Personal Financial Management Chapter 12

total return

A calculation that includes the yearly dividend amount as well as any increase or decrease in the original purchase price of the investment.

earnings per share

A corporation's earnings 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.

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.

account executive/stockbroker

A licensed individual who works for a brokerage firm and 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.

primary market

A market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities.

security 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 stock market or an index such as 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.

limit order

A request to buy or sell a stock at a specified price.

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 stocks.

stop-loss order

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

full-service brokerage firm

Beginning investors with little or no experience. Individuals who are uncomfortable making investment decisions. Individuals who are uncomfortable trading stocks online.

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.

Which of the following is not included in the Value Line report?

Information on the educational and work backgrounds of the analysts who cover the stock

equity financing

Money received from the owners or 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.

Which category of stockholder receives dividends first?

Preferred

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 stock's current price per share.

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 corporate ownership.

price-earnings (PE) ratio

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

option

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

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

defensive

a stock that remains stable during declines in the economy

income

an investment that pays regular and often higher-than-average dividends

dividend yield =

annual dividend amount / current price per share

book value =

assets - liabilities / number of shares outstanding

types of stocks

blue chip cyclical defensive growth income large-cap micro-cap mid-cap penny small-cap

most firms distribute between 30 and 70 percent of their earnings to stockholders

but some corporations follow a policy of smaller or no dividend distributions to stockholders

long-term techniques

buy-and-hold technique dollar cost averaging direct investment and dividend reinvestment plans

The annual dollar amount of dividends generated by an investment divided by the stock's current market value is called:

dividend yield

total return =

dividends + capital gain

why corporate earnings are important

earnings per share price-earnings ratio projected earnings

A company's website that can be viewed anytime is:

easily accessible.

sources of systematic risk

economic crisis increasing interest rates changes in consumer purchasing power political activity wars

no one invests in stocks in order to lose money

every investor wants to earn a better-than-average return on stock investments

there are two ways to make money by buying common stock:

income from dividends dollar appreciation of stock value

speculators/traders

individuals who routinely buy and then sell stocks within a short period of time

Most companies pay dividends to:

keep investors happy

Information on companies' websites is likely to be:

more up-to-date than printed materials.

A daily source of printed material that provides useful information about stocks is a:

newspaper

discount brokerage firm

people who understand how to research stocks and prefer to make their own decisions. individuals who are comfortable trading stocks online

price-earnings (PE) ration =

price per share / earnings per share

A legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individuals or individual is called a:

proxy

Mainly because of the accessibility of financial information online:

some newspapers have reduced or eliminated the amount of financial coverage

A procedure in which the shares of stock owned by existing stockholders are divided into a larger (or smaller) number of shares is called a:

stock split

When investing in stocks, it is important to remember that:

stocks do not always increase in value.

Is an increase in sales revenues a healthy sign for a corporation?

yes

dividend reinvestment plan

A plan that allows current stockholders the option to reinvest or use their cash dividends to purchase stock of the corporation.

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.

market order

A request to buy or sell a stock at the best available price.

stock market bubble

A situation in which stocks are trading at prices above their actual worth.

margin

A speculative technique whereby an investor borrows part of the money needed to buy a particular stock.

cyclical

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

small-cap

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

micro-cap

a stock that is issued by a company that has a capitalization of between $50 million and $300 million

mid-cap

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

large-cap

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

blue chip

a stock that is issued by large, stable corporations that often have a history of paying dividends and that generally attracts conservative investors

penny

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

unsystematic risk

affects a specific company or a specific industry

Average returns on stocks since the end of WWII is:

almost 10 percent.

short-term techniques

buying stock on margin selling short trading in options

Should a firm's profit increase or decrease over time?

increase

volatility for a stock =

increase in overall market times beta for a specific stock

systematic risk

occurs because of overall risks in the market and the economy

secondary markets for stocks

security exchanges the over-the-counter market