This homework for Adrian Monroe so please do not send me MSG

CHAPTER OVERVIEW

Initially, this chapter describes both common and preferred stock as investment alternatives. We discuss the topics of why corporations sell common stocks and why investors purchase those stocks. Next, we examine the major differences between common stock and preferred stock. Methods that investors can use to evaluate stock investments are presented. Then the steps involved in buying and selling stocks are described. We also explain the long-term techniques of buy and hold, dollar cost averaging, direct investment plans, and dividend reinvestment plans. Finally, the speculative techniques of day trading, margin transactions, selling short, and stock options are also discussed.

LEARNING OBJECTIVES

CHAPTER SUMMARY

After studying this chapter, students will be able to:

Obj. 1	Identify the most important features of common and preferred stock.	Both common and preferred stock are equity financing. Corporations sell common stock to finance their business start-up costs and help pay for their business expansion and their ongoing business activities. People invest in common stock because of dividend income and appreciation of value. There is also the possibility of gain through stock splits. Dividend payments must be approved by a corporation’s board of directors. In return for providing the money needed to finance the corporation, stockholders have the right to elect the board of directors. They must also approve changes to the corporate policies. The most important priority that an investor in preferred stock enjoys is receiving cash dividends before any cash dividends are paid to common stockholders. Still, dividend distributions to both preferred and common stockholders must be approved by the board of directors.
Obj. 2	Explain how you can evaluate stock investments.	A number of factors can make a share of stock increase or decrease in value. Depending on specific characteristics associated with a stock, investment, account executives, financial planners, and investors often classify a particular stock investment as blue chip, cyclical, defensive, growth, income, large cap, micro cap, mid cap, penny stock, or small cap. When evaluating a particular stock issue, most investors begin with the information contained on the Internet. Stock advisory services, annual reports, information contained on the SEC web site, and in newspapers and business periodicals, can all be used to evaluate potential stock investment

Obj. 3	Analyze the numerical measures that cause a stock to increase or decrease in value.	Many analysts believe that a corporation’s ability or inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. Generally higher earnings equate to higher stock value, and lower earnings equate to lower stock value. It is also possible to calculate earnings per share and a price-earnings ratio to evaluate a stock investment. While both earnings per share and a price-earnings ratio are historical numbers based on what a corporation has already done, it is possible to obtain earnings estimates for most corporations. Other calculations that help evaluate stock investments include dividend payout, dividend yield, total return, annualized holding period yield, beta, book value, and market-to-book ratio. Fundamental analysis, technical analysis, and the efficient market theory can also be used to explain the price movements that occur in the stock market.
Obj. 4	Describe how stocks are bought and sold.	A corporation may sell a new stock issue in the primary market with the help of an investment bank. Once the stock has been sold in the primary market, it can be sold time and again in the secondary market. In the secondary market, investors purchase stock listed on a securities exchange or traded in the over-the-counter market. Most securities transactions are made through an account executive who works for a brokerage firm. A growing number of investors are using discount brokerage firms or online firms to complete security transactions. Most brokerage firms charge a minimum commission for buying or selling stock. Additional commission charges are generally based on the number and value of the stock shares that are bought and sold and if you use a full-service or discount broker or trade stocks online. To purchase stocks you can use a market, limit, or stop order.
Obj. 5	Explain the trading techniques used by long-term investors and short-term speculators.	Purchased stock may be classified as either a long-term investment or a speculative investment. Long-term investors typically hold their investments for at least a year or longer; speculators (sometimes referred to as traders) usually sell their investments within a shorter period of time. Traditional trading techniques used by long-term investors include the buy and hold technique, dollar cost averaging, direct investment plans, and dividend reinvestment plans. More speculative techniques include day trading, buying on margin, selling short, and trading in options.