Ch. 6 Common Stocks

Stock Spin-Off

A way of issuing new stock. This occurs when a compnay gets rid of one of its subsidaries or divisions. The compnay does not just sell the subsidary to some other firm. It creates a new stnad-alone compnay and then distributes stock in that company to its exisiting stockholders.

Rights Offering

A way of issuing stock Existing stockholders are given the first opportunity to buy the new issue. Gives shareholders the right, but not the obligation, to purchase new shares of a company's stock in proportion to her or her own current ownership.

Public Offering

A way of issuing stock. Corporation offers the investing public a certain number of shares of its stock at a certain price.

Stock Split

A way to increase the number of shares. A firm announces that it will increase the number of shares outstanding by exchanging a specified number of new shares for each outstanding share of stock. in a three for two slip, three new shares are exchanged for two old shares. This is used by companies when it wants to enhance its stock trading appeal by lowering its market price.

Investing in Foreign Stock: ADRs

American Depository Receipts. Dollar dominated instruments (certificates) that represent ownership in AMerican Depository Shares (ADSs). ADSs represent a certain number of shares in a non-US company that have been depositeed with a US bank. Less hassles because they are sold in US $$ bought and sold on US markets.

Stock's Par Value

Arbitraty number. Represents min value belwoe which the corporation charter does not allow a compnay to sell shares

Blue Chip Stocks

Are issued by large, well-established firms that have impeccable financial credentials. Tend to be the leaders in their industry. It is a household name. Less risky than most stocks

Investing in Foreign Stock: Direct Investments

Buying shares DIRECTLY in foregin markets. Very risky Currency flucuations can have dramatic impact on returns. Different regulatory and accounting standards

Investment Value

Indicates the worth investors place on the stock...what they think the stock should be trading for.

Market Value

Its prevailing market price. Reflects what investors are willing to pay to aquire the compnay today and is independent of the book value. *Looks at the future*

Growth Stocks

Shares that are experiencing rapid growth in revenues and earnings.\ high operating margins and plenty of cash flow to service their debt. These stocks win big and lose big.

Speculative Stocks

Shares that lack sustained records of success but still offer the potential for substantial price appreciation. earnings are uncertain and highly unstable. highly risky

Market Cap Stocks

Small cap: < $2billion Mid cap: $2billion to $10billion Large cap: > $10billion

Stock Investment Strategies: Current Income

Some investors use common stocks to seek high current income. desireable because Dividends tend to increase over time focus on *dividend*

Residual Owner

Stockholders are this type of owner. Their claim is subordinate and are not guaranteed a return on their investment.

Equity Capital

Stocks are referred to as this because they represent an equity (ownership) position in a company.

Defensive Stocks

Stocks whose prices remain stable or even increase when general economic activity is tapering off. tend to be less susceptible to downswings in the business cycle than the average stock.

bid-ask spread

The difference between the bid and the ask prices for a stock.

Stock Dividend

The firm pays out it dividends by distributing additional shares of stock. 10% stock dividend means that you will recieve 1 new share of stock for each 10 shares you currently own.

Cash Dividends

The normal dividend.

Book Value

The stockholders' equity in the firm as reported on the balance sheet. Represents the amount of capital that the shareholder contributed to the firm when it initially sold shares as well as any profits that have been reinvested in the company over time. *looking at the past*

Income Stocks

These issues have a long history of regularly paying higher-than-average dividends. CON: little potential for grwoth since dividend is so high and subject to interest rate risk

Earnings Per Share (EPS) and equation

Translates aggregate corporate profits into profits per share. Provides convenient measure of the amount of earnings availabe to stockholders. NPAT: Net Profit After Taxes PD: Preferred Dividends #CSO: Number of shares of Common Stock Outstanding EPS= (NPAT-PD)/ #CSO

Classified Common Stock

When firms have different classes of stocks, ech of which have different privledges. Usually deals w/ the voting rights of different investors.

Ex-Dividend Date

Will dictate whether you were an official shareholder and therefore eligible to recieve the declared dividend. If you sell your stock on or after the ex-dividened date, you will recieve the dividend. 2 business days before date of record If you sell it before the ex-dividedend date, the person you sold it to will recieve the dividend.

Publicly Traded Issues

shares that are readily available to the general public and are bought and sold in the open market.

Stock Investment Strategies: Speculation and Short-Term Trading

sole objective is *capital gains.* *the shorter the time in which that can be achieved, the better.* constantly switching from one position to another. the riskiest of all strategies.

Date of Record

Date of which the investor must be a registered shareholder of the firm to be entitled to a dividend.

Dividend Payout Ratio Equaiton

Measures the % of earnings that a firm pays in dividends. = Dividends per share / Earnings per share

Stock Investment Strategies : Buy and Hold

Objective is to place money in a secure investment and watch it grow over time. focus on *capital appreciation*

Stock Investment Strategies: Aggressive Stock Management

aggressively trades in and out of stocks to achieve eye-catching returns, primariy from *capital gains* Involves lots of trading. *Investment horizon is only 6 to 12 months.* timing security transactions and turning investment capital fairly rapidly are both key elements of this strategy. subtantial risk and trading costs.

Currency Exchange Rates

exchnage rates can have a dramatic effect on returns. it depends on the behavior of the US dollar relative to the currency in which the security is dominated. a stronger dollar has negative impacts on total returns to US investors.

Odd Lot Theory

'Odd Lot Theory' A technical analysis theory/indicator based on the assumption that the small individual investor is always wrong. Therefore, if odd lot sales are up - that is small investors are selling stock - it is probably a good time to buy.

Advantages of Stock Ownership

*Get to participate in more upward momentum. Make more money *Allowed to benefit from earning, dividends, and capital appreciation. *Provide protection against inflation, over time returns exceed the inflation rate. *Gradually increase your purchasing power *Easy to buy and sell and costs associated with trading are modest. *The unit cost of a share of common stock is typically fairly low. *No Maturity date

Disadvnatages of Stock Ownership

*Subject to Various types of risk 1. business risk 2. financial risk 3. purchasing power risk 4. market risk 5. event risk *Stock returns are highly volatile and very hard to predict. *Distribute less current income than other investments (such as bonds).

Dividend Yield Equation

= Annual dividends recieved per share / current market price of the stock

Common Stock

A security that represents ownership of a corporation. They can vote for board of directors & corporate policey (only for voting class) Usually outperform bondholders

Dividend Reinvestment Plan (DRIP)

Corporate-sponsored programs where shareholders can automatically have their dividends reinvested into additional shares of the company's stock. treated as taxable income. Most plans will credit fractional shares into the investor's account.

Preferred Stock

Higher claim/ status than common stock. get paid dividends before other. -not easy to dispose of -dividends are fixed and cumulative -negotiated dividend amounts (funciton of a % of the par value of the stock itself). -SOME voting rights

Tech Stocks

Represents the technology sector of the market. offer high returns but also high risk.

Stock Investment Strategies: Quality Long-Term Growth

Seeks *capital gains* as primary source of retrun. attractive grwoth prospects greater risk because it relies on capitla gains Long term accumulation of capital is the most common reason for this appraoch. INvestor aggressively seeks a bigger payoff than the buy-and-hold. more market risk.

Payment Date

Set by the boad of directors, generally follows the date of record by a week or two. it is the actual date on which the company will mail dividends checks to holders of record.

Treasury Stock

Shares of stock that have been issued and subsequently repurchased by the issuing firm. Kept by corporation and can be used for several purposes. It can be used to pay for *Mergers and aquisitions *Meet employee stock option plans *Means of paying stock dividends. Stock prices tend to go up when firm repurchases their won shares.

Cyclical Stocks

issued by compaines whose earnings are closely linked to the overall economy. They tend to move up and down with the business cycle.