2277 Final - Stocks

What is a stock?

A share in the ownership of a company that represents a claim on the company's assets and earnings.

What do shares, equity, and stock represent?

They are the same thing, representing ownership in a company.

What is a public company?

A company whose stock is sold on a public market like the Toronto Stock Exchange or the New York Stock Exchange.

How can a company change the number of shares outstanding?

By selling new shares or buying them back from the public on the stock exchange.

What factors influence stock prices?

Supply and demand, expected income growth, and company value.

Why do investors purchase stocks?

They hope the price will increase over time for a profit or to receive dividends.

What is market capitalization?

A company's value, calculated as the number of shares outstanding multiplied by the share price.

What impacts a company's cash flows?

Economy, competition, new products, government regulations, taxes, labor demands, inflation, interest rates, supply chain issues, societal trends, global conflict, and advertising blunders.

What is a dividend?

A distribution of a portion of the company's profits, usually in cash.

What is total return in stock investing?

The combination of dividends received and the increase in the stock price.

Why might companies choose not to pay dividends?

To maximize their value and invest in growth opportunities.

What is a Dividend Reinvestment Plan (DRIP)?

An arrangement allowing shareholders to automatically use dividends to purchase more shares.

What are stock exchanges?

Facilities that allow investors to purchase or sell existing stocks.

What is the Toronto Stock Exchange (TSX)?

A stock exchange where senior equities of large well-established companies are traded.

What is the TSX Venture Exchange (TSXV)?

An exchange that serves the public venture capital market for small early-stage companies.

What is the New York Stock Exchange (NYSE)?

The most popular organized stock exchange in the United States.

What is demutualization?

The transformation of a firm from a member-owned organization to a publicly owned, for-profit organization.

What is the Over-the-Counter (OTC) market?

An electronic communications network that allows investors to buy or sell securities without a formal stock exchange.

What is a bid price?

The price at which a buyer would like to purchase stock.

What is an ask price?

The price at which the seller would like to sell the stock.

What is the bid-ask spread?

The difference between what buyers want to pay and what sellers want to receive.

What is a stock quotation?

Information about the price of each stock over the previous day or a recent period.

What does the ticker symbol represent?

The abbreviated term used to identify a stock for trading purposes.

What does the P/E ratio indicate?

How much investors are paying for each dollar of the company's earnings.

What does dividend yield represent?

Annual dividends as a percentage of the stock price, indicating the annual return from dividends.

What is the significance of a company's future performance on stock prices?

If the future is better than expected, the stock goes up; if worse, it goes down.

What is the relationship between dividends and company wealth?

Dividends decrease the company's wealth as cash is distributed to shareholders.

What is a broker?

A company licensed to buy and sell stocks on your behalf or the person who works for that company.

What should you consider when selecting a broker?

Analyst recommendations, individual broker skills, and brokerage commissions.

What is the difference between a full-service broker and a discount broker?

A full-service broker offers investment advice and executes transactions, while a discount broker executes transactions without offering advice.

What does BNNMS stand for in placing an order?

Name and class of the stock, Buy or Sell, Number of shares, Market Order or Limit Order, Stop Orders.

What is a market order?

An order to buy or sell a stock at its prevailing market price.

What is a limit order?

An order to buy or sell a stock only if the price is within limits that you specify.

What is a buy-stop order?

An order to buy a stock when the price rises to a specified level.

What is a sell-stop order?

An order to sell a stock when the price falls to a specified level.

What are the advantages of placing an order online?

Low commission per transaction and convenience with real-time stock quotes and financial information.

What is buying stock on margin?

Using borrowed money from the brokerage firm to purchase stocks instead of paying in cash.

What is margin in stock trading?

The amount of your own cash that you must use to purchase a stock.

What is short selling?

Selling shares that an investor has borrowed, expecting the stock price to fall, then buying them back at a lower price.

What is the benefit of buying on margin?

Greater capital gain because it is in proportion to the total that was invested.

What is a disadvantage of buying on margin?

Larger losses because they are in proportion to what you invested.

What does the Investment Industry Regulatory Organization of Canada (IIROC) do regarding short selling?

Sets limits on the amount of margin required when short selling a TSX stock.

What is an odd lot transaction?

A transaction involving less than a board lot of shares, which is typically less than 100 shares.

What is a board lot transaction?

Shares bought or sold in multiples of typically 100 shares.

Why might brokers and analysts be overly optimistic about stocks?

They may not want to defend the firms they might do business with in the future.

What is the role of an analyst in stock trading?

To provide investment advice and recommendations to clients.

What is the risk associated with short selling?

The return is uncertain because future conditions affecting the stock price are unpredictable.

What happens if the stock price rises in short selling?

The short seller will suffer a loss.

Do short sellers actually own the shares they sell?

No, short sellers never actually own the stocks.

What primarily determines the price of a stock?

The price is based on demand, not supply.

Define demand in the context of stock pricing.

Demand is the number of investors who wish to purchase shares of a stock.

Define supply in the context of stock pricing.

Supply is the number of investors who decide to sell their shares.

What is technical analysis?

Stock valuation based on historical price patterns.

What is fundamental analysis?

Valuation of stocks based on an examination of fundamental characteristics such as revenues or earnings.

What does a balance sheet indicate?

It indicates the sources of funding and how those funds have been invested at a specific point in time.

What does an income statement measure?

It measures revenues, expenses, and earnings over a particular period of time.

What does liquidity refer to in financial analysis?

Liquidity refers to how easily a firm can meet its short-term obligations.

What is the accounts receivable turnover?

It measures the frequency with which a firm can collect its account receivables.

What does the debt-equity ratio measure?

It measures the relative amount of funds provided by lenders versus owners.

What is the times interest earned ratio?

It assesses a firm's ability to cover its debt payments; a high ratio indicates better capability.

What is the net profit margin?

It measures net profit as a percentage of sales.

Define inflation.

Inflation is the increase in the general level of prices of products and services over a specified period.

What does the consumer price index measure?

It measures the increase in the prices of consumer products over time.

What is the intrinsic valuation model?

It estimates a stock's true worth based on expected future cash flows.

What is the dividend discount model (DDM)?

A method of valuing stocks based on future dividend payments discounted at an appropriate interest rate.

What are the three models of the DDM?

Zero growth model, constant growth model, and variable growth model.

What is the price-earnings (P/E) method?

A method used to determine the value of a stock based on the firm's earnings.

What does a high P/E ratio indicate?

It may indicate that the firm is overvalued or has higher growth prospects.

What is a limitation of the P/E method?

It may be unreliable if investors overestimate future earnings.

What is aggregate demand?

Overall demand for products and services in an economy.

What is fiscal policy?

How the government imposes taxes and spends tax revenues.

What is the effect of interest rates on stock prices?

Interest rates indirectly impact stock prices through their effect on economic growth.

What is the role of industry indicators?

They measure how the market value of firms within an industry has changed over time.

What is an efficient stock market?

A market where stock prices fully reflect all available information, making it impossible to identify undervalued stocks.

What does an inefficient stock market imply?

Stock prices do not reflect all public information, allowing investors to potentially beat the market.

How do you assess the performance of stock investments?

By comparing the returns on your stock to a relevant stock index.

What are bonds?

Long-term debt securities issued by governments or corporations, collateralized by assets.

What does a bondholder receive?

Periodic interest payments and the return of the par value at maturity.

How do interest rates affect bond prices?

Bond prices move inversely to interest rates; when rates rise, bond prices fall and vice versa.

What is the par value of a bond?

The amount returned to the investor at maturity, typically expressed as a percentage of its selling price.

What is a fixed coupon payment?

Regular periodic interest income paid to a bondholder.

What is a callable bond?

A bond that allows the issuer to repurchase it before maturity.

What is a noncallable bond?

A bond that prohibits the issuer from calling it prior to maturity.

What is a sinking fund?

A pool of money set aside to pay off part of a bond issue before maturity.

What is a convertible bond?

A bond that can be converted into a specified number of shares of the issuer's stock.

What is the yield to maturity (YTM)?

The annualized return on a bond if held until maturity.

What is a discount bond?

A bond trading below its par value.

What is a premium bond?

A bond trading above its par value.

What does the term structure of interest rates represent?

The relationship between bond yield to maturity and time to maturity, often illustrated by the yield curve.

What is an inverted yield curve?

A situation where long-term interest rates are lower than short-term rates, often indicating a recession.

What are Government of Canada Bonds?

Debt securities issued by the government of Canada, guaranteed with no risk of default.

What are municipal bonds?

Long-term debt securities issued by local governments for funding municipal projects, with low risk of default.

What are corporate bonds?

Long-term debt securities issued by corporations, subject to default risk.

What are T-bills?

Short-term debt securities issued by governments, sold at a discount with low yield to maturity.

What are mortgage-backed securities (MBSs)?

Securities representing a pool of residential mortgages, insured by CMHC, attractive for income-seeking investors.

What is the current yield?

The yield derived by dividing the bond's annual coupon payments by its current market price.

What is the yield to call (YTC)?

The yield on a bond if it is held until its call date.

What is the purpose of a put feature in bonds?

It allows the bondholder to force the issuer to repay the bond early, usually when market conditions change.

What is a high-yield bond?

Bonds issued by less stable corporations that carry a higher degree of default risk.

How is interest income from bonds taxed?

It is taxed as ordinary income for federal income tax purposes.