Stock Analysis Methods
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Questions and Answers

What happens to a limit order if the stock price does not reach the specified limit?

  • The order is executed at the current market price.
  • The order will remain unfulfilled. (correct)
  • The order converts to a market order immediately.
  • The order gets automatically canceled after one day.

What is the primary risk associated with placing a buy-stop order?

  • You cannot sell shares after buying them.
  • Your order may not execute if the price drops suddenly.
  • You may end up buying shares at a higher price than expected. (correct)
  • It is difficult to cancel once placed.

What does the term 'margin call' refer to?

  • A notification that profits have been realized from trades.
  • A requirement to pay off all borrowed funds immediately.
  • An alert to add more cash or equity to maintain a minimum percentage. (correct)
  • A request to close all open market orders.

What does owning stocks represent?

<p>Ownership in a company (A)</p> Signup and view all the answers

What are stock exchanges primarily used for?

<p>To facilitate buying and selling of stocks (D)</p> Signup and view all the answers

How is the maximum loan value determined when buying stock on margin?

<p>It's the remaining percentage after you provide your own equity. (D)</p> Signup and view all the answers

What occurs during the Initial Public Offering (IPO) of a stock?

<p>The company sells stocks to the public for the first time (D)</p> Signup and view all the answers

In short selling, what is the ultimate goal of the process?

<p>To profit from the decline in the stock price. (B)</p> Signup and view all the answers

When can stocks be traded in the secondary market?

<p>Immediately after they are issued in an IPO (B)</p> Signup and view all the answers

Which of the following best describes the consequences of a company experiencing growth after an initial sale?

<p>The value of shares may increase, allowing for potential profits (B)</p> Signup and view all the answers

What criteria must a company meet for its stock to be traded on a stock exchange?

<p>Meet specific rules and requirements set by the exchange (D)</p> Signup and view all the answers

If a pizza shop's value drops, what happens to the ownership shares?

<p>They decrease in value, leading to potential losses for owners (D)</p> Signup and view all the answers

What is the primary function of the secondary market for sellers?

<p>To sell shares at a profit when no longer wanted. (C)</p> Signup and view all the answers

Which exchange is primarily for large, established companies in Canada?

<p>Toronto Stock Exchange (D)</p> Signup and view all the answers

What characterizes senior equities listed on the Toronto Stock Exchange?

<p>They are stocks of large, financially stable companies. (C)</p> Signup and view all the answers

What is the role of options in financial markets?

<p>To let the buyer purchase stock at today's price at a future date. (D)</p> Signup and view all the answers

What happens if the market price of wheat rises above the fixed price in a futures contract?

<p>The seller misses out on potential profit as they must still sell at the agreed price. (C)</p> Signup and view all the answers

How do market makers profit from trades?

<p>By earning the difference between the bid and ask prices. (B)</p> Signup and view all the answers

What is a key characteristic of a high-quality stock exchange?

<p>A small difference between bid and ask prices. (C)</p> Signup and view all the answers

Which market is specifically designed for smaller or riskier companies?

<p>TSX Venture Exchange (D)</p> Signup and view all the answers

What was a main function of the open-outcry system in trading?

<p>Floor traders negotiate deals in person. (D)</p> Signup and view all the answers

What does a smaller bid-ask spread indicate for traders?

<p>Fairer prices for trading. (B)</p> Signup and view all the answers

What is the main characteristic of a market that has high liquidity?

<p>Many shares available for buying or selling. (A)</p> Signup and view all the answers

How does demutualization affect a stock exchange?

<p>It transforms the exchange into a publicly traded company. (B)</p> Signup and view all the answers

In the over-the-counter (OTC) market, how are prices determined?

<p>By dealers setting prices individually. (A)</p> Signup and view all the answers

What is a key difference between the OTC market and organized exchanges?

<p>OTC trades occur one-on-one with no fixed price. (C)</p> Signup and view all the answers

What is represented by an equity security?

<p>A piece of ownership in a company. (B)</p> Signup and view all the answers

What type of security involves lending money with a promise of interest payments?

<p>Debt securities. (A)</p> Signup and view all the answers

How does increased market depth benefit investors?

<p>It prevents significant price changes with large orders. (A)</p> Signup and view all the answers

Why is transparency important in stock exchanges?

<p>It enables easy access to real-time trading information. (D)</p> Signup and view all the answers

What is one characteristic of organized exchange markets?

<p>Trades happen in a centralized location. (A)</p> Signup and view all the answers

What does the ticker symbol for a stock represent?

<p>The unique identifier for the stock in trading (D)</p> Signup and view all the answers

What does a beta value greater than 1 indicate about a stock?

<p>The stock is more volatile than the market (D)</p> Signup and view all the answers

What is a market order in stock trading?

<p>A request to buy or sell a stock at the current market price (C)</p> Signup and view all the answers

Which of the following best describes a limit order?

<p>An order to buy or sell only at a specified price or better (C)</p> Signup and view all the answers

What does the 'volume' in stock quotations refer to?

<p>The number of shares traded during a specific time frame (D)</p> Signup and view all the answers

What could be a consequence of frequent trading based on broker recommendations?

<p>Higher commissions due to multiple transactions (A)</p> Signup and view all the answers

Why might a discount broker appeal to certain investors?

<p>They charge lower fees without offering advisory services (D)</p> Signup and view all the answers

What does a stock's closing price indicate?

<p>The final price at which the stock was traded within the day (D)</p> Signup and view all the answers

Why is it important to recognize the exchange on which a stock trades?

<p>It helps avoid confusion when investing in stocks (D)</p> Signup and view all the answers

What could indicate a negative beta for a stock?

<p>The stock's price rises when the market declines (C)</p> Signup and view all the answers

Flashcards

What are Stocks?

Stocks represent ownership in a company. When you buy stock, you buy a small piece (share) of that company.

What are stock exchanges?

Stock exchanges are organized marketplaces (physical or online) where stocks are bought and sold.

What is an IPO?

An Initial Public Offering (IPO) is the first time a company sells its stock to the public, raising money for its growth.

What is the secondary market?

The secondary market refers to the trading of stocks amongst investors after the IPO, allowing investors to buy and sell shares.

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How is the value of a stock determined?

The value of a stock can fluctuate based on the company's performance. If the company does well its stock price may increase, and vice versa.

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What are the potential benefits and risks of owning stocks?

Buying stock gives you the potential to earn money if the stock price goes up, but also carries the risk of losing money if the price goes down.

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What are the requirements for a company to be listed on a stock exchange?

Stock exchanges require companies to meet specific criteria before they can be traded. This involves providing financial information and meeting regulatory requirements.

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Secondary Market

The market where investors buy and sell existing shares of publicly traded companies, not directly from the issuing company.

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Toronto Stock Exchange (TSX)

A stock exchange in Canada specifically for large, well-established companies. These companies usually have strong financial performance and a history of stability.

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TSX Venture Exchange (TSXV)

A stock exchange in Canada for newer or smaller companies with potentially higher growth potential. These companies often face stricter regulations.

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Option

A financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

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Future Contract

A contract that obligates the buyer to purchase a specific quantity of an asset at a predetermined price on a future date.

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Bid Price

The highest price that a buyer is willing to pay for a stock at a given time.

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Ask Price

The lowest price at which a seller is willing to sell a stock at a given time.

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Bid-Ask Spread

The difference between the bid price and the ask price on a stock. This profit is earned by Market Makers for facilitating trades.

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Floor Traders

Brokers or representatives who work on the trading floor, buying and selling stocks on behalf of their clients.

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What is a limit order?

A limit order is an order to buy or sell a stock at a specific price or better. It only executes if the market price reaches your specified price.

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What is partial fill and all-or-none condition?

A partial fill occurs when only a portion of your limit order is executed, while an all-or-none condition means your entire order must be filled or it's rejected.

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What is margin in stock trading?

Margin is the money you put down when buying stocks on borrowed funds, meaning you only pay a percentage upfront. The rest is borrowed from your brokerage.

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What is a margin call?

A margin call happens when the value of your stocks drops below the broker's requirement. You need to add more money to bring your equity back up.

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What is short selling?

Short selling is borrowing shares and immediately selling them. You buy them back later (hopefully at a lower price) to return to the lender.

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What is the bid-ask spread?

The difference between the bid and ask prices. A smaller spread is better for traders as it means fairer prices. The bid price is almost always lower than the ask price.

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What is a high-quality stock exchange?

A stock exchange with a small difference between the bid and ask price.

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What is market liquidity?

The ability of a market to handle large trades (buying or selling) without causing major price changes.

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What is a large volume of shares?

Indicates how many shares are readily available to buy or sell. A large volume means it’s easier to make big trades without affecting the price.

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What is demutualization?

When a stock market, like a stock exchange, changes ownership from its members (brokers/traders) to being a public company.

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What is the Over the Counter (OTC) market?

A marketplace where securities like stocks, bonds, or other investments are traded directly between people through an electronic network, not through an organized exchange.

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What are securities?

Financial products or investments with value that can be bought, sold, or traded. They represent ownership (like in a company) or a debt that must be repaid.

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What are equities (stocks)?

A type of security where you own a small part of a company by buying a stock. You may profit if the stock price goes up or the company pays dividends.

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What are debt securities (bonds)?

A type of security where you lend money to a company or government by buying a bond. You are paid back with interest.

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What are derivatives?

Financial contracts that get their value from something else like a stock or commodity. For example, an option to buy a stock at a specific price in the future is a derivative.

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What is a 'Ticker Symbol'?

The ticker symbol identifies a specific stock on a stock exchange. It's like a unique code for the stock.

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What is 'Closing Price'?

The closing price is the price at which the last trade for a stock occurred on a specific trading day.

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What is the 'Day's Range'?

The day's range shows the highest and lowest prices a stock traded at during the day.

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What is the '52-Week Range'?

The 52-week range indicates the highest and lowest prices a stock has traded at during the past 52 weeks.

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What is 'Volume'?

Volume represents the number of shares of a particular stock that were traded during the day.

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What is 'Beta'?

Beta measures a stock's volatility compared to the overall stock market.

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What is the 'P/E Ratio'?

The price-earnings (P/E) ratio represents the stock price divided by the company's earnings per share. It helps assess the stock's valuation.

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What is 'Dividend Yield'?

The dividend yield represents the annual dividends paid out as a percentage of the current stock price.

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What is a 'Discount Broker'?

A discount broker offers low-cost trading services with minimal advice; you make your investment decisions.

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What is a 'Full-Service Broker'?

A full-service broker provides high-cost trading services with advice and financial planning; they guide your investments.

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Study Notes

Stock Analysis Methods

  • Stock valuation methods include technical analysis and fundamental analysis.

Technical Analysis

  • Technical analysis evaluates stocks based on historical price patterns.
  • Examples: If a stock rises three days consecutively, it may indicate a continued upward trend; if it declines over several days, it suggests a possible downward trend.

Fundamental Analysis

  • Fundamental analysis assesses a stock by reviewing a company's financial health, performance, and economic factors.
  • It analyzes key metrics like revenues, earnings, assets, and future growth potential to assess if a stock is undervalued, overvalued, or fairly priced.

Stock Demand and Supply

  • Demand refers to the number of investors wanting to buy a stock. High demand generally leads to higher prices.
  • Supply refers to investors wanting to sell a stock. High supply typically results in lower prices.
  • These forces, along with numerous other factors, influence the stock price.

Economic Factors

  • Economic growth, interest rates, and inflation significantly influence stock prices.
  • Generally, stocks often increase in value with rising economic growth, declining interest rates, and falling inflation.

Industry Analysis

  • Industry conditions affect stock prices. Key factors include consumer preferences and industry competition.
  • A stock is typically favored when companies recognize consumer preferences and face less rivalry.

Interpreting Financial Statements

  • Financial statements (balance sheets and income statements), along with other reports, are essential for assessing a firm.
  • This analysis considers a company's liquidity, efficiency, financial leverage, and profitability.
  • It's crucial to consider that accounting guidelines permit firms to use methods which can sometimes exaggerate or underestimate their performance.

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Description

Explore the key methods of stock analysis including technical and fundamental analysis. Learn how historical price patterns and a company's financial health can influence investment decisions. This quiz covers essential concepts that drive stock prices through demand and supply dynamics.

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