Chapter 14: Investing in Stocks
total return
A calculation that includes the annual dollar amount of dividends as well as any increase or decrease in the original purchase price of the investment.
investment bank
A financial firm that assists corporations in raising funds, usually by helping to sell new security issues.
account executive
A licensed individual who buys or sells securities for clients; also called a stockbroker.
dollar cost averaging
A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals.
secondary market
A market for existing financial securities that are currently traded among investors.
direct investment plan
A plan that allows stockholders to purchase stock directly from a corporation without having to use an account executive or a brokerage firm.
stock split
A procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares.
limit order
A request to buy or sell a stock at a specified price or better.
market order
A request to buy or sell a stock at the current market value.
ex-dividend
A situation when a stock trades "without dividend," and the seller—not the buyer—is entitled to a declared dividend payment.
margin
A speculative technique whereby an investor borrows part of the money needed to buy a particular stock.
preferred stock
A type of stock that gives the owner the advantage of receiving cash dividends before common stockholders are paid any dividends.
Nasdaq
An electronic marketplace for buying and selling global stocks and securities.
specialist
Buys or sells a particular stock in an effort to maintain an orderly market.
book value
Determined by deducting all liabilities from the corporation's assets and dividing the remainder by the number of outstanding shares of common stock.
equity financing
Money received from the sale of shares of ownership in a business.
initial public offering (IPO)
Occurs when a corporation sells stock to the general public for the first time.
selling short
Selling stock that has been borrowed from a brokerage firm and must be replaced at a later date.
dividend yield
The annual dividend amount divided by the investment's current price per share.
market-to-book ratio
The current price of one share of stock divided by the book value for one share of stock.
record date
The date on which a stockholder must be registered on the corporation's books in order to receive dividend payments.
common stock
The most basic form of ownership for a corporation.
dividend payout
The percentage of a firm's earnings paid to stockholders in cash.
earnings per share
A corporation's after-tax income divided by the number of outstanding shares of a firm's common stock.
dividend
A distribution of money, stock, or other property that a corporation pays to stockholders.
proxy
A legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individual or individuals.
primary market
A market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities.
securities exchange
A marketplace where member brokers who represent investors meet to buy and sell securities.
beta
A measure reported in many financial publications that compares the volatility associated with a specific stock issue with the volatility of the overall stock market or an index like the Standard & Poor's 500 Stock Index
over-the-counter (OTC) market
A network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange.
dividend reinvestment plan
A plan that allows current stockholders the option to reinvest or use their cash dividends to purchase stock of the corporation.
stock market bubble
A situation in which stocks are trading at prices above their actual worth.
annualized holding period yield
A yield calculation that takes into account the total return, the original investment, and the time the investment is held.
day trader
An individual who buys and then later sells stocks and other securities in a very short period of time.
fundamental analysis
An investment practice based on the assumption that a stock's intrinsic or real value is determined by the company's future earnings.
technical analysis
An investment practice based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole.
efficient market hypothesis (EMH)
An investment theory based on the assumption that stock price movements are purely random.
stop-loss order
An order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.
price-earnings ratio
The price of a share of stock divided by the corporation's earnings per share of stock.
option
The right to buy or sell a stock at a predetermined price during a specified period of time.
