chapter 12

smallcap

A stock issued by a company that has a capitalization of between $300 million and $2 billion.

Microcap

A stock issued by a company that has a capitalization of between $50 million and $300 million or less.

Midcap

A stock issued by a corporation that has a capitalization of between $2 billion and $10 billion.

Largecap

A stock issued by a corporation that has a large amount of capitalization in excess of $10 billion.

Growth

A stock issued by a corporation that has the potential of increasing sales revenues and earning profits above the average of all firms in the economy.

WHAT HAPPENS WHEN A CORPORATION SPLITS ITS STOCK?

A stock split A stock split is a procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares. In 2017, for example, the board of directors of Comcast, a media and technology company, approved a 2-for-1 stock split. After the stock split, a stockholder who had previously owned 100 shares now owned 200 shares. The most common stock splits are 2-for-1 or 3-for-1.

Cyclical

A stock that follows the business cycle of advances and declines in the economy.

Defensive

A stock that remains stable during declines in the economy.

Penny

A stock that typically sells for less than $5 per share (or in some cases, less than $1 per share) and has a small amount of capitalization.

Blue Chip Stocks

A stock, issued by large, stable corporations that usually have a history of paying dividends and that generally attracts conservative investors.

Income

An investment that pays higher-than-average dividends.

To make money in a short transaction, you must take these steps:

Arrange to borrow a stock certificate for a specific number of shares of a particular stock from a brokerage firm. Sell the borrowed stock, assuming it will drop in value in a reasonably short period of time. Buy the stock at a lower price than the price it sold for in step 2. Use the stock purchased in step 3 to replace the stock borrowed from the brokerage firm in step 1.

Type of Stock

Blue chip Cyclical Defensive Growth Income large Cap Micro Cap Midcap Penny Small cap

Why do corporations split their stock?

In many cases, a firm's management has a theoretical ideal price range for the firm's stock. If the price per share of stock rises above the ideal range, a stock split brings the price per share back in line.

Simply put, investors who want larger returns choose stocks. And yet, you should remember three facts:

While the almost 10 percent average annual return on stock investments described above is enticing, keep in mind that the value of stocks can also decrease. The nation's economy, high inflation, changes in interest rates, and a host of other factors can cause stocks to decrease in value The key to success with any investment program is often allowing your investments to work for you over a long period of time, and stocks are no exception.

Total return

a calculation that includes not only the yearly dividend amount but also any increase or decrease in the original purchase price of the investment.

An investment bank

a financial firm that assists corporations in raising funds, usually by helping to sell new security issues.

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.

Dollar cost averaging

a long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals.

limit order

a request to buy or sell a stock at a specified price. When you purchase stock, a limit order ensures that you will buy at the best possible price but not above a specified dollar amount.

market order

a request to buy or sell a stock at the current market price.

dividend reinvestment plan (often called a DRIP)

allows you the option to reinvest your cash dividends to purchase stock of the corporation.

direct investment plan

allows you to purchase stock directly from a corporation without having to use an account executive or a brokerage firm. Similarly,

Nasdaq

an electronic marketplace for stocks issued by over 3,000 different companies.

stop-loss order (sometimes called a stop order)

an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.

earnings per share

are a corporation's earnings divided by the number of outstanding shares of a firm's common stock.

option

gives you the right—but not the obligation—to buy or sell a stock at a predetermined price during a specified period of time.

securities exchange

is a marketplace where member brokers who represent investors meet to buy and sell securities.

The over-the-counter (OTC) market

is a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange.

The book value for a share of stock

is determined by deducting all liabilities from the corporation's assets and dividing the remainder by the number of outstanding shares of common stock.

the secondary market

isa market for existing financial securities that are currently traded among investors.

An 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

The dividend yield

the annual dividend amount divided by the stock's current price per share.

The price-earnings (PE) ratio

the price of a share of stock divided by the corporation's earnings per share of stock.

buying stock on margin

you borrow part of the money needed to buy a particular stock.

primary market

you purchase financial securities, via an investment bank or other representative, from the issuer of those securities.