Notes

STOCK BASICS
Vocab: http://contentlaunch.ple.platoweb.com/content/edl/personal_finance/assets/glossary.html#volatility
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Stock is a form of ownership, normally measured in shares
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Stocks pay investors back in two ways: through dividends and capital gains. A dividend is the share of a business's profit that is returned to the owners, or shareholders. Companies making no profits pay no dividends.
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Investors look at both dividends and capital gains.
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To have stock, a company typically makes an initial public offering or IPO
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Companies may raise money later by making additional stock offerings. Sometimes, when a stock becomes highly valued, it will split. Each shareholder will then be issued new shares, and the price will decrease. Splits do not change the value of the investment, only the number of shares owned. http://contentlaunch.ple.platoweb.com/content/edl/personal_finance/assets/PerFi_21L_StockSplit.jpg
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Most importantly, stocks represent ownership-Buying enough stock to control more than 50% of the voting rights is one way to take control of a company.
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The risk of owning a stock compared to a bond is that the value of a company can go down.
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Stocks also lack the stable prices of some other investments.
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Why might a stock that never pays a dividend still be a good investment? : If the company reinvests in itself instead, the stock will see capital gains.
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If a company issues 20,000,000 shares, each with identical voting rights, at least how many shares must an investor buy to be assured control of the company? : 10,000,001 shares

In order to gain control of a company through stock acquisition, an investor has to have more than 50% of the total shares, even if it is just one share more.
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What is a difference between a dividend and a capital gain? : A capital gain occurs only when a stock is sold for a profit, while a dividend can occur only when the company turns a profit.
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TYPES OF STOCKS
Preferred stock often receives a fixed dividend per share prior to any dividends for common stock. Often, common stock, the most common type of stock with no special rights, is cheaper because of this.
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Preferred stocks- fixed payments, and shares of common stock, which have high growth potential.
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Common - No special rights
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Derivatives make money from changing stock prices. Some derivatives make money when the price goes down, some when the price goes up. It would take too long to list all types of derivatives. However, some common derivatives are shorts, futures, and options.
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In a futures contract, one person promises to sell shares to another person on a future date for a specified price. If the price of a stock rises above the price in the contract, then the buyer makes money. If the price of the stock falls below the price in the contract, the seller makes money.
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Options are a class of derivatives in which the seller of the option is obligated to buy or sell the stock at a given price.
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the seller of an option is obligated to buy, it is called a put. If the seller of the option is obligated to sell, it is referred to as a call.
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Investors can use these and other derivatives to create leverage, which is when an investor borrows to buy additional shares.
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Describe two activities that are stock fraud.
: A company lying about its financial status is stock fraud. Financial reporters encouraging investment in companies where they have an undisclosed personal stake in the trade is also illegal market manipulation.

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How does inflation affect the size of capital gains? : Inflation can increase the apparent size of a capital gain because the price of everything, including stock shares, increases.
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What is share dilution? How can it hurt an investor? : Share dilution is the issuing of new shares without increasing the value of the company. This type of loss in value can hurt an investor because the new shares decrease the percentage of the company the investor owns without increasing the total value of the company.
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The P/E ratio is found by dividing the price of a share of stock by the annual earnings per share. - Lower P/E ratio, more profits.
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Elsa thinks this is a good P/E ratio. What else should she investigate to be more confident of investing in this company? - PE Ration comparable to other similar companies, and PE rations of the place in the earlier years.
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What would it mean if competing cement firms had P/E ratios of 14, which is more than QZ Cement's P/E of 12? : Other investors might think QZ Cement is not going to perform as well as other cement sellers---- Lower P/E might have another meaning
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Why does the price of bonds affect the price of stocks? : Generally, bonds and stocks both serve the same purpose: to grow investors' money. When bonds are expensive, stock becomes more expensive. When bonds get cheaper, stocks get cheaper.
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How should personal risk tolerance affect your investing decisions? : You should never invest in stocks with risks that impact your peace of mind.
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When is volatility most detrimental to shareholders? : When the shareholders are going to need to sell their stocks in the near future.