STOCKS VS OTHER INVESTMENTS

Common stock

Voting ownership; residual claim (paid last); limited liability; unlimited upside.

Preferred stock

Fixed dividend paid before common; senior to common in liquidation; usually no vote.

Cumulative preferred

Missed dividends accumulate and must be paid before common dividends resume.

Participating preferred

Can earn above the stated dividend rate.

Convertible preferred

Convertible into common shares.

Callable preferred

The issuer can buy it back.

Float

Shares available to the public.

Pre-emptive right

Existing shareholders can buy new shares first to keep their ownership percent.

Stock split

More shares at a lower price; total value unchanged (2-for-1: 100 @ $50 becomes 200 @ $25).

Ex-dividend date

One business day before the record date; buy on/after and you do NOT get the dividend.

Blue chip stock

A large

Growth stock

High P/E

Value stock

Low P/E

Income stock

High dividend.

Defensive stock

Utilities/staples; performs steadily regardless of the economy.

Cyclical stock

Autos/airlines; performs best in expansions.

Penny stock

Trades under $5.

Shareholder

An owner of a company with a residual claim and unlimited upside.

Creditor

A bondholder or bank with a fixed claim

Agency problem

When executives act in their own interest rather than shareholders'.

Fiduciary duty

The legal obligation to act in the client's best interest. Higher than suitability.

Suitability standard

Recommendations must merely be suitable for the client.

KYC

Know Your Customer - gather a client's situation and objectives before recommending.

Churning

Excessive trading to generate commissions (illegal).

Front-running

Trading ahead of a client's order (illegal).

Selling away

Selling unapproved products (a violation).

Commingling

Mixing client and firm funds (a violation).

Income statement

Shows profitability over a period (revenue minus expenses = net income).

Balance sheet

A snapshot at a point in time. Assets = Liabilities + Equity.

Cash flow statement

Shows actual cash from operating

Current ratio

Current assets divided by current liabilities (short-term liquidity).

Quick ratio

(Current assets minus inventory) divided by current liabilities.

Debt-to-equity

Total debt divided by equity (a leverage measure).

EPS

(Net income minus preferred dividends) divided by shares.

ROE

Return on Equity - net income divided by equity.

Net profit margin

Net income divided by revenue.

Fundamental analysis

Evaluates economic

Technical analysis

Studies price charts and trading volume to predict direction.