Preferred Stock and Stock Classifications
What type of stock has a market value that tends to reflect the state of the economy?
A Cyclical Stock.
What are stocks issued by the strongest and most respected companies?
A blue chip stock.
What three (3) characteristics determine whether a company is considered blue-chip?
A company that shows leadership in an industry, a history of stable earnings and consistency in the payment of dividends.
What type of stock remains stable during declines in the economy?
A defensive stock.
What type of stocks are issued by corporations whose potential earnings may be higher than the average earnings predicted for all the corporations in the country?
A growth stock.
What type of stock typically sells for less than $5 per share?
A penny Stock.
What is a participation feature of preferred stock?
Allows preferred stockholders to share in the corporation's earnings with the common stockholders.
What are stocks that pay higher than average dividends compared to other stock issues?
An income stock.
Why are buyers of preferred stock attracted to income stock?
Because the dividends are predictable.
Why is the market value of a cyclical stock so directly tied to the economy?
Because the products and services of these companies are tied directly to the activities of the economy.
What other types of stocks are also considered defensive?
Blue chip stocks and Income stocks.
What type of utilities companies have stock that is considered income stock?
Dow Chemical and Bristol- Myers Squibb.
What are three (3) characteristics that show a company is engaged in growth activities (activities to produce higher earnings and sales revenue)?
Engaged or involved in activities that produce higher sale revenues, building new facilities, and introducing new high quality products.
What are characteristics of companies whose stock is defensive?
Have steady earnings and can continue to dividend payments even in periods of economic decline.
What are large-cap stocks?
Is a stock from a corporation that has issued a large number of shares of stock and has a large amount of capitalization.
What are small-cap stocks?
Is a stock issued by a company with a capitalization of 500 million or less.
What is preferred stock?
Is a type of stock that gives the owner the advantage of receiving cash dividends before common stockholders receive cash dividends.
What is par value of a preferred stock?
Is an assigned dollar value that is printed on a stock certificate.
What is capitalization?
Is the total amount of stocks and bonds issued by a corporation.
What is the amount of the dividend that a preferred stockholder receives?
It is either a specific amount or a percentage.
Why is preferred stock considered a middle investment in regards to risk?
It is safer than common stock but not as safe as bonds which makes it in between.
What happens to the market value of a cyclical stock when the economy declines?
It may decrease.
When do investors want to sell cyclical stocks?
Just before the economy declines.
What type of companies are in the Dow Jones Industrial Average (DJIA)?
Large cap stocks.
What type of investors are attracted to small-cap stocks?
Less established companies.
Why are penny stocks a high risk and therefore should only be invested in by speculative, informed investors?
The prices of this can go up and down quickly and have a lot of risks.
How would preferred stock be considered safer than common stock to invest in?
They receive the cash dividend before common stockholders receive the cash.
What type of investor is attracted to preferred stock?
To a person who needs a predictable source if income greater than what is normally offered.
When do investors want to buy cyclical stocks?
When they are still inexpensive.
What is the Dow Jones Industrial Average (DJIA) and what does it measure?
the Dow Jones Industrial Averages a stock indicator that measures the overall condition of the stock market. They appeal to conservative investors because they are considered secure.
What type of companies are cyclical in nature?
Stocks issued by Ford and centex( a construction firm)
Why does growth stock companies not issue dividends?
Stocks issued by these corporations do not usually pay dividends.
What happens to the market value of a cyclical stock when the economy is improving?
The market value of a cyclical stock usually goes up.
What is yield on an investment?
The yield is the income return on an investment, such as the interest or dividends received from holding a particular security.
Why is preferred stock considered a middle investment financially?
The yield on corporate bonds but higher yield on common stock which makes it in the middle.
What are characteristics of penny stock companies?
These stocks are issued by new companies or companies whose sales are very unsteady.
Why are preferred stocks not considered a good investment for most people?
They lack the potential for growth.
If par value on a preferred stock is $30 and the dividend rate is 5%, then how much will the dollar amount of the dividend be?
$1.50 you would do ( 30x 5= 1.50)
What type of investment is preferred stock considered?
Can also be called a callable meaning that the company has the option to purchase the shares from the shareholders at any time.
What type of investors are attracted to large-cap stocks? Why?
Conservative investors because they are considered secure.
What is convertible preferred stock?
Convertible preferred stock is stock that can be exchanged for shares of common stock.
What type of voting rights do preferred stockholder receive? When do they usually vote?
Cumulative Preferred Stock and Convertible Preferred Stock.
What is cumulative preferred stock?
Cumulative preferred stock is stock whose unpaid dividends build up and must be paid before any cash dividend is paid to the common stockholders.
What are three things that corporations may offer to make preferred stock more attractive to investors?
Cumulative preferred stock, Convertible preferred stock, and participation feature.
What are the people who invest in preferred stock seeking?
People who need a predictable source of income greater than what is offered in common stock.
How is par value of preferred stock considered different than market value of common stock?
Preferred stock is considered a "middle investment" the yield on a preferred stock is normally low then the yield on corporate bond but higher than common stock.