Personal Finance Chapter 12- Stocks

Round

Fewer than 100 shares of a stock.

Par Value

Has nothing to do with a stock's market value.

Stockholders Gain Profits in Two Ways

1) They may earn dividends. 2) Through capital gain

Lot

100 shares or multiples of 100 shares of one stock.

NYSE Trading Hours

9:30am to 4:00pm Monday thru Friday, excluding holidays

Securities Exchanges

Are marketplaces where brokers who represent investors meet to buy and sell securities.

Floor Brokers

Buy and sell stocks on the exchange. Only those who are members of the exchange can do business there.

Stock Split

Can add to the overall of stock over time. A stock split is an increase in the number of outstanding shares of a company's stock. When a company increases it stocks, it lowers the selling price in direct proportions.

Takeovers

Can be favorable for the employees of the company as there may be a loss of jobs.

Common Stockholders

Don't directly manage the corporation but may vote on major ownership decisions. Each share has the same voting power to the more shares owned, the greater the power to influence corporate decisions. They may vote in person or by proxy.

Preferred Stockholders

Earn the stated dividend no matter how well the company is doing. If the company fails, they are paid before common stockholders. Dividends may be lower than common stock dividends.

The Market

If a company is in a popular industry and its products or services are selling well, the stock price will rise. If the demand for a particular product or service declines, the price of stock will also decrease.

Short Term Techniques

If you buy and sell stock within a short period, you are speculator or day trader. When you buy and sell stocks for quick profits, you are "playing the stock market." Many investors make short-term gains through a process called buying on margin and selling short. Short-term gains can be very risky.

Long Term Techniques

If you hold your investment for a year or longer you are an investor. Most financial consultants advise you to invest for the long term.

Preferred Stock

Pays a fixed dividend and has no voting rights. This kind of stock is less risky than common stock.

Dollar Cost Averaging

Involves the systematic purchase of an equal dollar amount of the same stock at regular intervals. The result is usually a lower average cost per share.

Stock Index

Is a benchmark that investors use to judge the performance of their investments. An example of this is the Dow Jones Industrial Avenue, which only has 30 stocks listed on the NYSE.

Leverage

Is when borrowed money is used to buy securities. You use less of your own money can buy more stocks with less cash.

Blue Chip Stocks

Larger, well-established corporations with a solid record of profitability. THey are conservative as they are considered safe and stable and have moderate returns.

Reinvesting Dividends

Means using dividends previously earned on the stock to buy more shares. Buying stock this way avoids a broker fee and other costs of receiving cash dividends on the stock.

NASDAQ

National Association of Securities Dealers Automated Quotation System. To be listed with this, companies must have issued at least 100,00 shares of stock worth 1 million dollars.

Bull Market

Pro-longed period of rising stock prices. Confidence about how the country is doing also serves to drive up stock prices. There is a feeling of investor optimism.

Overvalued Stocks

Stocks that are selling at a price that seems too high based on their earnings potential. It is risky for the investor because the price of the stock will most likely drop.

Cyclical Stocks

Stocks that do well when the economy is stable or growing but do poorly during recessions. Examples- travel companies, airlines, resorts.

Trading Volume

The figure shows the total number of shares traded for the day listed in hundreds. To get the actual number traded, add "00'" to the end of the number listed.

Cycles

What the stock market goes through. Stocks go up in value for a period of time. Then the market corrects itself as people sell to make a profit and then stock prices decrease.

Capital Loss

When a stock decreases in price.

Interest Rates

When these are low, people look for more profitable places to invest their money. As interest rates rise, people tend to move their money to safer investments. When interest rates fall below the current rate of inflation, people buy more stock and stock prices rise.

Income Stocks

Are stocks that have a consistent history of paying high dividends. Investors chose they stocks so that they receive current income in the form of dividends.

Outstanding

Shares in the hands of investors.

Buy on Margin

You can borrow money from your broker to buy stock. You must sign a contract called a margin agreement. You must also deposit a minimum of $2,000 in cash.

Factors that Affect the Price You Pay for a Stock

1- The company 2- Interest Rates 3- The Market 4- Earnings Per Share

Dividends

A part of the corporations profits that are paid to the stockholders.

Capital Gain

A profit from the sale of property or of an investment. This only becomes a profit when the stock is sold. It is the difference between the original purchase price and selling price.

Bear Market

A prolonged period of falling stock prices. There is a feeling of investor pessimism as investors become negative about the overall economy as stock prices may fall 20% or more and start to sell stocks. These markets last three to four times as long as a bear market usually.

Proxy

A stockholder's written authorization to transfer his or her voting rights to someone else who is usually a company manager. Most stockholders sign this rather then attend the meetings.

Buy and Hold

All stocks go up and down but over several years the overall trend of non-speculative stocks is moderately ip.

AMSE

American Stock Exchange. To be listed on this, a company must meet a minimum number of public shares and dollar market value requirements.

Trading Posts

Are horseshoe shaped counters which has specialists and are the brokers to the floor brokers. All buying and selling is done around these. About 90 different stocks are assigned to each. Posts display units above each counter that show which stocks are solid in each section, the last price of the stock and whether the price is an increase or decrease from the previous price.

Growth Stocks

Are stocks when the corporation reinvests their profits into the business so it can grow. The corporations may pay little or no dividends. Investors buy these stocks for future capital gains.

Earnings Per Share

Are the corporations after tax earnings divided by the number of common stock shares outstanding. Stockholders use this as a measure of a company's profitability.

Direct Investment

Is buying stock directly from a corporation. By doing this you avoid brokerage and other purchasing fees. The shares may also be at lower prices than on open exchanges. Often available to existing stockholders who may have the privilege of buying additional shares at fixed prices that are at or below market value.

NYSE

New York Stock Exchange is the largest organized exchange in the US. To be listed on this, a company must meet a minimum number of public shares and dollar market value requirements.

Over-The-Counter

OTC, securities brought and sold through brokers and not through a stock exchange. This is a market of brokers who buy and sell the securities of corporations that are not listed on a securities exchange.

Market Values

Reflects the price investors are willing to pay for the stock. This is dependent on how financially stable the company is and how well it is expected to perform in the future.

Defensive Stocks

Remains stable and pays dividend during economic declines. Usually these companies have a history of stable earnings. These stocks are not affected by business cycles. Examples- utilities, drugs companies, food and health care. These are usually safe to invest in during bad economic times.

ROI

Return on Investment. It is the profit earned on the stock as a percentage of the total cost of buying the stock. Your profit is the difference between what you paid for the stock and what you sold it for plus any dividends you earned. To compute the total costs, add commission paid to the stockbroker to the purchase price of the stock. Then find this by dividing the profit by cost.

Selling Short

Selling stock is borrowed from a broker that must be replaced at a later time. To sell short, you borrow a certain number of shares from the broker. You then sell the borrowed stock knowing you much by it back later and return it to the broker.

Price/Earnings Ratio

The is calculated by dividing the current stock price by earnings per share from the last four quarters.

The Company

The stock is "attractive" and investors will want to purchase the stock when the bills are being paid and making a profit. The stock price should continue to rise.

Net Change

This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means this was positive.

Ticker Symbol

This is the unique alphabetic name which identifies the stock.

Common Stock

This type of stock pays a variable dividend and gives the stockholder voting rights.

Undervalued Stocks

Those that have market values that seem too low. They are good investments for investors but create a dangerous situation for businesses. The corporation is vulnerable to a takeover by a large investor or company.

Less-Established Stocks

Young corporations have a higher risk because it is not known if they will be successful or not. These types of stocks are usually inexpensive but risky.