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Stock Market EDU

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Roadrunner Financial Group (RFG) Key Terms and Concepts

Equity – Common and preferred stocks, which represents shares in the ownership of a company.

Market Value – the total market capitalization of a stock. The Market value is derived by multiplying the # of shares outstanding by the stock price

Shares Outstanding – the number of shares currently available for trading on the open market

EPS (Earnings Per Share) – measure of profitability. In essence, it shows how much money the company earned for each share of stock. Investors look for companies that consistently produce EPS growth.

P/E (Price to earnings multiple) – a ratio between the stock price and the earnings per share. The P/E ratio reflects investor’s confidence in the stocks future earnings potential. Therefore, a High P/E means investors are very optimistic about the future (however too much optimism can drive a stock upwards, but you must be careful about it being overvalued). Can also be viewed as how much the market values each dollar a company makes. So a P/E ratio of 20, means the market will pay $20 for each dollar a company earns.

PEG = (Price/Earnings)/growth rate – The P/E ratio divided by the growth rate. This takes into account the companies expected earnings growth, which can often justify higher P/E ratios. A PEG of 2 or under is considered good.

Volatility – Volatility refers to the degree to which a traded security fluctuates in price.

Volume – The number of shares of stock traded in a day.

Dividends – A portion of a company’s profits that is paid out to shareholders on a quarterly or annual basis. The Board of Directors of the company declares dividends. It is not mandatory to declare dividends on common stock even though the company is making good profits.

Yield – When a company pays a dividend the yield is the percentage of dividend over the stock price. In other words, if a stock is trading for $10 and pays a dividend of $0.50, the yield is 5%, because for every $10 you invest, you would receive 5% back annually being $ 0.50

Book Value – The value of a company if all liabilities were subtracted from total assets.

Ask – The lowest price a seller is willing to accept when selling a security (stock).

Bid – The highest price a buyer is willing to accept when purchasing a security (stock).

Spread – The difference between ask and bid

Limit Order – An order to buy or sell a share at a specified price. The order will be executed only at the specified limit price or even better. A limit order sets a minimum price the seller is willing to accept and maximum price the buyer is willing to pay for it.

Initial Public Offering (IPO) – A company’s first issue of shares to general public. IPOs are issued by smaller, younger companies seeking funds for expansion and growth, but large companies also practice this to become publicly traded companies.

Index – A statistical measurement of change in the economy or security market. Indices have their own calculation methodology and are usually measured as a percentage change in the base value over the time.

Hedge – A strategy or an attempt in reducing the risk of adverse price movements of assets. Diversification: Reducing the investment risk by purchasing shares of different companies operating in different sectors.

Defensive Stock – A stock that provides a constant dividends and stable earnings even in the periods of economic downturn i.e. even in the extreme critical situations of the stock market these companies continue to pay the dividends at a constant rate

Exchanged Traded Funds – Also known as ETFs, exchange traded funds are mutual funds that trade throughout the day on stock exchanges as if they were stocks. This means you can actually pay more or less than the value of the underlying holdings in the fund. In some cases, ETFs might have certain tax advantages but most of their benefits compared to traditional mutual funds are largely a triumph of marketing over substance.

REITs – Some investors prefer to buy real estate through real estate investment trusts, or REITs, which trade as if they were stocks and have special tax treatment. There are all different types of REITs specializing in all different types of real estate. For example, if you wanted to invest in hotel properties, you could consider investing in a hotel REIT.

Bull Market vs. Bear Market

By definition, a bull market is just a 20% (or greater) rise in stock market indexes (often the broadly followed S&P 500 or Dow Jones Industrial Average) from a recent low. It’s meant to signify a growing U.S. economy. Conversely, a bear market represents a downtrend of 20% or more from a recent high-water mark in the indexes, and could be indicative of an upcoming or current recession in the economy.

Growth Stock vs. Value Stocks vs. Income stocks

Growth – Investors are attracted to growth stocks in the hopes that the investment will produce large capital gains (Current Stock price – cost basis), due to the fact the high growth companies have much more potential for positive earnings surprises.

Value Stocks – Some stocks are considered value stocks due to their relatively cheap valuations in relation to their fundamental metrics. For example, Ford could be considered a value stock because it is very cheap considering its solid fundamentals. However value stocks rarely have explosive growth rates, and have relatively stable expectations that often make these stocks less volatile.

Income Stocks – Investors who are looking for fixed income may turn to income stocks, which pay quarterly dividends to return capital to investors while also serving as a way to increase interest from investors. Stocks with high dividends can be valuable if you continue to reinvest your dividends.