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Chapter 14

is in increase in sales revenues a healthy sign for a corporation?
Should a firm’s net income increase or decrease over time?
Should a corporation’s earnings per share increase or decrease over time?
Common Stock
the most basic form of ownership for a corporation
why do corporations issue common stock
to finance their business start up costs and help pay for expansion and their ongoing business activities.
Why do corporation prefer selling stock?
because the money doesn’t have to be repaid and the company doesn’t have to buy back shares from stockholders
equity financing
money received from the sale of shares ownership in a business
a distribution of money, stock, or other property that a corporation pays to stockholders
how are dividends handled?
Dividends are paid out of profits, and dividend payments must be approved by the corporation’s board of directors
Dividend policies
most firms distribute between 30 and 70 percent of their earnings to stockholders
a legal form that lists the issues to be decided at a stockholders’ meeting and requests that stockholders transfer their voting rights to some individual or individuals
Why do people invest in stocks
investors want the larger returns that stocks offer, even though they are aware of the potential for losses
how to reduce anxiety when you make stock decisions:
– evaluate each investment
– analyze the firms finances
– track the firms product lines
– monitor economic developments
– be patient
two ways to make money when buying common stock
1. income fromdends and dollar appreciation of stock value
2. a stock split
What do the board of directors for corporations do?
approve all dividend distributions to stockholders
record date
the date on which a stockholder must be registered on the corporations books in order to receive dividend payments
True or false: dividends remain with the stock until two business days before the record date
a situation when a stock trades “without dividend,” and the seller – not the buyer – is entitled to a declared dividend payment
Stock split
a procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares
*no guarantees that a stock will go up after a split
what are the most common stock splits?
2-for-1, 3-for-1, and 3-for-2
total market capitalization
the value of a companies stock and other securities
*does not change because a company splits its stock
How is a stocks long-term value determined?
by the firms ability to generate sales, earn profits, and introduce new products
Preferred stock
a type of stock that gives the owner the advantage of receiving cash dividends before common stock holders are paid any dividends
*referred to as “middle” investments
preferred stock compared to corporate bonds
the yield on preferred stock is often higher than the yield on bonds but less secure than corporate bonds
preferred stock compared to common stocks
preferred stocks are safer investments that offer more secure dividends.
what does the federal government require that corporations do after stock is sold to the public?
requires that corporations report financial information to the Securities and Exchange Commission (SEC)
Stock market bubble
a situation in which stocks are trading at prices above their actual worth
Why do stock market bubbles burst?
because of an economic slowdown, high unemployment rates, higher interest rates, and other factors that affect the economy
Earnings per share
a corporations after-tax income divided by the number of outstanding shares of a firms common stock
price-earnings ratio
the price of a share stock divided by the corporation’s earnings per share of stock
*gives investors an idea of how much they are paying for a companies earning power
Dividend payout
the percentage of a firms earnings paid to stockholders in cash
dividend yield
the annual dividend amount generated by an investment divided by the investments current price share
total return
a calculation that include the annual dollar amount of dividends as well as increases or decreases in the original purchase price of the investment
annual holding period yield
a yield calculation that takes into account the total return, the original investment, and the time the investment is held
a measure that compares the volatility associated with a specific stock issue with volatility of the Standard & Poor’s 500 stock index
what are the betas of the majority of stocks
between 0.5 and 2.0
conservative stocks Vs. speculative stock
conservative stocks have low betas while speculative stocks have beats greater than one
book value
determined by deducting all liabilities from the corporations assets and dividing the remainder by the number of outstanding shares of common stock
market-to-book ratio
the current market value of one share of stock divided by the book value for one share of stock
fundamental analysis
an investment practice based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earnings
technical analysis
an investment practice based on the assumption that a stock’s market value is determined by the forces of supply and demand in the stock market as a whole
efficient market hypothesis
an investment theory based on the assumption that stock price movements are purely random
primary market
a market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities
investment bank
a financial firm that assists corporations in raising funds, usually by helping to sell new security issues
initial public offering (IPO)
occurs when a corporation sells stock to the general public for the first time
secondary market
a market for existing financial securities that are currently traded among investors
securities exchange
a marketplace where member brokers who represent investors meet to buy and sell securities
where do securities issued by nationwide corporations get traded?
New York Stock Exchange or regional exchanges
The New York Stock Exchange
one of the largest security exchanges in the world. list stocks for more than 8,000 corporations
buys or sells a particular stock in an effort to maintain an orderly market
over-the-counter (OTC) market
a network of dealers who buy and sell that stocks of corporations that are not listed on a securities exchange
an electronic marketplace for approximately 3,200 different stocks
account executive
a licensed individual who buys or sells securities for clients; also called a stockbroker
what is the minimum commission for most brokerage firms for buying and selling stock
Dollar cost averaging
a long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals
direct investment plan
a plan that allows stock holders to purchase stock directly from a corporation without having to use an account exchange or brokerage firm
dividend reinvestment plan
a plan that allows current stock holders the option to reinvest or use their cash dividends to purchase stock of the corporation
what advantage do direct investment plans and dividend reinvestment plans give to stockholders?
the enable them to purchase stock without paying a commission charge to a brokerage firm
day trader
an individual who buys and then later sells stocks and other securities in a very short period of time
do most day traders lose money?
Yes, this is one of the most speculative techniques used today – much like going to Las Vegas and gambling
a speculative technique whereby an investor borrows part of the money needed to buy a particular stock
when buying stock on margin
you borrow part of the money needed to buy a particular stock
who is the margin requirement set by?
the federal reserve board
what is the current margin requirement
50 percent
selling short
selling stock that has been borrowed from a brokerage firm and must be replaced at a later date
the right to buy or sell a stock at a predetermined price during a specified period of time
put option
the right to sell 100 shares of stock at a guaranteed price before a specified expiration date
*the purchaser is betting that the stock will decrease in value before the expiration date

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