Chapter 9 Personal Finance

How does a company spend the money they earn from common stock? they use the money to make and sell the products; expand the business
What happens if there is a profit in the company (to the stockholders)? then earn a return or gain on their investment
Why do people buy and sell stocks? large return, stock splits, dividends
Why do companies issue stock? to raise money to start and maintain an ongoing business
What is a private corporation? one who’s shares are owned by a relatively small group of people; shares are not publicly traded
What is a public corporation? one that sells its share openly in stock markets where anyone can buy them
What are three reasons why companies issue common stock? a form of equity, dividends are not mandatory, and voting rights and control of the company
What is a proxy? a document that transfers stockholders’ voting rights to someone else
What is a preemptive right? gives current stockholders the right to buy new stock before it is offered to the general public
What must a company who issues stock do? send a quarterly report to stock holders
What is preferred stock? a stock that must receive dividends
What is the par value? the assigned dollar value that is printed on a stock certificate
Is preferred stock safer or less safe than common stock? safer
When do preferred stock holders get to vote? limited voting rights
What is the order (least safe to most safe) for investments? common stock, preferred stock, corporate bonds
What are the three types of preferred stock? cumulative preferred stock (dividends are paid before common stockholders get any), convertible preferred stock (can be exchanged for a specific number of shares of common stock), and participation feature (very rare, extra money left over after dividends is split by all stockholders)
What are the 8 types of stocks? blue-chip stock, large cap stock, small cap stock, cyclical stock, defensive stock, penny stock, growth stock, income stock
What is a blue chip stock? considered a safe investment, well known, at the top of it’s class
What is an income stock? a stock that pays higher than average dividends
What is a growth stock? a corporation whose potential earnings are higher than the average earnings predicted for all other firms
What is a cyclical stock? market reflects state of economy, when market is improving, so is stock; when market is decreasing, so is the stock
What is a defensive stock? a stock that remains stable during declines in the economy
What is a large cap stock? issued a large number of shares of stock; large amount of capitalization
What is capitalization? the total amount of stocks and bonds issued by a corporation
What is a small cap stock? a stock issued by a company with capitalization with less than 500 million
What is a penny stock? a stock that generally shares for less than $1 a share, can be up to $10 per share
What is bull market? when investors are optimistic about the economy and buy stocks
What is a bear market? occurs when investors are pessimistic about the economy and sell stocks
What is current yield? yield = dividend/stock price
What is total return current return + capital gain = total return
What is earnings per share? after tax profits/ total shares = earnings per share
What is the price/earnings ratio? P/E Ratio = market value per share/earnings per shareP/E Ratio = Average Common Stock price/net income per Share
What is the fundamental theory? assumes that a stock’s value is determined by looking at the company’s future earnings
What is the technical theory? based on the idea that a stock’s value is really determined by the stock market itself
What is the efficient market theory? argues that stock price movements are completely random
What is the primary market? where stocks are sold for the first time?
What is an initial public offer occurs when a company sells stock to the general public for the first time
What is a secondary market? a market for existing financial securities that are currently traded among investors
What is a securities exchange? a marketplace where brokers who represent investors meet to buy and sell securities
What is an account executive? stockbroker
What is a portfolio? consists of all the securities held by an investor
What is commission? a fee charged by the brokerage firm for the buying and selling of a security
What is a market order? a request to buy or sell a stock at the current market value
What is a limit order? a request to buy or sell a stock at a specific price
What is stop order? a type of limit order to sell a particular stock at the next available opportunity after its market price reaches a certain amount
What is a round lot? 100 shares or multiples of 100 shares of a particular stock
What is an odd lot? contains less than 100 shares of a stock
What are three long term investment strategies? buy and hold technique, dollar cost averaging, direct investment and dividend reinvestment plans
What are two short term investment techniques? buying stocks on margin, short selling
What is short selling? selling a stock that has been borrowed from a brokerage firm and must be replaced at a later date

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