Chapter 12: Investing in Stocks

Hannah's stock, valued at $50 per share, underwent a 2-for-1 stock split. The price of each one of Hannah's shares is now worth:

$25

Current dividends are $450, capital gains are $5,645, and interest rates are 11%. Solve for total return.

$6,095

Average returns on stocks since the end of WWWII is:

10%

A put option allows you to sell ______ shares of stock at a guarenteed price before expiration date.

100

In the case of a 2-for-1 stock split, the stockholder now owns:

2x the number of shares previously owned.

If the price per share is equal to $75.00 and earnings per share is equal to $2.50, the price-earnings ratiois equal to _______.

30

When buying stock on margin, the current margin requirement is:

50%

Hannah owns 300 shares of "Dirt International." The company does a 3 for 1 stock split. Hannah now has:

900

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 earning 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 requires that stockholders transfer their voting rights to some individual or individuals.

Account Executive

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 dame 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 issues of those securities.

Securities Exchange

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

Beta

A measure reported in many financial publications that compare 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.

Dividend Reinvestment Plan

A plan that allows current stockholders that obtain 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 large number of shares.

Limit Order

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

Market Order

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

Small Cap

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

Micro Cap

A stock issued by a company that has a capitlization 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.

Large Cap

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.

Blue Chip

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

Cyclical

A stock that follows the business cycles 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.

Preferred Stock

A type of stock that gives the owners the advantage of receiving cash dividends before common stockholders are paid by individuals.

Nasdaq

An electronic marketplace for stocks issued by approximately 3,000 different companies.

Income

An investment that pays higher-than-average dividends.

Stop-Loss Order

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

Selling short is selling stock that has been borrowed from a(n) ________ broker firm and must be replaced at a later date.

Broker

Options are the right to _____ or ______ a stock at a predetermined price during a specified period of time.

Buy or Sell

The strategy of buying a stock hoping it will increase in value over time is called:

Buying Long

You should purchase a(n) optional if you believe the price of a stock will increase a short amount of time.

Call

Divided Yield = Annual Dividend Amount Divided by:

Current Price Per Share

Book Value

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

A plan that allows stockholders to purchase stocks directly from a corporation without having to use an account executive or a brokerage firm is called:

Direct-Investment Plan

The higher the _______ yield, the more potential for a stronger investment.

Dividend

A plan that allows current stockholds the option to reinvest or use their cash dividends to purchase stock of the corporation is called:

Dividend Reinvestment Plan.

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

Dividend Yield

When selling short, since you borrow stock from a broker that belongs to another investor, you must pay any:

Dividends the stock earns.

In order to make a profit when selling short on a stock, you must consider having to pay any ______ the stock earns and you need the stock to ______ in price.

Dividends, decrease

A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals is called:

Dollar-Costing Averaging

Which of the following helps to provide projections of future stock price using PE ratio?

Earnings Estimates

Price-Earnings (PE) ratio equal price per share divided by:

Earnings Per Share

Earnings per share is equal to a corporation's _______ divided by the number of outstanding _____ of a firm's common stock.

Earnings, Shares

Churning

Excessive buying and selling of securities to generate commissions.

After stock is sold to the public, the federal governmennt requires that corporations report finanica information to the Securities and ______ Commision

Exchange

Net profit will be increased by interest on margined stocks.

False

Net profits will be increased by interest on margined stocks.

False

Investors buy on margin as borrowing money can lead to higher returns by creating:

Financial Leverage

An investment bank is a financial fimr that assistssd corporations in raising _____, usually by helping to sell new security issues.

Funds

Dollar-Costing Averaging is used to avoid buying _______ and selling _______.

High; Low

The Value Line report contains current information about the company's totalnet _______ and total ________.

Income; Revenue

Equity Financing

Money received from the owners or from the sale of shares of ownership in a business.

Information on companies websites is likey to be:

More up-to-date than printed materials.

Interest charges on margin transactions will reduce:

Net Profits

A dialy source of printed material that provides useful information about stocks is a(n):

Newspaper

Initial Public Offering (IPO)

Occurs when a corporation sells stick to the general public for the first time.

The right to buy or sell stock to a predetermined price during a specified period of time is called:

Option

The total return is a calcuation that includes the annual dollar amount of income as well as any increase or decrease from the _____ ______ price of the investment.

Original purchase

The price of a share of stock divided by the corporation's earnings per share of stock is called:

Price-Earning Ratio

What factor gives investors an idea of how much they are paying for a company's earning power?

Price-Earning Ratio

A(n) ______ market is a market in which an investor purchases financial securities through an investment bank or other representation from the issuer of those securities.

Primary

What document discloses corporate earnings, assests, liabilities, products, or services and the qualifications of top managment?

Prospectus

A ______ is a legal form that requests that stockholders transfer their voting rights to someone with in the organization who knows the situtaitons of the company better.

Proxy

A _____ ______ is the date on which a stockholder must be registered in the corporations books in order to recieve dividend payments

Record Date

An advantagae of dividend reinvestment plans is that they require lower investment minimums which allow you to purchaes stock for less money than

Required by most brokers.

Selling stock that has been borrrowed from a brokerage firm and must be replaced at a later date is called:

Selling Short

Selling Short

Selling stock that has been borrowed from a brokerage firm and must be replaced at a later date.

Earnings per share equal after-tax income divided by the number of _______ outstanding.

Shares

Margined stock will be _______ if the margin call is not met.

Sold

Buying a margin is a technique whereby an investor borrows part of the money needed to buy shares of a particular:

Stock

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

Stock split

Along with charts, graphs, and abundance of information, you can get up-to-date market values by simply entering the _____ for corporations in the Quote Lookup box on Yahoo! Finance

Symbol

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-Earning (PE) Ratio

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

Option

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

The key element in investing is:

Time

A calculation that includes the annual dollar amount of income (dividends) as well as any increase or decrease (gain or loss) in the original purchase price of the investment is called:

Total Return

A calculation that includes the annuall dollar amount of income (dividends) as well as any increase or decrease (gain or loss) in the original pruchase price of the investment is called:

Total Return

True or False: The first step in selling short stick is to borrow the stock from your broker.

True

The advantage of direct investment and dividend reinvestment plans is that you can purchase stocks ______ paying a commision.

Without

When selling short (borrowing stock and then replacing it later) it is the investor's desires that the stock:

decrease in value.