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Finance: Investing Guide

Finance: Investing

Table of Contents

Investing Terms

Definitions of the following terms are taken directly from Strauss’s Handbook of Business Information: A Guide for Librarians, Students, and Researchers, 2nd Edition by Rita W. Moss available in the Maag Stacks at call number
Z7164 .C81 S7796 2004.

Capital Stock: Most companies issue stock to raise capital. Each share of stock represents part ownership in a corporation. With common stock ownership comes the opportunity to vote on corporate matters. Ordinarily each shareholder has one vote for each share held. This voting right is one of the ways in which common stock is different from preferred stock. The other major difference pertains to dividends. A dividend is a payment, usually in cash, but occasionally in stock, made by a firm to its shareholders. Dividends are usually paid quarterly or semiannually. The boards of directors determine dividends on common stocks. The potential for profit or loss is much greater than with preferred stock.

Preferred Stock: Given preferential treatment over common stock. Preferred stockholders are entitled to their dividends before common stockholders are paid. Preferred stock, however, pays dividends at a specified rate, determined at the time the stock is issued. In most corporations, preferred stockholders do not have the voting, or participation, rights enjoyed by common shareholders.

Convertible Preferred Stock: Basically the same as regular preferred stock except that it can be converted into a certain number of shares of the company’s common stock, determined at the time the convertible shares were placed on the market. The holder of the convertible preferred is promised a fixed dividend on the stock as long as he or she holds it and at the same time enjoys the prospect of being able, at a later date, to convert the shares to take advantage of a rise in the value of the common stock. This conversion privilege can only be exercised once.

Earnings Per Share: A measure to help determine the value of a stock and to compare it with other stocks. Earnings per share (EPS) translates total corporate profits into profits on a per share basis.
EPS=(Net profit after taxes-preferred dividends paid)÷(Number of shares of common stock outstanding)

Dividend Yield: Derived by dividing annual dividends paid per share by the market price per share of stock. Dividend yield is expressed in percentage points. A company that paid $3 per share in dividends to its stockholders and whose stock was trading at $30 would have a dividend yield of 10%. Dividend yield is an indication of the rate of current income earned on the investment dollar and is one of the items reported in newspaper stock tables and in other stock-related information sources.

Price/Earnings Ratio (P/E): The price-earnings ratio, also known as the price-earning multiple, multiple, p/e ratio, or p/e, is one of the most commonly used measures of stock value, particularly in comparison with other stocks in the same industry. The price-earnings ratio of a stock is simply the price of the stock divided by its earnings, normally its earnings for the past 12 months.
P/E=Price of a share of stock ÷ Earnings per share of the stock for the most recent 12 month period
A share of stock selling for $35 with earnings of $7 per share in the past 12 months will have a p/e ratio of 5. In other words, the market is willing to buy one share of the stock at a price 5 times greater than its current earnings. Generally speaking, stocks in a given industry tend to have similar price-earnings ratios, and growth industries tend to have higher p/e ratios than more established industries.

Warrants: Warrants are neither stock nor bond, have no book value, and pay no dividends. A warrant is a purchasable right that allows investors to buy corporate securities, usually common stock, for an extended time at a fixed price. When the designation wt. follows a corporate name (or abbreviation) in a newspaper stock table, it indicates that the security in question is a warrant.

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