Ch. 14 Investing in stocks and bonds

Corporation

State-chartered legal entity that can conduct business operations in its own name.

Public Corporation

I sone that issues stock purchased by the general public and traded on stock markets such as the New York Stock Exchange.

Privately Held Corporation

Is held by a relatively small number of people and is not traded on a public stock exchange.

Star-up Capital

Funds initially invested in a business enterprise.

Securities

Negotiable instruments of ownership or debt.

1. Common Stock

2. Preferred Stock

3. Bonds

Common Stock

Most basic form of ownership of a corporation. For investors, stocks represent potential income because the investor owns a piece of the future profits of the company.

Cash Dividends

Cash profits that a firm distributes to stockholders by the board of directors.

Market Price

A share of stock, which is the current price that a buyer is willing to pay a willing seller. Will increase over time.

Residual Claim

Common stockholders have a right to share in the income and assets of a corporation after higher-priority claims are satisfied.

Limited Liability

AS their responsibility for business losses is limited to the amount invested in the shares of stock owned.

Board of Directors

This group sets policy and names the principal officers of the company.

Management

Who runs the firms day-to-day operations.

Proxy

Can vote by proxy. Shareholder’s written authorization to someone else to represent them and to vote their shares at a stockholder’s meeting.

Preferred Stock

Type of fixed-income ownership security in a corporation. Owners of preferred stock receive a fixed dividend per share that corporations are required to distribute before any dividends are paid out to common stockholders.

Noncumulative Preferred Stock

The preferred stockholders would have no claim to previously skipped dividends.

Convertible preferred stock

A unique security occasionally sold by companies, can be exchanged at the option of the stockholder for a specified number of shares of common stock.

Bond

Is an interest-bearing negotiable certificate of long-term debt issued by a corporation, the U.S. government, or a municipality.

Bonds are basically IOUs that are subsequently bought and sold in the bond market.

Investors lend the issuer a certain amount of money with 2 expectations

(1) they will receive regular interest payments at a fixed rate of return for many years, and

(2) they will get their principal returned on a specific day in the future, called the maturity date

Maturity Date

Date upon which the principal is returned to the bondholder. If an investor wants to sell before the maturity date, they must recognize that the market price of the bonds is sensitive to changes in interest rates.

Profit

Money left over after a firm pays all expenses and interest to bondholders.

After-tax Profit

Money left over after a firm has paid expenses, bondholder interest, and taxes.

Retained Earnings

Money left over after a firm has paid expenses, bondholder interest, taxes, preferred stockholder dividends, and common stockholder dividends.

Crowdfunding

Is a way for companies to raise capital. Very risky investment, and most such start-ups are bankrupt withing 3-5 years.

Pre-emptive Right

Right of common stockholders to purchase additional shares before a firm offers new shares to the public.

Income Stock

A stock that may not grow too quickly, but year after year pays a cash dividend higher than that offered by most companies.

Growth Stock

The stock of a company that offers the promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings in all economic.

Beta Value

A measure of stock volatility; that is, how much the stock price varies relative to the rest of the market.

Beta coefficient

A measure of stock volatility; that is, how much the stock price varies relative to the rest of the market.

A high beta means there is more price volatility, and possible big swings in price as the market changes.

Fundamental Analysis

School of thought in market analysis that assumes each stock has an intrinsic (or true) value based on its expected stream of future earnings.

Technical Analysis

Often these are authors of investment newsletters focusing more on short-term investing.

This method of evaluating securities analyzes statistics through the study of past market data, primarily price and volume. Use charts, mathematics, software, and graphs to identify and predict future price movements, almost entirely on recent price changes.

Corporate Earnings

The profits a company makes during a specific time period that indicate to many analysts whether to buy or sell a stock.

Earnings Per Share (EPS)

A firm’s profit divided by the number of outstanding shares. Indicates the income that a company has available, on a per-share basis, to pay dividends and reinvest as retained earnings.

Annual profit divided by the number of outstanding shares.

Price/earnings Ration (p/e ratio)

Is the current market price of a stock divided by earnings per share (EPS) over the past four quarters. This ratio is the primary means of valuing a stock.

Earnings Yield

The earnings per share of a stock divided by its price; an inversion of the price/earnings ratio; helps investors more clearly see investment expectations in percentage form.

Trailing P/E ratio

Measures because it is calculated using recently reported earnings, usually from the previous four quarters.

Calculated using recently reported earnings, usually from the previous four quarters.

Projected P/E or forward price/earnings ratio

Because investors need to look to the future rather than the past, this measure divides price by projected earnings over the coming four quarters.

Earnings Yield

Is the inverse of the P/E ratio can also be calculated based on projected P/E//

PEG Ratio or Price-earnings Growth

The P/E ratio divided by the company’s projected growth rate.

Price/sales Ratio (P/S Ratio)

Indicates the number of dollars it takes to buy a dollar’s worth of a company’s annual revenue.

Shows the number of dollars it takes to buy a dollar’s worth of a company’s annual revenues; calculated by dividing company’s total market capitalization by its sales for the past four quarters.

Dividends Per Share

Measure translates the total cash dividends paid out by a company to common stockholders into a per-share figure.

Employee Stock Option (ESO)

Is a gift, like a bonus, from an employer to an employee that allows them to benefit from the appreciation of their employer’s stock price with or without putting any money down.

Dividend Payout Ratio

Is the dividends per share divided by EPS.

It helps us judge the likelihood of future dividends.

Book value or Shareholder’s Equity

New worth of a company, determined by subtracting total liabilities from assets.

Book Value Per Share

Reflects the book value of a company divided by the number of shares of common stock outstanding.

Price to Book Ratio (P/B ratio)

Identifies firms that are asset rich, such as many banks, brokerage firms, and insurance companies.

Current stock price divided by the per-share net value of a firm’s plant, equipment, and other assets minus liabilities (book value).

Treasury Bills

Government securities with maturities of less than one year. Historically exceeded the rate of inflation by a slight degree, but not always. Sometimes it is lower.

Real rate of return

zero return on investment after inflation and income taxes.

Estimate of the required rate of return on an investment

A calculation that multiplies the beta value of an investment by the estimated market risk premium and adds the risk-free T-bill rate.

Potential Return

Determined by adding anticipated income (from dividends, interest, rents, or other sources) to the future value of investment and then subtracting the investment’s original cost.

Approximate Compound Yield

A measure of the annualized compound growth of any long-term investment stated as a percentage.

Stock Screening Tool

Enable you to quickly sift through vast databases of hundreds of companies to find those that best suit investment philosophy and objectives.

Portfolio Tracking

Automatically updates the value of our portfolio after we enter the symbols of the investments we own and the number of shares held.

10-Q Report

Reports required by the SEC prepared by the company showing its financial results for the year and quarter, a discussion from management, a list of material events and other risk factors that have occurred, forecasts oof the company’s future, and notes of any significant changes or events since the last report.

Annual Report

Legally required yearly report about financial performance, activities, and prospects sent to major stockholders and made available to the general public.

Prospectus

Highly legalistic information presented by a firm to the SEC and to the public with any new issue of stock.

Securities Market Index

Measures the average value of a number of securities chosen as a sample to reflect the behavior of a more general market.

Dow Jones Industrial Average (DJIA)

The most widely reported of all stock market indexes that tracks prices of 30 actively traded blue chip stocks, including well-known companies such as American Express, Walmart, and Coca-Cola.

Standard and Poor’s (S&P) 500 Index

Reports price movements of 500 stocks of large, established, publicly traded firms.

NASDAQ Composite Index

Takes into account all stocks traded in this online global marketplace started in 1971 by the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA)

FT Wilshire 5,000 Index

Is a market-capitalization-weighted index of the market value of all stocks actively traded in the U.S.

Russel 2,000 Index

Is a small-cap stock market index of relatively small capitalized companies and is the most widely quoted measure of the overall performance of the small-cap to midcap company shares.

Securities Exchange or Stock Market

Market where agents of buyer and sellers can find each other easily by providing an orderly, open plan to trade securities.

Over the counter (OTC) or off-exchange trading

Used to refer to stocks that trade via a dealer network of a centralized exchange like the NYSE.

Stockbroker or account executive

is licensed to buy and sell securities on behalf of the brokerage firm’s clients. Can buy or sell securities through an online or human stockbroker, both linked to a brokerage firm that has access to the securities markets.

Cash Account

Brokerage account that requires an initial deposit and specifies that full settlement is due to the brokerage firm within three business days after a buyer or sell order has been given.

General (full service) Brokerage Firm

Offer a full range of services to customers, including investment advice and research.

Security’s Street Name

Securities certificates kept in the brokerage firm’s name instead of the name of the individual investor.

Round Lots

Which are standard units of trading of 100 shares of stock and 1000 or 5000 par value for bonds.

Odd lot

Is an amount of a security that is less than the normal unity of trading for that particular security.

Day Trading

Is speculation in securities, specifically buying and selling financial instruments within the same trading day with the hope that prices will move enough to cover transactions costs and earn some profit.

Financial Industry Regulatory Authority (FINRA)

is the largest regulatory organization in the securities industry and offers BrokerCheck providing consumers with a snapshot of a broker’s employment history, regulatory actions, and investment-related licensing information, arbitrations, and complaints.

Executing an order

Stockerbroker will facilitate the transaction between buyer and seller according to prescribed instructions.

Margin Buying

Requires making a deposit of 2000 in cash or securities. It is an account offered by brokers that allows investors to borrow money to buy securities.

Margin

Is the percentage of the value or equity in an investment that is not borrowed. Regulation T sets the requirement for stocks at 50 percent, thus at least 50 percent of each dollar invested must be the investors.

After tax money

Where you earn an income on which you pay taxes and then you invest some of the remaining money.

Maintenance Margin Requirement

Would be implemented by the broker. Minimum amount of equity that must be maintained in a margin account. The FINRA required minimum level or margin to be maintained is 25 percent of the total market value of the securities in the margin account, although many brokerages have higher maintenance requirements such as 30-40 percent.

Margin Call

Demand by a broker that an investor deposit cash or securities to cover possible losses.

Buying Long

Buying a security (especially on margin) with the hope that the stock price will rise.

Selling Short

Investors selling securities they do not own (borrowing them from a broker) and later buying the same number of shares of the security at an anticipated lower price (returning them to the broker).

Covers the position

Many brokers hold the proceeds of a short sale, without paying interest, until the customer covers the position by buying it back for delivery to the broker.

Investment Grade Bonds

Offer investors a reasonable certainty of regular receiving periodic income (interest) and retrieving the amount originally invested (principal).

Speculative Grade Bonds

Long-term, high-risk, high-interest rate corporate (or municipal) IOUs issued by companies (or municipalities) with poor credit ratings. Also called junk bonds or high-yield bonds.

High-yield Bonds

They carry investment ratings that are below traditional investment grade and carry a higher risk of default (not repaying the bond investors).

Default Rate

On investment grade AAA-rated bonds is essentially 0 percent. Is is under .5 percent on AA bonds and A bonds; and just above 1percent on BBB bonds.

Zero Coupon Bond or zeros or deep discount bonds

Are municipal, corporate, and Treasury bonds that pay no annual interest. They are sold to investors at sharp discounts from their face value and may be redeemed at full value upon maturity.

Coupon Rate

is the interest rate printed on the certificate when the bond is issued. It reflects the total annual fixed rate of interest that will be paid.

Serial or sinking fund

Money is set aside with a trustee each year for repayment of the principal portion of the debt. Bonds with sinking funds are considered safer (all else the same), given the presence of these funds dedicated to repayment.

Corporate Bonds

Are interest-bearing certificates of long-term debt issued by a corporation. They represent a needed source of funds for corporations. The dollar value of newly issued bonds is much higher than the dollar value of newly issued stocks.

Bond Rating

Represents the opinion of an outsider on the quality-or creditworthiness of the issuing organization. It reflects the likelihood that the issuing organization will be able to repay its debt.

Default Risk or credit risk

which is the uncertainty associated with not receiving the promised periodic interest payments as well as the principal amount when it becomes due at maturity.

U.S. Treasury Securities

Are backing by the full faith, credit, and taxing power of the U.S. government and this all but guarantees the timely payment of principal and interst.

Treasury Securities

Securities issued by the U.S. government, including bills, notes, and bonds.

Municipal Government Bonds or munis

Issued by states, municipalities and local government agencies.

Market Interest Rates

Current long-and short-term interest rates paid on various types of corporate and government debts that carry similar levels of risk.

Interest rate risk

is the risk that interest rates will increase and bond prices will fall, thereby lowering the prices on older bond issues.

Field Yield

the interest income payment remains the same but a variable value.

Value of bond or bond selling price formula

Bond Premium

A sum of money paid in addition to the face value of a bond.

Current Yields

Equals the bond’s fixed annual interest payment (also known as the coupon yield) divided by its bond price.

It is a measure of the current annual income (the total of both semiannual interest payments in dollars) expressed as a percentage when divided by the bond’s current market price.

Current Yield Formula

Yield to maturity (YTM)

Is the total annual effective rate of return earned by a bondholder on a bond if the security is held to maturity. Internal rate of return on cash flows of a fixed-income security.