Buying and Selling Equities - Mechanics
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Questions and Answers

Which feature differentiates stocks from bonds regarding payment priorities in bankruptcy situations?

  • Both stocks and bonds are paid equally.
  • Bonds are paid after debt holders.
  • Stocks pay after preferred shareholders. (correct)
  • Preferred stockholders are paid before both stocks and bonds. (correct)

What is a key reason why vehicle leases do not resemble residential leases?

  • Vehicle leases include a residual value. (correct)
  • Vehicle leases do not require a down payment.
  • Residential leases have fixed payment terms.
  • Vehicle leases always include ownership rights.

How does the time value of money concept primarily affect investment decisions?

  • It makes future dollars appear more valuable.
  • It considers real interest rates, risk, and inflation. (correct)
  • It leads to a preference for longer investment durations.
  • It eliminates risks associated with investments.

What calculation can be used to determine how much a future value is worth today?

<p>Present value single amount formula. (D)</p> Signup and view all the answers

Which statement about price volatility in relation to stocks and dividends is accurate?

<p>Stocks have higher price volatility than dividends. (C)</p> Signup and view all the answers

What does the term 'marketability' refer to in the context of financing options?

<p>The ease with which an asset can be sold. (A)</p> Signup and view all the answers

Which of the following components is relevant when entering into a vehicle lease agreement?

<p>Residual value of the car. (C)</p> Signup and view all the answers

What factor does NOT influence the concept of the time value of money?

<p>Market trends. (B)</p> Signup and view all the answers

What is the effect of increasing interest rates on bond prices?

<p>Bond prices decrease. (C)</p> Signup and view all the answers

Which feature of a bond allows an issuer to recall it before maturity?

<p>Callable feature. (A)</p> Signup and view all the answers

Which of the following is true about preferred stock dividends?

<p>They are paid before common stock dividends. (A)</p> Signup and view all the answers

How is the yield of a bond typically calculated?

<p>Total returns divided by the price paid for the bond. (D)</p> Signup and view all the answers

What happens to the expected yield of a bond if interest rates increase?

<p>Expected yield increases. (A)</p> Signup and view all the answers

Which statement regarding common stock is accurate?

<p>Common stock entails voting rights. (C)</p> Signup and view all the answers

What typically impacts the coupon rate at the time of a bond issue?

<p>Prevailing interest rates. (D)</p> Signup and view all the answers

What defines the face value of a bond?

<p>The amount the issuer agrees to pay back. (B)</p> Signup and view all the answers

What is a key characteristic of a convertible bond?

<p>It can be converted into stock. (C)</p> Signup and view all the answers

What is the principle behind bond pricing?

<p>Bond prices vary inversely with interest rates. (B)</p> Signup and view all the answers

When calculating yield to maturity, what do you need to consider?

<p>The purchase price and years to maturity. (B)</p> Signup and view all the answers

In what situation does an investor experience a capital loss?

<p>When the purchase price is more than the face value. (C)</p> Signup and view all the answers

What is the main return type for stocks?

<p>Variable returns through appreciation. (A)</p> Signup and view all the answers

Which of the following factors does NOT impact bond prices when traded?

<p>Type of stock held by issuer. (B)</p> Signup and view all the answers

Which term best describes the practice of buying more securities with borrowed money?

<p>Buying on margin (C)</p> Signup and view all the answers

What happens to an investor if the market value of their investment falls below the required margin?

<p>They will receive a margin call. (C)</p> Signup and view all the answers

How is yield calculated?

<p>Yield = dollar return ÷ total cost of the investment (C)</p> Signup and view all the answers

What is a characteristic of going long in an investment?

<p>Buying a security with the expectation it will increase in value. (D)</p> Signup and view all the answers

What does leverage in investment mean?

<p>Using borrowed money to increase potential returns. (B)</p> Signup and view all the answers

What is the formula to calculate capital gain?

<p>Capital Gain = Selling price - Purchase price (C)</p> Signup and view all the answers

Which of the following is not a typical risk associated with margin buying?

<p>Possibility of high returns (D)</p> Signup and view all the answers

When calculating yield, which costs must be deducted from the dollar return?

<p>All expenses including commissions and interest (C)</p> Signup and view all the answers

In the context of selling short, what is the primary goal?

<p>Selling high and repurchasing at a lower price. (A)</p> Signup and view all the answers

Flashcards

Market Order

The most common type of stock transaction, where you ask a broker to buy or sell a certain number of shares.

Capital Gain

Profit made by selling an asset (like stock) for more than its purchase price.

Yield

Return on investment expressed as a percentage or ratio. Calculated by dividing total return by the initial investment amount, adjusted by subtracting expenses (like commissions).

Going Long

Buying an investment with hopes its value will rise so you can sell it for a profit.

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Buying on Margin

Using borrowed money from a broker to increase your investment.

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Margin Call

A demand from a broker for more funds to maintain the required margin (minimum deposit).

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Margin

Percentage of the investment's value that is financed by the investor. Calculated as (current market value of the investment – loan) ÷ Current market value of the investment

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Leverage

Using borrowed money to increase potential profits or losses.

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Selling Short

An investment strategy where you predict a security's value will fall and borrow the shares to sell.

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Commission

A fee charged by a broker for executing a trade.

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Callable Bond

A bond where the issuer has the right to repay the debt before its maturity date.

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Serial Bond

A bond where the issuer repays the debt in installments over a period rather than all at once.

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Convertible Bond

A bond that can be converted into shares of the company's stock.

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Coupon Rate

The interest rate paid on a bond.

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Bond Price

The market value of a bond.

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Approximate Yield to Maturity

A way to estimate the return on a bond if held till its maturity date

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Bond Pricing

The process of determining the market value of a bond

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Bond Issuer

The company or entity that borrows money by issuing bonds.

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Face Value

The amount a bond will pay upon maturity date.

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Maturity Date

The date when the issuer repays the loan to the investor.

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Common Stock

Represents ownership in a company with voting rights but no guaranteed dividend.

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Preferred Stock

Represents ownership in a company with no voting rights, but dividends are guaranteed.

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Principle

The amount of money borrowed in a bond.

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Bankruptcy Claim Priority

Order of payment in bankruptcy proceedings, with preferred creditors and debt holders paid before others.

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Price Volatility (Stocks)

How much the price of a stock fluctuates.

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Marketability

How easily a stock can be bought or sold.

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Vehicle Lease Components

The parts of a vehicle lease agreement, including price, APR, down payment, residual value, and monthly payments.

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Vehicle Lease Residual Value

Estimated value of the vehicle at end of lease term.

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Time Value of Money

A dollar today is worth more than a dollar in the future.

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Present Value Single Amount

Find today's value of a future amount.

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Lease vs. Ownership

Vehicle leases do not provide ownership like traditional purchases.

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Study Notes

Buying and Selling Equities - Mechanics

  • Market Order:
    • Most common transaction type
    • To buy shares, you instruct a broker to purchase a specific number of shares at the current market price.
    • Purchase price = price per share * number of shares * 2% commission
    • Sale price = price per share * number of shares * 2% commission
  • Capital Gain:
    • Financial benefit from buying an asset and selling it for more than the purchase price.
    • Capital Gain = Sale Price - Purchase Price
  • Yield:
    • Return on investment
    • Yield = (Dollar return) / (Dollar invested)
    • Commission and interest expense are deducted from the return.
  • Going Long and Buying on Margin:
    • Going Long:
      • Purchasing a security expecting its price to increase
      • Investor pays the full price of the security.
    • Buying on Margin:
      • Borrowing money from a broker to purchase a security.
      • Investor puts down a certain percentage—minimum 80%—of the value of the investment.
      • The rest is borrowed.
      • When the value of the security increases, investor makes a profit.
      • If it decreases, losses are amplified.
  • Margin Buying Costs and Risks:
    • Interest is charged on borrowed funds.
    • Margin calls may occur if the value of the security decreases, requiring extra funds.

Stocks

  • Characteristics:
    • Voting rights: Shareholders have a vote on important matters.
    • Dividends: Payments to shareholders.
    • Risk: Stocks' value fluctuates.
  • Types:
    • Common Stock: Basic form of ownership, no guarantee on dividend amount or payment, always last in line in case of liquidation
    • Preferred Stock: Preferred shareholders receive dividend payments first in case of liquidation.
  • Risk: Company performance volatility influence price changes.

Bonds

  • Types of Bonds:
    • Registered bonds, bearer bonds
  • Features:
    • Callable: Issuer may repay bond before maturity date
    • Serial: Repaid in set amounts over time
    • Convertible: Option to convert bond into equity
  • Yield:
    • Percentage return on any investment.
  • Interest Expense:
    • Interest expense = loan * interest rate * portion of year that loan was held.

Mortgages

  • Secured Debt: Property (real estate) serves as collateral.
  • Process:
    • Determine the loan amount and repayment period (max 25 years).
    • Interest rates are decided by the bank.
    • A mortgage agreement outlines the terms of repayment.

Vehicle Leases

  • Lease Components:
    • Price of vehicle, down payment, monthly lease payments, residual value (car value at end of lease)

Time Value of Money

  • Concepts:
    • A dollar today is more valuable than a dollar in the future to compensate for possible income/inflation/risk.
    • Future value calculations: Given an initial amount, determine the future value at a given interest rate.
    • Present value calculations: Given a future value amount, determine the corresponding present value with the given rate.

Business and Technology

  • Impact of Technology on Business:
    • Increased efficiency, ability to innovate, communication & collaboration
    • Access to Information
    • Production/service delivery improvements
  • Technology Shifts:
    • Changes in devices and techniques that improve the business processes and products.
  • Technology and Consumer Behavior:
    • Changes in customer preferences and behavior patterns are directly influenced by changes in technology.

Stock Price Impacts

  • Demand and Supply: Driven by market sentiment, news, and other factors.
  • Primary Factors: Earnings, interest, speculation, and general market conditions.

Social Responsibility

  • Customer Responsibility: Businesses consider the rights of customers, such as right to safe products, information, and to be heard.
  • Employee Responsibility: Fair treatment, safe conditions, opportunities for advancement, appropriate compensation, and good training.
  • Investor Responsibility: Financial stability, ethical decisions, transparent reporting and accounting.
  • Social Responsibility: Responsibility to society and the environment; fair prices, sustainable practices and positive societal impact.
  • Environmental Responsibility: Responsible for the environment sustainability practices (ie. reducing waste) and protecting the environment by reducing CO2 emissions and other harmful substances.

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Description

Explore the key concepts and mechanics involved in buying and selling equities. This quiz covers market orders, capital gains, yield calculations, and strategies like going long and buying on margin. Test your understanding of these essential investment principles.

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