Personal Finance- Chapter 9

a unit of ownership of a corporation
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Terms in this set (38)
what's the indicator of the 30 major blue chip stocksDOW JONESBlue Chip Stockthe stock of a large, well-established and financially sound company that has operated for many yearsHow many companies are under S & P500How many companies are under NASDAQ2,872when a company sells stock to the general public for the first time.Initial Public Offeringa market for existing financial securities that are currently traded among investors (NYSE, Nasdaq).Secondary MarketWhen securities are bought and sold through a broker but NOT on an exchange floor this is an OTC transaction.Over the counter marketThis is not a face-to-face trade but a computer-to-computer transactionNASDAQOwners get paid first so it is less risky but they have no voting rights.Preferred stockGet paid after preferred stock owners but they have voting rights.Common stockStocks that have a consistent history of paying high dividends are known as____ (Energy, utilities, financial, insurance.)Income stocks_____ are stocks in corporations that reinvest their profits into the business so that it can grow. Most growth stocks are long-term investments.(Younger companies, technology, large retail)Growth stocks____ remains stable and pays dividends even during an economic decline. This stock is generally not affected by ups and downs of business cycles. (i.e. utilities, drugs, food, and health care) There is a consistent demand for these items.Defensive stock____ do well when the economy is growing but do poorly during recession. (i.e. travel, manufacturing, restaurants).Cyclical stocksthe stock of a corporation that has issued a large number of shares and has a large amount of capitalization (total value of stocks and bonds issued by a corporation). Stocks listed in the Dow and appeal to conservative investors.Large capis a stock issued by a company with a capitalization of $500 million or less. They are a higher risk.Small capsells for less than $1/share. Usually newer companies, very unsteady & risky.Penny stocksIt is the price someone is willing to pay for that share of stock.Market valueare stocks whose prices seem low. These can be good bargains for investors but bad for the business as this leaves the business vulnerable to takeover."Undervalued" stocksstocks are selling at a price that is not justified by their earnings. These are very risky because it is likely that the price will readjust to its true value when earnings reports are made public."Overvalued" stocksShort-term techniquesBuy on margin, sell shortyou can borrow money from your broker to buy stock. You must deposit $2000 in cash or securities. Using borrowed money to buy securities is called leverage. You can buy more stocks because you are using borrowed money. You are betting that the stock will increase in value. If it does increase then you sell, pay off the loan and pocket the net profit. If the stock decreases in value, you will have a margin call where your broker will expect you to pay off the loan.Buying on MarginTo sell short you borrow shares from a broker. You then sell the borrowed shares betting that the price of the stock will drop! You want to buy the share back for less than you sold it for! If the stock prices increases, you lose money.Selling ShortLong-term techniquesBuy and Hold, Stock splitsall stocks go up and down but over the long haul they generally go up and you can ride out the down times.Buy and Holdcan add to the value of the stock over time. A split lowers the price per share but proportionally increases your number of shares.Stock Splitspurchasing stock directly from the corporation and bypassing the broker. May only be available to existing shareholders.Direct Investmentuse your dividends to buy more shares of the stockReinvesting Dividends