Ch. 8 Economics

Which of the following is considered the best health indicator of American history? (p. 153) *NYSE *DJIA *S&P 500 *Amex

DJIA

person on the trading floor who makes requested trades (p. 148)

floor trader

What is the term for a corporation's first sale of stock? (p. 149)

initial public offering

Privately managed stock portfolios (p. 154)

mutual funds

Short Answer: (p. 150-151) *What is a stock exchange? *What is the full name of the most reputable stock exchange? *Give one reason for its importance.

*A stock exchange is simply a location to which people come to buy and sell stocks. *The New York Stock Exchange *It's important because of its history, its location in New York, and the presence of many of the world's most significant companies in its roster.

Short Answer: Describe a stock index and explain its purpose. (p. 152-153)

*A stock index is a group of important stocks from a particular industry. *Analysts use these groups to help identify stock trends in specific industries.

*In the realm of stock markets, what is speculation? *What financial phenomenon often results from speculation, and what are its effects? (p. 156-157)

*Buying and selling stock for the purpose of taking advantage of short-term price changes to make money. *The financial phenomenon is called a speculative bubble; this is where stock prices rise due to consumer expectations and eventually it will burst causing prices to fall and other investors to lose money.

Short Answer: What is the fundamental difference between common and preferred stock? Name two advantages or disadvantages of each type of stock. (p. 147-148)

*Common stock represents partial ownership of the company. *advantage: owners have voting rights. *disadvantage: carries more risk than preferred stock. *Preferred stock asserts the buyer's right to some of the profits of the company. *advantage: carries less risk of loss than common stock. *disadvantage: shareholders usually don't have the right to vote on important matters to the business.

Short Answer: How do stock markets reflect the laws of supply and demand? Explain. (p. 151)

*Stock markets reinforce that prices are a reflection of what consumers are willing to pay for a product. *If buyers perceive that a company is doing well financially, the demand for that company's stock will increase and the price of the stock will increase. *If buyers perceive that a company's stock is worth less than before, demand for its share will drop, eventually driving the price down as well.

What is the most well-known stock index in the United States, and who developed it? (p. 152)

*The DJIA (Dow Jones Industrial Average) *Charles Dow

What is the most well-known stock exchange in the world, and what accounts for its importance? (p. 151)

*The NYSE (New York Stock Exchange) *Its importance is based on its history, its location, and the corporations that it lists.

What stock index gives a broader perspective than the DJIA, and why is it important? ( p. 153)

*The S&P 500. *It tracks not only industrial production but also other types of industries, including service industries.

What does the acronym SEC stand for? Name one purpose of the organization. (p. 157-158)

*The Securities and Exchange Commission *One purpose is to require companies to fully disclose their financial status.

In what 2 countries did stock exchanges originate? (p. 150)

1. Great Britain 2. Holland (or the Netherlands)

In what 2 ways its a stock market like other markets? (p. 151)

1. It is a location where those who wish to buy and sell a product come together. 2. The price of its product reflects what consumers are willing to pay.

Short Answer: Name 2 ways in which stock markets are important today. (p. 154)

1. Stock market indices provide valuable information to business leaders, economic analysts, and governmental policymakers for their jobs. 2. Stock markets provide opportunities for individuals to invest and earn money.

List 3 reasons that stock markets are important to the economy. (p. 154)

1. They provide a place where corporations can raise needed revenue. 2. They provide opportunities for individuals to invest. 3. They provide valuable information concerning the state of the nation's economy.

Short Answer: What are the 2 primary reasons that people buy stock? (p. 149)

1. To make a profit. 2. To receive dividend payments.

Stockholders can be called to vote on _________________. (p. 147)

1. electing a board of directors 2. hiring or firing a manager. 3. expanding into a new market.

Standard & Poor's 500 (S&P 500)

An index based on the stock prices of 500 of the largest firms by market value. (p. 153)

Dow Jones Industrial Average (DJIA)

An index that tracks stock prices of 30 large, well-known U.S. corporations. (p. 153)

What do the owners of a corporation lose when they sell shares of stock? (p. 148-149)

A portion of the control of the corporation.

How does a person control a corporation? (p. 147)

By obtaining majority ownership of that corporation's shares of stock.

Why do corporations sell stock? (148-149)

Corporations sell stock to raise money for research, purchasing necessary materials, expansion, and so forth.

Explain how the phrase "buy low; sell high" applies to buying stock for profit. (p. 149)

Investors buy stock at a price below what they believe will soon be its market value and then sell it when the price rises above their purchase price, thus making a profit on each share.

The first American stock exchange was located in _________________. (p. 151)

Philadelphia

Where and when did the first U.S. stock exchange develop? (p. 151)

Philadelphia, 1790

According to the text, what are 2 distinctions between gambling and stock ownership? (p. 155)

Purchasing stock is more than just a remote opportunity to make money. It is purchasing partial ownership of a corporation. Purchasing stock does not carry the same amount of risk that gambling does.

The fact that spending on services constitutes the majority of U.S. consumer spending makes which of the following important? (p. 153) *NYSE *NASDAQ *DJIA *S&P 500

S&P 500

What is the evidence of ownership of a corporation? (p. 147)

Shares of stock

American Stock Exchange (AMEX)

Stock market where shares of smaller companies are traded. (p. 152)

What is the largest stock exchange in the United States that has no trading floor? (p. 151)

The NASDAQ (National Association of Securities Dealers Automated Quotations)

When and why was the SEC founded? (p. 157-158)

The SEC was founded following the Great Depression to protect investors by regulating brokers and exchanges and ensuring that corporations provide accurate and current information to the public.

Initial Public Offering (IPO)

The first public offering of a corporation's stock. (p. 149)

Owning shares of stock not only makes a person a partial owner of a corporation but also gives that person what other opportunity? (p. 147)

The opportunity to vote on business decisions proposed by the board of directors.

Short Answer: IPOs are often less than half the company's total stock. Why? (p. 149)

The original owners want to retain a majority holding stock in their company.

What is the danger of speculation? (p. 156)

There is a high risk of losing your entire investment.

Which of the following is NOT true of Charles Dow and Edward Jones? (p. 153) *They founded the Wall Street Journal. *They were known for honest reporting. *They invented the DJIA together. *They had a third business partner.

They invented the DJIA together.

When launching an IPO, how do the original owners maintain control of their corporation? (p. 149)

They offer less than 50% of its stock for sale.

What are the two principal reasons that individuals purchase shares of stock? (p. 149)

To make a profit and to receive dividend payments.

What is the primary reason for a corporation selling shares of its stock? (p. 148-149)

To raise capital for business expenses.

The stock market crash of 1929 was a result of ________________. (p. 157)

a speculative bubble

Identify each of the following as being associated with common (C) or preferred (P) shares of stock.(p. 147-148) a. shareholders receive dividends first b. owners have voting rights c. considered true ownership d. less risky e. if the corporation fails, these shareholders receive any leftover revenue ahead of other shareholders.

a. P b. C c. C d. P e. P

Fee paid for a stockbroker's services (p. 148)

commission

If a corporation files for bankruptcy and sells all its assets, who would last receive payment from the proceeds of the sale? (p. 147)

common shareholders

What is the most prevalent type of stock that most corporations offer? (p. 147)

common stock

a distribution of a portion of a company's profits (p. 147)

dividend

portions of ownership in a corporation (p. 154)

stock

A collection of stocks from different individual corporations (p. 154)

stock portfolio

person specializing in buying and selling stocks for clients. (p. 148)

stockbroker

electronic message board indicating stock prices and transactions (p. 148)

tape

The SEC was founded following which important historical event? (p. 157)

the Great Depression

The stock exchange famous for having no "floor" is _______________. (p. 151)

the NASDAQ