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How does a Margin Loan work?

A margin loan allows you to borrow money to buy stocks using your existing investments as collateral.

What can happen if the value of stock drops and it was purchased using a Margin Loan?

You may receive a margin call and be forced to deposit more funds or sell assets; losses are amplified.

What can happen if the value of stock rises and it was purchased using a Margin Loan?

Your gains are amplified because you used borrowed money.

What is a major risk of buying stock with a Margin Loan?

You can lose more than your initial investment due to amplified losses.

What is a key difference between Active and Passive stock investing?

Active investing tries to beat the market; passive investing tracks the market.

Which of the following is a common argument for Passive Investing?

Lower fees, broad diversification, and better long-term performance.

Which of the following is a common argument for Active Investing?

The ability to exploit market inefficiencies and potentially outperform the market.

What percentage of Active Funds typically beat Passive Funds over the long term?

Only 23% over a 10-year period.

What is the textbook definition for how to value stocks?

The present value of expected future cash flows.

What are the two main future cash flows of a stock?

Dividends and the future selling price.

Why is it generally more difficult to calculate the price of a stock compared to a bond?

Stock cash flows are uncertain and variable, unlike predictable bond payments.

How might we estimate the Dividend Growth Rate?

Using historical growth rates or analyst forecasts.

What formula can be used to calculate the price of a stock with growing dividends?

P = D1 / (r - g)

The Dividend Discount Model (DDM) is the same formula as what, just with a different name?

Growing Perpetuity.

How would you value a No Growth Dividend stock?

P = D / r (Perpetuity formula).

How would you value a Constant Growth Dividend stock?

P = D1 / (r - g)

How would you explain the Required Rate of Return to an 8th grader?

It’s the amount of return you expect to make it worth investing your money.

How can you value a stock using the Price-to-Earnings (P/E) Ratio?

EPS × Industry PE ratio.

How should an investor interpret a company's P/E Ratio?

It shows how much investors will pay per dollar of earnings.

Why can’t you calculate a P/E Ratio for some companies?

Because they have zero or negative earnings.

What happens to the P/E Ratio if a company has low earnings?

It appears artificially high.

Why do Tech Companies often have higher P/E Ratios than other companies?

Investors expect fast future earnings growth.

Why do Traditional Companies that have been around for a long time typically have lower P/E Ratios?

They are expected to grow slowly and steadily.

What is a Dividend Yield?

Dividend ÷ Price paid.

What is a Capital Gains Yield?

(Price sold - Price paid) ÷ Price paid.

How can the P/E Ratio be used to assess if the stock market is over or under valued?

Compare it to historical P/E averages.

What does Common Stock provide to investors?

Equity ownership in the company.

What rights do Common Stockholders typically have?

Voting rights in corporate decisions.

What is the role of Directors elected by Common Stockholders?

They hire managers and guide the company’s strategic direction.

What is Cumulative Voting?

Allows shareholders to use all their votes on fewer board members, giving minorities more influence.

What is Straight Voting?

Votes are cast separately for each director; majority shareholders have more control.

What is a Proxy in the context of common stock?

Authorization for someone else to vote your shares.

What is a Proxy Fight?

An attempt to replace the board of directors by collecting enough proxy votes.

Which of the following is NOT a characteristic of Dividends?

Dividends are not required and not tax-deductible, but they are taxable to the recipient.

What is the difference between Cumulative and Non-Cumulative preferred stock?

Cumulative dividends accumulate if unpaid; non-cumulative do not.

What are two main benefits of stock ownership?

Dividends and capital gains.

What is a Proxy Designation?

Giving someone else the authority to vote your shares.

How can Classes of Stock benefit company founders?

Founders can retain control through special voting rights (e.g., Class B shares).

How is Preferred Stock different from Common Stock?

Preferred stock has dividend priority, often lacks voting rights, and usually pays a fixed dividend.