Chap 10

preferred stock

A type of stock that gives its holder preference over common stockholders in terms of dividends and claims on assets. Holders of preferred stock have a claim on assets that comes before common stock- holders if the company goes out of business.]This gives preferred stockholders a better chance than common stockholders of recovering their investment if the company goes bankrupt. dividends on preferred stock are usually a stated amount. a corporation can't pay any dividend to its common stockholders unless it pays the full stated dividend on its preferred stock.

market order

An order telling a broker to buy or sell a specific security at the best currently available price.

limit order

An order to a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level

Buying and Holding

If you're a patient person with steady nerves, a buy-and-hold approach might appeal to you. This strategy involves purchasing a di- versified set of securities and holding them for a long period of time. Buy-and-hold investors put their faith in the ability of the overall market to continue the long-run upward trend it has exhibited throughout its history.

Value Investing

Investors who favor value investing try to find stocks that are undervalued in the market. They believe that the market price will rise over time to reflect its true value, thus generating a capital gain. This approach requires intensive research to identify discrepancies be- tween a company's true (or intrinsic) value and its current market price.

Investing for Growth

Investors who focus on growth look for companies that have the potential to grow much faster than av- erage for a sustained time, which they believe will lead to a steady (and sometimes spectacular) rise in the stock's price. Investors us- ing this strategy often invest in stocks of relatively new companies with innovative products in a hot sector of the economy.

institutional investors

Large organizations - such as pension funds, mutual funds, and insurance companies - that invest their own funds or the funds of others don't accept deposits but amass huge pools of financial capital from other sources and use these funds to acquire a portfo- lio of many different assets.

Financial Markets

Markets that transfer funds from savers to borrowers.

Investing for Income

Some in- vestors focus on buying bonds and preferred stocks to generate a steady, predictable flow of income. This ap- proach is popular with retirees who want to supplement their retirement income. But the return on such low- risk securities is relatively low, and their market value seldom increases much over time. T

the spread

This is the difference between the bid and the ask prices of a stock, or the amount someone is willing to buy it and someone is willing to sell it.

Dividends

earnings distributed to stockholders a distribution of earnings to the corporation's stockholders. All com- mon stockholders have the right to receive a dividend if their corporation's board of directors declares one.

market timing

try to predict when prices of specific stocks are likely to rise and fall. Market timers try to make quick gains by buying low and selling high over a relatively short time horizon. The problem with market timing is that so many fac- tors can influence stock prices—some of them random in nature—that it's tough to consistently identify the timing and direction of changes in stock prices.