A Primer on Selected Financial Terms by odg66466


									A Primer on Selected
Financial Terms

  Dr. Dan Gilbert
  Tennessee Wesleyan College
Stock Exchange
 A mutual corporation providing facilities for
  stock brokers and traders to trade stocks and
    Archaic term: bourse
 US regulated by SEC (Securities and Exchange Commission)
1. NYSE (owned by NYSE Euronext)
    The Big Board
2. Tokyo Stock Exchange
3. NASDAQ (National Assn of Securities Dealers Automated Quotations)
 Following NASDAQ are London, Toronto,
   Frankfurt, Hong Kong, Shanghai, etc.
 The Dow Jones Industrial Average
   The Dow, the Dow Jones, the Dow 30
 The average price of the 30 of the
  largest and publicly traded
  corporations in the US
   Modified periodically; no longer
    exclusively manufacturing
 Editors of Wall Street Journal oversee
  DJIA reports
S&P 500
 Index of the stock prices of top 500
  corporations (chiefly US) in terms of
  market capitalization (stock price x
  shares outstanding)
   Bond ratings, credit ratings: AAA to D
   A division of McGraw Hill since 1960’s,
    Standard & Poor’s is a financial services
   Merger of Standard Statistics and Poor’s
    Publishing in 1940’s
Stock (generic “share”)
 A security or share of ownership in a
 Generally, two types:
   Common Stock
   Preferred Stock
 Earnings not retained by the firm are paid to
  stockholders (owners) as dividends
 Otherwise, “retained earnings” are reinvested
  in the corporation, such as new equipment,
  buildings, assets
Common Stock
 Right to share in distribution of profits
 Regular dividends –
   Typically declared quarterly by board of
   Based on profitability of firm
 Right to elect board of directors
   One certificate = one vote
 Right to remaining assets after liquidation
  (only after creditors)
   This is rare
Preferred Stock
 Dividends are paid at a fixed interval
  and fixed amount, if profits sufficient
   “Preferred” because dividends paid out of
    net earnings before dividends to holders
    of common stock
 Does not have voting rights
 Fixed amount does not increase if
  corporation more profitable
   Lower class of stock than common stock
 Sometimes viewed as creditors
Common versus Preferred
 Common stock             Preferred stock
   Dividends can be         Dividends paid at
    higher than               fix amount no
    expected if profits       matter what (if
    increase                  corporation is

   Voting rights            No voting rights

     The main issue – RISK of the owner
 A security in a corporation but without
  ownership; the bond holder is a lender
 Has a maturity date at which bond is
 Value is based on present value (PV) of all
  future interest and principal payments of
  the bond, discounted by the bond's rate of
  return (yield).
   Can be traded; less individual ownership than
 Viewed as a safer investment than stocks,
  because of creditor status
 Not without risk
Earnings per share
 Earnings Per Share: A ratio of earnings to the
  number of common shares outstanding
 EPS =                Net Earnings
           Wt Avg Outstanding Common Shares
 One indicator of a company’s profitability.
 Higher numbers are preferred.
    Outstanding shares - Weighted by number outstanding
     over different time periods (e.g., 10 million Jan-June,
     12 million July – Dec.)
    Diluted shares – shares that could potentially enter
    Should compare against stocks in same industry
    Net earnings after preferred stock dividends are paid

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