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Chapter 6: Common Stocks

Terms in this set (43)

What are residual owners entitled too?
To dividend income AND prorated share of the firm's earnings ONLY after other obligations have been met
What does being a residual owner allow?
-Investors to tailor towards the individual's needs and preferences
-Provide steady stream of income through dividends
-May increase in value over time through CAPITAL GAINS
What do stock returns take into account?
BOTH price change and dividend income
Where do the BIG returns from stock come from?
Capital Gains
What is a routine decline?
a drop of 5% or more
What is a correction?
a drop of 10% or more
What is a bear market?
a drop of 20% or more
Why do stocks provide a good inflation hedge?
because they're returns are typically higher than the rate of inflation
What risks are stocks subject too?
-Business Risk
-Financial Rick
-Purchasing Power Risk
-Market Risk
-Event Risk
Why is it hard to predict which stocks will go up in value?
due to wide swings in profits and general stock market performance
What is equity capital?
evidence of ownership position in a firm, in the form of shares of common stock. This is why stocks are sometimes called "equities"
Whats publicly traded issues?
shares of stock that are readily available to the general market and are bought and sold in the open market
Whats a public offering?
an offering to sell to the investing public a set number of shares of a firm's stock at a specified price
What a rights offering?
an offering of a new issue of stock to existing stockholders, who may purchase new shares in proportion to their current ownership
Whats a stock spin-off?
conversion of one of a firm's subsidiaries to a stand-alone company by distribution of stock in the new company to existing shareholders
Whats a stock split?
when a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share
Why does a company perform a stock split?
Usually done to lower the stock price to make it more attractive to investors
What do shareholders end up with after a stock split?
Stockholders end up with more shares of stock that sells for a lower price
Whats a classified common stock?
common stock issued in different classes, each of which offers different privileges and benefits to its holders
What does classified common stock allow to happen?
-to allow a relatively small group to control the voting of a publicly-trade company
-Different shares may have different voting rights
-Different shares may have different dividend payout ratios
Whats par-value?
the stated, or face, value of a stock
-Mainly an accounting term and not very useful to investors
Whats book value?
the amount of stockholders' equity
-The difference between the company's assets minus the company's liabilities and preferred stock
Whats market value?
the current price of the stock in the stock market
What is market capitalization?
the overall current value of the company in the stock market
-Total number of shares outstanding multiplied by the market value per share
What is the investment value?
the amount that investors believe the stock should be trading for, or what they think it's worth
-Probably the most important measure for a stockholder
Why are dividends are preferred by investors seeking lower risk?
Dividend income is more predictable than capital gains
What are dividends taxed at?
taxed at maximum 15% tax rate, same as capital gains.
What do dividends represent?
represent the return of part of the profit of the company to the owners, the stockholders.
*What is Earnings Per Share (EPS)
the amount of annual earnings available to common stockholders, stated on a per-share basis
-Earnings are important to stock price
-Earnings help determine dividend payouts
*What is the Dividend Yield
a measure to relate dividends to share price on a percentage basis
-Indicates the rate of current income earned on the investment dollar
-Convenient method to compare income return to other investment alternatives
*Whats the Dividend Payout ratio?
the portion of earnings per share (EPS) that a firm pays out as dividends
-Companies are not required to pay dividends
-Some companies have high EPS, but reinvest all money back into company
What is a stock dividend?
payment of a dividend in the form of additional shares of stock
What is a Dividend Reinvestment Plan?
plans where cash dividends are automatically reinvested into additional shares of the firm's common stock
-Over 1,000 companies offer DRIPs
-Usually have no brokerage fees
-Uses dollar-cost averaging
What are Blue Chip Stocks?
financially strong, high-quality stocks with long and stable records of earnings and dividends
-Companies are leaders in their industries
-Relatively lower risk due to financial stability of company
-Popular with investing public looking for steady growth potential, perhaps dividend income
-Provide shelter during unsettled markets
-Examples: Wal-Mart, Proctor & Gamble, Microsoft, United Parcel Service, Pfizer and 3M Company
What are Income Stocks?
stocks with long and sustained records of paying higher-than average dividends
-Good for investors looking for relatively safe and high level of current income
-Dividends tend to increase over time (unlike interest payments on bonds)
-Some companies pay high dividends because they offer limited growth potential
-More subject to interest rate risk
-Examples: Verizon, Conagra Foods, Pitney Bowes, R.R. Donnelley, Bank of America and AmSouth Bancorp
What are Growth Stocks?
stocks that experience high rates of growth in operations and earnings
-Have sustained rate of growth in earnings above general market
-Investors expect higher price appreciation due to increasing earnings
-Riskier investment because price may fall if earnings growth cannot be maintained
-May include blue chip stocks as well as speculative stocks
-Typically pay little or no dividends
-Examples: Lowe's, Harley-Davidson, Starbucks, Kohls
What are Tech Stocks?
stocks representing the technology sector of the market
Range from speculative stocks of small companies that have never shown a profit to blue chip stocks of large companies that are growth-oriented
-Potential for attractive returns
-Considerable risk and volatility
-Difficult to put value on due to erratic or no earnings
-Examples: Microsoft, Cisco Systems, Dell
What are Speculative Stocks?
stocks that offer potential for substantial price appreciation, usually due to some special situation such as a new product
Companies lack sustained track record of business and financial success
-Earnings may be uncertain or highly unstable
-Potential for substantial price appreciation
-Stock price subject to wide swings up and down in value
-Examples: P.F. Chang's, Quicksilver, Dollar General
What are Cyclical Stocks?
stocks whose earnings and overall market performance are closely linked to the general state of the economy
-Stock price tends to move up and down with the business cycle
-Tend to do well when economy is growing, especially in early stages of economic recovery
-Tend to do poorly in slowing economy
-Best for investors willing to move in and out of market as economy changes
-Examples: Caterpillar, Maytag Corp.
What are Defensive Stocks?
stocks that tend to hold their value, and even do well, when the economy starts to falter
-Stock price remains stable or increases when general economy is slowing
-Products are staples that people use in good times and bad times, such as electricity, beverages, foods and drugs
-Gold stocks are a form of defensive stock
-Best for aggressive investors looking for "parking place" during slow economy
-Examples: Proctor & Gamble, WD-40
What are Small-Cap Stocks:
under $1 billion
What are Mid-Cap Stocks:
$1 billion to $4 or $5 billion
What are Large-Cap Stocks:
more than $4 or $5 billion
THIS SET IS OFTEN IN FOLDERS WITH...