S TOCKS Chapter 9 Study Guide Answers

Common Stock Vs. Preferred Stock

Securities – all the investments, including stocks, bonds, mutual funds, options and commodities that are traded – on the securities exchanges or the over the counter market

Private corporation - shares are owned by small group of people – not traded on the stock market. Ex. VonMaur) Public corporation –shares are traded on the open markets- anyone can buy them (ex. IBM, Deere)

Stock split – your profits will increase. The company divides the number of shares outstanding into a larger number of shares – Usually 2 for 1 split (if you owned 100 shares before – you now will have 200) The value of the shares reduces in ½ also. They do it b/c they want to make it more attractive and affordable for others to buy.

Par value - an assigned dollar value that is printed on the stock certificate (par value * dividend rate= dividend in dollar form per share)

Bull Market – a market that is rising – people are optimistic- buy stocks- the overall stock market value increases. Bear Market - a falling market – people are generally pessimistic that the economy is doing poorly, earning are down, etc.- people are selling stocks

Earnings per share - Measures the amount of corporate profit assigned to each share of common stock- shows profitability (see pg 289)

Dividend- distribution of money, stock or property a corporation pays to stockholders (not guaranteed – based on corporate earnings)

Price-earnings ratio (P/E) - used frequently to compare companies in the same industry (ex. Compare Wells Fargo to Bank of America) Low PE indicates a good investment – the company has lots of earnings per share of stock.

Initial Public Offering (IPO)- occurs when a company sells shares of stock for the first time to public investors. Used to fund new start up companies Over-the-counter market- a network of dealers who buy and sell securities not listed on the exchanges. (must match the buyer and seller) NASDQ

S TOCK T YPES Blue Chip Description attracts conservative investors- issued by strong/respected companies (GE, AT&T) Advantage relatively safe / stable earnings /consistent dividends Disadvantage Can still lose money. (amount invested) / Slower growth

I NCOME Description Good for investors looking for income producing investments / Pays steady dividends / Drug and G&E companies Advantage Pays higher than average dividends / Predictable dividends Disadvantage Not a ton of growth- but consistent

G ROWTH Description Issued by a company whose potential earnings may be higher than average than for all firms in the U.S. / Tech stocks/ companies Advantages Potential for growth in value/price of stock and can sell for quick profit Disadvantages Generally do not pay dividends Potentially more risky

C YCLICAL Description Stock reflects the state of the economy John Deere, Auto makers Advantages When economy is good – stock value is up Disadvantage When economy is bad – stock value is down Potential for economy to remain poor

D EFENSIVE Description One that remains stable during declines in economy (many blue chip and income stocks fall in this category – Proctor & Gamble and Kellogg) Advantages Steady earnings / Continue to pay dividends even if decline in economy Disadvantages Growth is slower than that of “growth stocks”-

L ARGE C AP Description Stock of a company that has issued a large number of shares of stock and has large capitalization / Typical DOW 30 stocks Advantages For conservative investors - more secure/ less risk Disadvantages Steady growth – not a quick money maker

S MALL CAP Description Stock issued for companies with less that $150 million in capitalization Advantages Value may appreciate faster Disadvantages Higher risk investment – may be newer companies – not a proven track record

P ENNY STOCK Description Typically sell for less than $1 Advantages Cheap investment – low money in Disadvantages Very risky/ No track record of performance

L ONG TERM S TRATEGIES Buy-and-Hold- long tern investment strategy, buy and hold for a number of years- generally increase in value over time.

L ONG TERM S TRATEGIES Dollar cost Averaging – put an equal amount of money into an investment an equal period of time. Example: Buy 100 shares of IBM at $50 per share January 1 st and put in $5000 each month into IBM stock – theory is that over time the price you pay will average out over time- see top of pg 299

L ONG T ERM CONT … Direct Investment and Dividend Reinvestment- buy directly from the company and use DRIP (dividend reinvestment plan)- dividends paid from the company will be used to purchase more shares of the stock. Good plan for those that don’t have a lot of $$ to invest

S HORT TERM S TRATEGIES Buying Stock on Margin- borrow money against your other investments from the brokerage house to buy more stocks – can be risky – if the overall market value of your investments goes down – you may have a “margin call” and be expected to put in cash to cover the declining value.

S HORT T ERM S TRATEGIES Selling Short selling of stock that you have borrowed from the brokerage house – you are betting against or for the market. Make money if stock price goes down – you can buy the stock you need to replace back at a cheaper price and you keep the difference. See page 301 for steps. Very risky – if stock price increases – you must replace it at a higher price and therefore lose money.