STOCKS
Chapter 9
Study Guide Answers
Common
Stock
Stock Vs. Preferred
Securities – all the
investments, including
stocks, bonds, mutual funds,
options and commodities that
are traded – on the securities
exchanges or the over the
counter market
Private corporation- shares are
owned by small group of people –
not traded on the stock market.
Ex. VonMaur)
Public corporation –shares are
traded on the open marketsanyone can buy them (ex. IBM,
Deere)
Stock split –your profits will
increase.
The company divides the number of
shares outstanding into a larger
number of shares –
Usually 2 for 1 split (if you owned 100
shares before – you now will have
200) The value of the shares reduces
in ½ also. They do it b/c they want
to make it more attractive and
affordable for others to buy.
Par
value- an assigned dollar
value that is printed on the
stock certificate (par value *
dividend rate= dividend in dollar
form per share)
Bull Market – a market that is
rising – people are optimisticbuy stocks- the overall stock
market value increases.
Bear Market- a falling market –
people are generally pessimistic
that the economy is doing poorly,
earning are down, etc.- people
are selling stocks
Earnings
per share- Measures
the amount of corporate profit
assigned to each share of
common stock- shows
profitability (see pg 289)
Dividend-distribution of money,
stock or property a corporation
pays to stockholders (not
guaranteed – based on corporate
earnings)
Price-earnings
ratio (P/E)used frequently to compare
companies in the same industry
(ex. Compare Wells Fargo to
Bank of America) Low PE
indicates a good investment –
the company has lots of earnings
per share of stock.
Initial Public Offering (IPO)occurs when a company sells
shares of stock for the first time
to public investors. Used to fund
new start up companies
Over-the-counter market- a
network of dealers who buy and
sell securities not listed on the
exchanges. (must match the
buyer and seller) NASDQ
STOCK TYPES
Blue Chip
Description
 attracts conservative investors- issued by
strong/respected companies (GE, AT&T)
Advantage
 relatively safe / stable earnings /consistent dividends
Disadvantage
 Can still lose money. (amount invested) / Slower
growth
INCOME
Description
 Good for investors looking for income producing
investments / Pays steady dividends / Drug and G&E
companies
Advantage
 Pays higher than average dividends / Predictable
dividends
Disadvantage
 Not a ton of growth- but consistent
GROWTH
Description
 Issued by a company whose potential earnings may be
higher than average than for all firms in the U.S. /
Tech stocks/ companies
Advantages
 Potential for growth in value/price of stock and can sell
for quick profit
Disadvantages
 Generally do not pay dividends
Potentially more risky
CYCLICAL
Description
 Stock reflects the state of the economy
John Deere, Auto makers
Advantages
When economy is good – stock value is up
Disadvantage
 When economy is bad – stock value is down
Potential for economy to remain poor
DEFENSIVE
Description
 One that remains stable during declines in economy
(many blue chip and income stocks fall in this category –
Proctor & Gamble and Kellogg)
Advantages
 Steady earnings / Continue to pay dividends even if
decline in economy
Disadvantages
 Growth is slower than that of “growth stocks”-
LARGE CAP
Description
 Stock of a company that has issued a large number of
shares of stock and has large capitalization / Typical
DOW 30 stocks
Advantages
 For conservative investors - more secure/ less risk
Disadvantages
 Steady growth – not a quick money maker
SMALL CAP
Description
 Stock issued for companies with less that $150 million
in capitalization
Advantages
 Value may appreciate faster
Disadvantages
 Higher risk investment – may be newer companies –
not a proven track record
PENNY STOCK
Description
 Typically sell for less than $1
Advantages
 Cheap investment – low money in
Disadvantages
 Very risky/ No track record of performance
LONG TERM STRATEGIES
Buy-and-Hold- long tern
investment strategy, buy and
hold for a number of yearsgenerally increase in value
over time.
LONG TERM STRATEGIES
Dollar
cost Averaging – put
an equal amount of money into
an investment an equal period of
time. Example: Buy 100 shares
of IBM at $50 per share January
1st and put in $5000 each month
into IBM stock – theory is that
over time the price you pay will
average out over time- see top of
LONG TERM CONT…
Direct Investment and Dividend
Reinvestment- buy directly from
the company and use DRIP
(dividend reinvestment plan)dividends paid from the company
will be used to purchase more
shares of the stock. Good plan for
those that don’t have a lot of $$ to
invest
SHORT TERM STRATEGIES
Buying Stock on Margin- borrow
money against your other investments
from the brokerage house to buy more
stocks – can be risky – if the overall
market value of your investments
goes down – you may have a “margin
call” and be expected to put in cash to
cover the declining value.
SHORT TERM STRATEGIES

Selling Short selling of stock that you have
borrowed from the brokerage house – you are
betting against or for the market. Make money if
stock price goes down – you can buy the stock you
need to replace back at a cheaper price and you
keep the difference. See page 301 for steps. Very
risky – if stock price increases – you must replace
it at a higher price and therefore lose money.