Chapter 12: Investing in Stocks Flashcards Preview

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Flashcards in Chapter 12: Investing in Stocks Deck (57)
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Stock Exchanges

facilities that allow investors to purchase or sell existing stocks

A stock must be listed on a stock exchange in order to be traded there


Canadian stocks are traded on two markets:

1.Toronto Stock Exchange (TSX)
-Where senior equities are traded
TSX Venture Exchange
-Serves the public venture capital market
2.Montreal Exchange
-A derivatives exchange created for investors interested in trading options and futures
-Part of the TMX Group


Venture capital

refers to investors’ funds destined for risky, generally new businesses with tremendous growth potential


To be listed on the TSX, a firm must meet minimum listing requirements in areas such as:

cash flow,
net tangible assets,
working capital, and


Other Stock Exchanges

1. NYSE Euronext
-Resulted from a series of consolidations between seven stock exchanges and six derivatives markets from six countries
-Includes the New Your Stock Exchange
-A world leader for listings, stock market, trading, derivatives, bonds, and the distribution of market data
.refers to the transformation of a firm from a member-owned organization to a publicly owned for-profit organization
-The National Association of Securities Dealers Automated Quotation (NASDAQ) provides continual market price information on stocks that meet its requirements on size and trading volume
-The American Stock Exchange (AMEX) lists about 800 stocks that are generally smaller and less actively traded than those on the NYSE Euronext

3.Over-the-Counter (OTC) Market

an electronic communications network that allows investors to buy or sell securities



refers to the transformation of a firm from a member-owned organization to a publicly owned for-profit organization


Where can you find stock quotes?

Financial newspapers (e.g. Globe & Mail)
Business sections of local newspapers
Financial news television networks (e.g. BNN)
Financial websites


Selecting a Broker

Analyst Recommendations
-A full-service broker can provide you with investment advice
-Some advisers may suggest that you buy or sell securities frequently
-Recommendations made by brokers or analysts do not necessarily lead to better performance


Discount brokerage firm:

: a brokerage firm that execute transactions but does not offer investment advice


Full-service brokerage firm

a brokerage firm that offers investment advice and executes transactions
Full-service brokerage firms tend to charge higher fees


Placing an Order
Must specify the following:

Name and class of the stock,
Buy or sell,
Number of shares
Market order or limit order


Name and Class of the Stock
Ticker symbol:

the abbreviated term used to identify a stock for trading purposes


Number of Shares
Board lot

shares bought or sold in multiples of typically 100 shares. The size of the board lot depends on the price of the security


Number of Shares
Odd lot:

less than a board lot of that particular stock


Market order
(advantage and disadvantage?)

an order to buy or sell a stock at its prevailing market price
Advantage: you are assured that your order will be executed quickly
Disadvantage: stock price could change abruptly just before you place your order


Limit order:

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


Stop Orders:
On-stop order:

an order to execute a transaction when the stock price reaches a specified level; a special form of limit order


Stop Orders:
Buy stop order:

an order to buy a stock when the price rises to a specified level


Stop Orders:
Sell stop order:

an order to sell a stock when the price falls to a specified level


Placing an Order Online

The commission charged per transaction is very low


Buying Stock on Margin

On margin:
: purchasing a stock with a small amount of personal funds and a portion of the funds borrowed from a brokerage firm

Enable you to purchase stocks without having the full amount of cash necessary


Margin call:

a request from a brokerage firm for the investor to increase the cash in the account in order to return the margin to the minimum level


Analysis of a Firm:Annual Report

Includes a corporate profile, a message from the firm’s CEO, and a section summarizing recent performance and expected future performance
Also contains financial statements


Analysis of a firm: Balance sheet:

a statement that indicates a firm’s sources of funds and how it has invested its funds as of a particular point in time
- assets, liabilities, shareholder's equity.


income statement

a financial statement that measures a firm’s revenues, expenses, and earnings over a particular period of time


analysis of the firm: firm-specific characteristics

Firm-Specific Characteristics
-Shows the firm’s ability to cover expenses
-Current ratio: the ratio of a firm’s short-term assets to its short-term liabilities


Analysis of a firm:Financial leverage:

a firm’s reliance on debt to support its operations
Used to determine a firm’s ability to make debt payments


Analysis of a firm:Debt ratio

a measure of financial leverage that calculates the proportion of total assets financed with debt


Analysis of a firm:Times interest earned ratio:

a measure of financial leverage that indicates the ratio of the firm’s earnings before interest and taxes to its total interest payments


Analysis of a firm:Efficiency

A firm that generates a relatively low level of sales and earnings with a large amount of assets is not using its assets efficiently