Upgrade to remove ads
Only $2.99/month

Persp. Ch 6

Terms in this set (55)

Residual Owners
stockholders of a firm are the owners, who are entitled to dividend income and a prorated share of the firm's earnings only after all the firm's other obligations have been met
Stock Returns
take into account both price changes and dividend income
Routine Decline
a drop of 5% or more in one of the major market indexes, like the Dow Jones Industrial Average (DJIA)
Correction
a drop of 10% or more in one of the major market indexes
Bear Market
a drop of 20% or more in one of the major market indexes
Advantages of Stock Ownership
-Provide opportunity for higher returns than other investments
-Over past 100 years, stocks earned annual returns that we roughly double the returns provided by corporate bonds
-Good inflation hedge since returns typically exceed the rate of inflation
-Easy to buy and sell stocks
-Price and market information is easy to find in financial media
-Unit cost per share of stock is low enough to encourage ownership
Disadvantages of Stock Ownership
-Stocks are subject to many different kinds of risk:
--Business risk
--Financial risk
--Purchasing power risk
--Market risk
--Event risk
-Hard to predict which stocks will go up in value due to wide swings in profits and general stock market performance
-Low current income compared to other investment alternatives
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
Publicly Traded Issues
shares of stock that are readily available to the general market and are bought and sold in the open market
Public offering
an offering to sell to the investing public a set number of shares of a firm's stock at a specified price
Rights Offering
an offering of a new issue of stock to existing stockholders, who may purchase new shares in proportion to their current ownership
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
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
Treasury Stock
-shares of stock that were originally sold by the company and have been repurchased by the company. Share repurchases are often called "buybacks."
Treasury Stock
Reduces the number of shares outstanding to public
Companies buyback when they believe stock is undervalued and a good buy
Companies may try to raise undervalued stock price or prop up overvalued stock price
May be used for mergers, acquisitions or employee stock option plans
Classified Common Stock
common stock issued in different classes, each of which offers different privileges and benefits to its holders
Classified Common Stock
Different shares may have different voting rights
Often used to allow a relatively small group to control the voting of a publicly-trade company
Ford family owns "B" shares and other investors own "A" shares; Ford family controls 40% of Ford Motor Company
May have different dividend payout schedules
Round lot
buying 100 shares of stock or multiples of 100 shares
Odd-Lot
buying less than 100 shares of stock
Par value
the stated, or face, value of a stock
(Mainly an accounting term and not very useful to investors)
Book Value
the amount of stockholders' equity
(The difference between the company's assets minus the company's liabilities and preferred stock)
Market Value
the current price of the stock in the stock market
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)
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
Dividends
-Dividend income is one of the two basic sources of return to investors
-Dividend income is more predictable than capital gains, so preferred by investors seeking lower risk
Earnings Per Share
-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)
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)
Dividend yield
=annual dividends received per share DIVIDED BY current market price of the stock
EPS
Net profits after taxes SUBTRACTED BY preferred dividends DIVIDED BY number of shares of common stock outstanding
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)
Dividend Payout ratio
= dividends per share DIVIDED BY earnings per share
Stock Dividend
payment of a dividend in the form of additional shares of stock
Dividend Reinvestment Plans (DRIPs)
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.)
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: AT&T, Chevron, Johnson & Johnson, McDonald's, Pfizer)
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: Duke Energy, Conagra Foods, General Mills, Altria Group)
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: Amazon, Apple, Google, eBay, Berkshire Hathaway, Starbucks)
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, Yahoo!, NVIDIA, SanDisk, Intel, Electronic Arts)
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: Sirius XM Radio, Dreamworks Animation, Liberty Media, Under Armour)
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: Alcoa, Caterpillar, Genuine Parts, Lennar, Brunswick, Timken)
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: Walmart, Checkpoint Systems, WD-40))
large cap stocks
Large companies with market capitalizations over $10 billion.
((Number of companies is smaller, but account for 80% to 90% of the total market value of all U.S. equities
Bigger is not necessarily better
Tend to lag behind small-cap and mid-cap stocks, but typically have less volatility
Examples: Walmart, Exxon Mobil, Apple))
Mid cap stocks
Medium-sized companies with market capitalizations between $2 billion and $10 billion.
((Provide opportunity for greater capital appreciation than Large-Cap stocks, but less price volatility than Small-Cap stocks
Usually have long-term track records for profits and stock valuation
"Baby Blues" offer same characteristics of Blue Chip stocks except size
Examples: Logitech, American Eagle Outfitters, Garmin Ltd.))
Small cap stocks
Small companies with market capitalizations less than $2 billion.
((Provide opportunity for above-average returns (or losses)
Usually do not have a financial track record
Earnings tend to grow in spurts and can have dramatic impact on stock price
Usually not widely-traded; liquidity is an issue
"Initial Public Offerings" (IPOs)
Examples: Callaway Golf, Wendy's, Shoe Carnival))
Buying Shares Directly in Foreign Markets
-Most adventuresome approach
-Logistical problems: fluctuating currency rates, different regulatory and accounting standards, tax problems, "red tape
Buying American Depositary Shares (ADSs)
-Simpler approach
-Bought and sold on U.S. markets just like stocks in U.S. companies
-Transactions are in U.S. dollars
Total returns (in u.s dollars)
= current income (dividends)
PLUS
capital gains (or losses)
PLUS/MINUS
Changes in currency exchange rates
Storehouse of value
-Safety of investment is primary goal
-Investors use high-quality blue chip and non-speculative stocks
To Accumulate Capital
-Growth of investment is primary goal
-Investors use growth-oriented stocks to generate capital gains
Source of Income
-Current income is primary goal
-Investors use stocks with dependable flow of dividends
Buy and hold
-Investors buy high-quality stocks and hold them for extended time periods
-Goal may be current income and/or capital gains
-Investors often add to existing stocks over time
-Very conservative approach; value-oriented
Current income
-Investors buy stocks that have high dividend yields
-Safety of principal and stability of income are primary goals
-May be preferable to bonds because dividends levels tend to increase over time
-Often used to provide to supplement other income, such as in retirement
Quality Long-Term Growth
-Investors buy high-quality growth stocks, mid-cap stocks and tech stocks
-Capital gains are primary goal
-Higher level of risk due to emphasis on capital gains
-Significant trading of stocks may occur over time
-Diversification is used to spread risk
-"Total Return Approach" is version that emphasizes both capital gains and high income
Aggressive Stock Management
-Investors buy high-quality growth stocks, blue chip stocks, mid-cap stocks, tech stocks and cyclical stocks
-Capital gains are primary goal
-High level of risk due to emphasis on capital gains
-Investors aggressively trade in and out of stocks, often holding for short periods
-Timing the market is key element
-Time consuming to manage
Speculation and Short-Term Trading
Also called "day trading"
-Investors buy speculative stocks, small-cap stocks and tech stocks
-Capital gains are primary goal
-Highest level of risk due to emphasis on capital gains in short time period
Investors aggressively trade in and out of stocks, often holding for extremely short periods
-Looking for "big score" on unknown stock
-Time consuming & high trading costs
Buy and hold
...
THIS SET IS OFTEN IN FOLDERS WITH...