Investment Basics: Asset Classes
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Questions and Answers

A stock's bid price represents:

  • The lowest price a seller is willing to accept.
  • The price the stock opened at in the morning.
  • The highest price a buyer is willing to pay. (correct)
  • The average price of the stock over the last day.

What does EPS (Earnings Per Share) primarily indicate about a company?

  • The amount of profit earned relative to each share outstanding. (correct)
  • The amount of profit earned relative to its market capitalization.
  • The total assets of a company, minus its liabilities, per share.
  • The total revenue a company generates, divided by the number of employees.

Which of the following best describes a cyclical stock?

  • A stock that experiences growth at a high rate in new technology sectors.
  • A stock that consistently provides dividends to its investors.
  • A stock that is valued at less than a dollar per share and experiences high volatility.
  • A stock with performance that is closely tied to larger economic trends. (correct)

What is the primary difference between the primary and secondary stock markets?

<p>The involvement of the company: the primary market involves the company and the secondary market does not. (C)</p> Signup and view all the answers

What market condition is characterized by actively falling share prices, encouraging investors to sell?

<p>A bear market. (B)</p> Signup and view all the answers

Which term best describes the annual interest payment a bond pays, based on its par value?

<p>Coupon. (D)</p> Signup and view all the answers

How do rising interest rates typically affect the price of existing bonds?

<p>They decrease the price of older bonds. (D)</p> Signup and view all the answers

What is the primary advantage of investing in a mutual fund?

<p>Diversifying investments at a lower cost via pooled funds and external management. (A)</p> Signup and view all the answers

How do you calculate a company's market capitalization?

<p>Number of shares outstanding multiplied by the share price. (B)</p> Signup and view all the answers

What does the 'change' of a stock price represent?

<p>The difference from the stock's previous closing price. (A)</p> Signup and view all the answers

Which type of stock is likely to be associated with AI firms?

<p>Fast growers. (B)</p> Signup and view all the answers

An ETF (Exchange Traded Fund) is best described by:

<p>A collection of securities that is often pegged to an index and is passively managed. (B)</p> Signup and view all the answers

What is the likely impact of low volume experienced by penny stocks?

<p>Increased susceptibility to price manipulation and sharp fluctuations. (C)</p> Signup and view all the answers

What does the PE ratio of a company indicate?

<p>The ratio of its share price to its earnings per share. (D)</p> Signup and view all the answers

When calculating the Net Asset Value (NAV) of a mutual fund, what is deducted?

<p>Management expenses. (A)</p> Signup and view all the answers

Which of the following best describes a key difference between preferred and common shares?

<p>Preferred shares have a more fixed dividend rate and priority in payments, while common shares have voting rights. (A)</p> Signup and view all the answers

Which statement accurately describes the relationship between risk and yield for corporate and government bonds?

<p>Corporate bonds pay a higher yield because they involve more risk than government bonds. (A)</p> Signup and view all the answers

What is a characteristic of a Guaranteed Investment Certificate (GIC)?

<p>It offers a guaranteed rate of return and 100% principal protection. (B)</p> Signup and view all the answers

Which of the following best describes a key feature of a T-Bill?

<p>They are sold at a discount, and the full amount is paid at the end of the term. (C)</p> Signup and view all the answers

What is the typical payment schedule for dividends?

<p>Quarterly (D)</p> Signup and view all the answers

What is a capital gain?

<p>The profit made from selling an asset for more than its purchase price. (C)</p> Signup and view all the answers

What is a key characteristic of international equities in comparison to American and Canadian equities?

<p>They are generally considered to have more risk. (A)</p> Signup and view all the answers

What does the term 'maturity date' refer to in the context of bonds?

<p>The date when the bond's value is paid back to the bond holder. (C)</p> Signup and view all the answers

Which of the following is a major difference between short-term GICs and regular GICs?

<p>Short-term GICs have a much shorter redemption date than regular GICs. (C)</p> Signup and view all the answers

What is the relationship between the laws of supply and demand and the stock market?

<p>The laws of supply and demand influence the stock market by affecting share prices. (B)</p> Signup and view all the answers

Which of the following is true about dividend yield?

<p>It is set by the company as a percentage of the current stock price (D)</p> Signup and view all the answers

What is the primary difference between equities and fixed income investments?

<p>Equities represent ownership, variable risk while fixed income represents debt with less risk. (A)</p> Signup and view all the answers

What is the primary goal of a buyer and a seller in the stock market, respectively?

<p>Buyers hope for a fair price; sellers hope to maximize their price. (A)</p> Signup and view all the answers

Which situation would lead to a capital gain?

<p>Buying a property for $200,000 and selling it for $250,000. (C)</p> Signup and view all the answers

Why are government bonds often considered to be less risky than corporate bonds?

<p>Government bonds are backed by the taxing power, decreasing the chance of default. (A)</p> Signup and view all the answers

Flashcards

Bid price

The highest price a buyer is willing to pay for a share of a company.

Common Shares

Shares of publicly traded companies that offer ownership and voting rights. Investors buy these shares hoping to increase the value over time.

Preferred Shares

Shares of publicly traded companies that prioritize dividend payments over voting rights. They offer a mix of equity and fixed income features.

Ask price

The lowest price a seller is willing to accept for a share of a company.

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Bonds

A type of debt-equity where the issuer borrows money from investors and promises to pay back the principal plus interest on a specific date.

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Bid-Ask Spread

The difference between the bid price and the ask price.

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Corporate Bonds

Issued by corporations to finance projects, they are considered riskier than government bonds, but offer higher potential returns.

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Return on Investment

The gain or loss on an investment over a specific period of time.

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Government Bonds

Issued by governments to fund projects, they are considered safer than corporate bonds, but offer lower potential returns.

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Earnings Per Share (EPS)

A measure of a company's profitability, calculated by dividing net income by the average number of outstanding shares.

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Guaranteed Investment Certificate (GIC)

A secured investment with 100% principal protection, offering a guaranteed rate of return over a fixed period.

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Stalwart companies

Large, well-established companies that still have growth potential, like Coca-Cola or Procter & Gamble.

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Treasury Bills (T-Bills)

Short-term government debt instruments, with a maturity date of less than a year. They are considered risk-free.

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Fast-growing companies

Companies that are growing at a rapid pace, often in emerging markets or with innovative products.

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Cyclical companies

Companies whose performance is closely tied to the overall economy, like automotive companies.

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Dividend

The sum of money a company pays to its shareholders, usually quarterly, to share profits.

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Slow-growing companies

Companies with slower growth, often in mature industries like telecommunications.

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Capital Gain

The profit gained from selling an asset, like a stock, for more than its purchase price.

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Common Asset Classes

Equities, Fixed Income, Cash Equivalents and Money Market Instruments

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Penny Stocks

Stocks trading for less than a dollar, often considered speculative and risky.

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Equities (Stocks)

Investments that are generally considered to have a higher level of risk but also the potential for higher returns.

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Price-to-Earnings (P/E) Ratio

The ratio of a company's share price to its earnings per share.

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Market Capitalization

The total market value of a company's outstanding shares, calculated by multiplying the share price by the number of shares.

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Fixed Income

Investments that are generally considered to have a lower level of risk and offer a fixed rate of return. Examples are bonds and GICs.

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Primary Market

The market where companies issue new stocks or bonds for the first time.

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Cash Equivalents and Money Market Instruments

Short-term, highly liquid investments that are considered to have very low risk. Examples include T-Bills and Money Market Instruments.

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Secondary Market

The market where pre-existing stocks or bonds bought in a primary market are traded.

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Stock Exchange

The market where buyers and sellers of shares of publicly traded companies come together to trade.

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Bull Market

A period of time when stock prices are rising consistently, driven by positive economic conditions.

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Supply and Demand in the Stock Market

The laws of supply and demand dictate the price of stocks. When demand exceeds supply, the price increases and vice versa.

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Study Notes

Asset Classes

  • Equities are considered to have variable risk.
  • American and Canadian equities are medium to high-risk.
  • International equities are higher risk.
  • Equities involve purchasing shares of publicly traded companies.
  • Shares are traded on public exchanges.
  • Buyers hope to get a fair price, while sellers want to maximize the price.
  • Different share types have varying rights.
    • Preferred shares:
      • Blend equity and fixed-income aspects.
      • Offer ownership of the company without voting rights.
      • Dividend payments are prioritized, coming first in line.
      • Receive a fixed dividend rate.
      • Unpaid dividends accumulate.
      • Often trade at a lower price with greater volatility compared to common shares.
      • Last in line to receive dividends.
      • Voting rights are present.
    • Common shares:
      • Often trade at a lower price with greater volatility compared to preferred shares.
      • Last in line to receive dividends.
      • Voting rights are available.
  • Laws of supply and demand apply to the stock market.

Fixed Income - Bonds

  • Bonds are a form of debt-equity.
  • Bond purchasers loan money to corporations or governments.
  • Bond holders receive a yield (interest on the loan).
  • Bonds have maturity dates, when the principal and accrued interest are repaid.
  • Corporate bonds bear higher risk, but usually offer higher yields.
  • Government bonds have lower risk and lower yields.
  • Bond prices change based on interest rates.

Other Assets

  • GICs (Guaranteed Investment Certificates):
    • Secured accounts with 100% principal protection.
    • Offer fixed returns over a set period.
    • Funds are locked until the redemption date.
    • Redemption penalties may occur.
  • Cash Equivalents and Money Market Instruments (e.g., T-Bills):
    • Considered low-risk investments.
    • Backed by governments.
    • Sold with short maturity dates.
    • Typically bought at a discount, with the face value paid at maturity.
    • Highly liquid.
  • Short-Term GICs:
    • Similar to regular GICs.
    • Shorter maturity periods.
    • Money can be withdrawn within a month.

Stock Aspects

  • Dividends:
    • Payments by companies to shareholders, representing a portion of profits.
    • Often paid quarterly.
    • The yield is calculated as a percentage of the current stock price.
    • Dividend amounts can vary based on company performance.

Capital Gains

  • Profit made from selling property/investments.
  • Profit from selling stocks is included.
  • Occurs when an asset is sold for more than its initial purchase price.
  • Taxed at varying rates based on holding time.

EPS (Earnings Per Share)

  • A measure of a company's profitability.
  • Calculated by dividing net income by average shares outstanding.
  • Higher EPS usually indicates greater profitability.
  • Used to evaluate firms' profitability.

Stock Types

  • Stalwarts: Large, well-established firms with potential for growth.
    • Examples: Coca-Cola, P&G
  • Fast Growers: Companies experiencing rapid growth.
    • May be involved in rapidly growing sectors, like AI.
  • Cyclicals: Stock prices influenced by wider economic conditions.
    • Example: Ford Motor Company
  • Slow Growers: Companies with steady but not rapid growth.

Stock Market Conditions

  • Bull Market: Increasing stock prices.
  • Bear Market: Decreasing stock prices.
  • Several factors influence share prices.

Stock Market Details

  • Penny Stocks: Stocks trading at low values (less than $1). Speculative. Low volume, easily influenced.
  • PE Ratio (Price-to-Earnings Ratio): Ratio of a stock's price to its earnings per share. High PE may indicate overvaluation.
  • Share Price/Annual EPS: Represents company performance for a year.
  • Market Capitalization: Total market value of a company (share price × number of outstanding shares).
  • Primary/Secondary Markets: Primary = where companies initially sell stock. Secondary = subsequent trading.
  • Volume: Number of shares traded in a specific time period.
  • Open/Close/Range: Opening and closing stock prices and high/low values over a period.

Mutual Funds

  • Pool investments from multiple investors.
  • Buy various stocks and bonds.
  • Offer diversification and low cost access to investment.
  • Value determined by the Net Asset Value (NAV).

ETFs (Exchange Traded Funds)

  • A collection of securities that directly tracks an index.
  • Passively managed.
  • Offers lower costs and mirroring market performance automatically.
  • Lower expense ratios and flexibility than mutual funds.

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Description

This quiz explores the key concepts of asset classes, focusing on equities, their risks, and the differences between preferred and common shares. Understand how these financial instruments function and their implications for investors. Test your knowledge on trading, dividend rights, and market volatility.

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