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Personal Finance Chapter 12 Questions


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What is a capital gain?
#1 on handout
Increase in stock price from purchase price
Which stock does not grant voting privileges?
preferred stock
Elderly people should purchase this category of stock. - #3
Income stocks
Young investors should purchase this category of stock. - #4
Growth stocks
Why should young investors purchase growth stocks?
In the event of a significant loss, they still have time to recover their position.
How is common stock different from preferred stock? (dividend treatment, voting) - #2
Common stockholders vote to elect the board of directors and are entitled to vote on major corporate issues at the annual stockholders meetings.

They share in the profits of a corporation; however, dividends are not guaranteed. If there are no profits, there are no dividends.

Preferred stock has guaranteed dividends stated either as a percentage of the par value or a stated amount of money for each share of stock. This dividend is paid before any dividend payments are made to common stockholders.
Which involves the greatest risk--stocks of young businesses or blue chips? - #5

Explain the differences between the two types of stocks.
Less-established stocks are risky because they represent companies that are small and not well established. If the companies succeed, the potential return is very high.

A blue chip stock is a very safe investment that generally attracts conservative investors.
Why are defensive stocks not subject to the usual ups and downs of business cycles? - #6
Defensive stocks usually remain stable during declines in the economy.

Companies in this category typically have stable earnings and continue dividend payments to stockholders during periods of economic decline.
Explain the relationship between par value and market value. - #7
Par value is the stated value of a stock when it is issued.

Market value is what the stock is selling for in the securities marketplace.
What causes stock prices to rise and fall?
List four factors that affect stock prices. - #8
Stock prices rise and fall based on
(a) how the company is doing (its financial condition),
(b) current interest rates,
(c) the market for the product or service provided by the company, and
(d) the earnings per share of the company.
Which is the largest exchange in the United States?

How does a company get listed on this exchange? (i.e. how much common stock must be publicly owned & the market value of the public owned stock)
The New York Stock Exchange is the largest in the United States.

Before a company is listed on the exchange, certain criteria must be met. A total of at least 1.1 million shares of its common stock must be publicly owned with a market value of at least $9 million.
Why would a stock be listed on the NASDAQ rather than the NYSE or American Stock Exchange? - #10
A stock would be traded on the NASDAQ (over-the-counter) if the stock issued was under the dollar amount and publicly held shares requirements for stock listed on the New York or American exchanges.
What characterizes a bull market? a bear market?
A bull market develops when investors are optimistic about the overall economy and purchase stocks.

A bear market develops when investors are pessimistic and sell stocks.
Explain four techniques for long-term investing
(a) holding stocks for a long time (buy and hold),
(b) dollar-cost averaging (lowering the average price of stock purchases), and
(c) direct investment (buying stock directly from the issuing corporation), or
(d) dividend reinvestment (buying additional shares of stock with cash dividends).
Why do investors use dollar-cost averaging?
because it lowers the average price of stock purchasing.

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