Investing in Stocks (ch. 12)

growth stocks

CS issued by companies that have exhibited sales and earnings growth well above their industry average. generally smaller stocks, and often newer

defensive stocks

CS issued by companies whose earnings tend not be be affected by swings in the economy, and in some cases actually perform better during downturns

cyclical stocks

CS issued by companies whose earnings tend to move with the economy

blue chip stocks

CS issued by large, nationally known companies with sound financial histories of solid dividend and growth records

income stocks

CS issued by mature firms that pay relatively high dividends with little increase in earnings

speculative stocks

CS that carry considerably more risk and variability than a typical stock

Can you beat the market from a risk/return perspective?

NO. They're effective and can't be "beat"

technical analysis

a method of stock analysis that focuses on supply and demand, using charts and computer programs to identify and project price trends for a stock or for the market as a whole looks at greed and fear economic factors should be avoided because it encourages moving in and out of the market, rather than buying and holding

Dividend Reinvestment Plans (aka DRIPs)

allow investors to automatically reinvest stock dividends in the same company's stock without paying any brokerage fees

book value per share formula

book value/ # of shares outstanding

large-cap, mid-cap, and small-cap stocks

classifications of CS that refer to the size of hte issuing firm--specifically the firm's market value large cap: $10 billion + mid cap: $2-10 billion small cap: < $2 billion

fundamental analysis

determining the value of a share of stock by focusing on such determinants as future earnings and dividends, expected levels of interest rates, and the firm's risk essentially looking for diamonds in the rough

how do you make money from a stock?

dividends appreciation (sell for more than you paid)

draw down (definition and wisdom)

drawdown: decrease in worth of your investment the greater the drawdown, the exponentially bigger return you need in order to break even

what does it mean to have limited liability?

even though a common stockholder owns a small part of the company, even if the company goes bankrupt, you can't lose more than you've invested--no inherent debt risk

what are stock splits

increasing the # of stock shares outstanding by replacing the existing shares of stock with a given number of new shares as the # of shares increases, each share is worth less, even though the total value of the company is unchanged

buy and hold strategy

investment strategy where you buy stock and hold it for a number of years avoids attempts to beat the market, minimizes brokerage fees and transaction costs, postpones capital gains taxes; long term gains

dollar cost averaging

investment strategy where you purchase a fixed dollar amount of stock at specified intervals you average out price fluctuations forces investing discipline

herd behavior

investors are influenced by what other investors are doing

why is profit to the company beneficial to the investors, regardless of whether dividends are paid or reinvested into the company?

investors either get dividend return OR the value of their company increases, so the value of their stock increases

since the investor can't beat the market, what's the most important thing they can do?

keep the costs of their investing to a minimum (index mutual funds and ETFs) and then leave it alone

trailing twelve month (TTM)

last 12 months earnings/price type of P/E ratio

how can you tell if a stock/other investment is a good deal?

look at metrics or ratios for the entire market, for sectors of the market, or for individual stocks Price to earnings ratio Price to book ratio Price to sales ratio Upside/downside capture ratio

loss aversion

losing money feels worse than gaining money feels good; people also don't want to admit that one of their investments is a loss and will hold it a long time after it's gone bad to avoid admitting the loss

price to earnings approach and ratio

measure of a stock's value, relative to the strength of the economy, interest rates, investor demand = price per share/earnings per share 10-30 is avg range higher PE = higher assumed growth

max amount available to common shareholders formula

net income -- preferred stock dividends

status quo bias

people don't adjust their goals or holdings over time, preferring to let what isn't broke remain instead of actively maximizing generation of wealth

upside/downside ratio (def; no specific formula given)

shows you whether a given fund has outperformed--gained more or lost less--than a broad market benchmark during periods of market strength or weakness, and if so, by how much

market to book or price to book ratio formula

stock price/book price per share most stocks are > 1.0; some up to 2.5

dividend yield (def and formula)

tells investors how much in the way of a return they would receive if the stock price and dividend remain constant annual dividends/market price of stock

declaration date

the date on which the board of directors of a company announce the size of the dividend (if there is one), the ex-dividend date, and the payment date

ex-dividend date

the date on which the stock "goes ex"; meaning that it begins trading on the stock market without dividend for that fiscal year

book value (def and formula)

the value of a firm's stocks = total assets -- total liabilities

what happens to common stockholders when companies go bankrupt?

they're unlikely to get any of their investment back, since they're the last to get to pick through the rubble of the company, after debt holders, creditors, and preferred stockholders

why would a company repurchase its own stock?

to increase the worth and power of each remaining outstanding stock

price to sales ratio formula

total market value of a stock/total sales of the company

over long term, stock markets always go...

up

Why consider stocks?

1. over time, they outperform all other investments and exceed inflation rate by a lot 2. reduce risk by diversification 3. high liquidity 4. growth in investment is determined by more than just interest rates (company performance)

earnings per share formula

[net income -- preferred stock dividends]/ # of shares outstanding tells investors who much the company will pass along in dividends

SWOT analysis

a framework for analyzing a security in which you look both internally at a firm's Strengths and Weaknesses as well s externally at their Opportunities and Threats allows you to anticipate changes that might occur in a company

stock market index

a measure of the performance of a group of stocks that represent the market or a sector or the market DOW (represents larger firms), S & P 500 (represents total market), etc.