stock traded on open stock market Ex: Hershey

Income stocks

Stocks in corporations that have a consistent history of paying high dividends to stockholders.

Growth stocks

Stocks in corporations that reinvest their profits into the businesses so that it can grow.

Blue Chip Stocks

Stocks of large, well-established corporations with a solid record of profitability. 30 High price/low yield Coke, Ford, Exxon

Securities and Exchange Commission (SEC)

The U.S. Securities and Exchange Commission (SEC) is an agency of the United States federal government.

Market Value

The price for which stock is bought and sold in the marketplace.

Stock Exchange

a market in which securities are bought and sold

Shareholders

an owner of shares in a company.

Cyclical

is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession. Perform in relation to the economy Do well in good economy, bad in bad economy (luxuries)

Why do people invest in the stock market?

stocks have consistently earned more than bonds over the long term, despite regular ups and downs in the market (Make money)

Stock

the capital raised by a business or corporation through the issue and subscription of shares.

Insider trading

the illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.