Jagonob, Bena B.

BSACT-4 TTH 8:30-10:00 am

FM 42 August 10, 2017

1. Define the following:

Stock Investment- is the venture of stocks in a market. Stocks are shares of ownership in a
corporation. When you buy stocks of publicly listed company, you become a stockholder or
shareholder of a company. In other words, you become part-owner of that company. As such,
you participate in that companys growth and future profits. Conversely, you may also lose if the
company suffers a loss or performs below market expectations. History has shown that investing
in stocks is one of the easiest and most profitable ways to build wealth over the long-term.

Common stock- Common stock is a security that represents ownership in a corporation. Holders
of common stock exercise control by electing a board of directors and voting on corporate
policy. Common stockholders are on the bottom of the priority ladder for ownership structure;
in the event of liquidation, common shareholders have rights to a company's assets only after
bondholders, preferred shareholders and other debt holders are paid in full.

Growth stocks- A growth stock is a share in a company whose earnings are expected to grow at
an above-average rate relative to the market. A growth stock usually does not pay a dividend, as
the company would prefer to reinvest retained earnings in capital projects. Growth investors
choose stocks based on the potential for capital gains, not dividend income, so they can be risky.

Price volatility- is used to describe price fluctuations of a commodity. Volatility is measured by

the day-to-day percentage difference in the price of the commodity. The degree of variation,
not the level of prices, defines a volatile market. Since price is a function of supply and demand,
it follows that volatility is a result of the underlying supply and demand characteristics of the
market. Therefore, high levels of volatility reflect extraordinary characteristics of supply and/or
demand.

Domino Effect- a domino effect or chain reaction is the cumulative effect produced when one
event sets off a chain of similar events. The term is best known as a mechanical effect, and is
used as an analogy to a falling row of dominoes.

Down Averaging- also known as averaging down refers to the purchase of additional units of a
stock already held by an investor after the price has dropped. Averaging down results in a
decrease of the average price at which the investor purchased the stock.

Loss Cutting- in investment means to stop doing something that is already failing in order to
reduce the amount of time or money that is being wasted on it. By cutting a loss short, you
guarantee that no single stock will hand you a devastating loss and severely damage your overall
portfolio. This is especially important when dealing with aggressive growth stocks, which can
dive bomb significantly lower over a period of only a few weeks.

Stock Exchange- a stock exchange or bourse is an exchange where stock brokers and traders can
buy and sell stocks (also called shares), bonds, and other securities.
 Preferred Stock- a preferred stock is a class of ownership in a corporation that has a higher claim
on its assets and earnings than common stock. Preferred shares generally have a dividend that
must be paid out before dividends to common shareholders, and the shares usually do not carry
voting rights.

Stockbroker- a stockbroker is a regulated professional individual, usually associated with a

brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail
and institutional clients through a stock exchange or over the counter in return for a fee or
commission.

Price band- A price band is a value-setting method in which a seller indicates an upper and lower
cost range, between which buyers are able to place bids. The price band's floor and cap provides
guidance to the buyers. This type of auction pricing technique is often used with initial public
offerings (IPOs).

Bullish market- A bull market is a financial market of a group of securities in which prices are
rising or are expected to rise. The term "bull market" is most often used to refer to the stock
market but can be applied to anything that is traded, such as bonds, currencies and
commodities.

Composite Index- A composite index is a grouping of equities, indexes or other factors combined
in a standardized way, providing a useful statistical measure of overall market or sector
performance over time, and it is also known simply as a "composite."

Over-the-counter market- A decentralized market, without a central physical location, where

market participants trade with one another through various communication modes such as the
telephone, email and proprietary electronic trading systems.

Blue chips- blue chips generally sell high-quality, widely accepted products and services. Blue
chip companies are known to weather downturns and operate profitably in the face of adverse
economic conditions, which help to contribute to their long record of stable and reliable growth.

Stock dealer- a stock market dealer trades equities under its own name. The business itself
maintains stock holdings that are not in the name of any client. The dealer may actually be a
client of another broker, so as to trade these stocks for its own account.

Market capitalization- Market capitalization (market cap) is the market value at a point in time
of the shares outstanding of a publicly traded company, being equal to the share price at that
point of time times the number of shares outstanding.[2][3] As outstanding stock is bought and
sold in public markets, capitalization could be used as an indicator of public opinion of a
company's net worth and is a determining factor in some forms of stock valuation.

Bearish market- A bear market is a condition in which securities prices fall and widespread
pessimism causes the stock market's downward spiral to be self-sustaining. Investors anticipate
losses as pessimism and selling increases.

Zero-based approach-
 Net asset value- net asset value (NAV) is value per share of a mutual fund or an exchange-traded
fund (ETF) on a specific date or time. With both security types, the per-share dollar amount of
the fund is based on the total value of all the securities in its portfolio, any liabilities the fund
has and the number of fund shares outstanding.

2. What are the different classifications of stock? Explain each.

Based on Ownership Rights

There are two different types of stock that investors can own. They have different
ownership rights and different privileges.

Common Stock

Common stock represents ownership in a company and a claim on a portion of that companys
profits (dividends). Investors can also vote to elect the board members who oversee the major
decisions made by management. Common stock has yielded higher returns than almost all other
common investment classes. In addition to the highest returns, common stock probably also
carries the highest risk. If a company goes bankrupt, the common shareholders will not receive
money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock

Preferred stock represents some degree of ownership in a company but usually doesnt come
with the same voting rights. With preferred shares, investors are usually guaranteed a fixed
dividend. Recall that this is different than common stock, which has variable dividend payments
that fluctuate with company profits. Unlike common stock, preferred stock doesnt usually enjoy
the same appreciation (or depreciation in market downturns) in stock price, which results in
lower overall returns. One advantage of preferred stock is that in the event of bankruptcy,
preferred shareholders are paid off before the common shareholder (but still after debt
holders).

Based On Company Specifics

Each company has a unique plan for growth and dividend distributions which is reflected in
these stock classifications.

Blue-Chip Stocks

Blue-chip stocks are stocks of the biggest companies in the country. These are usually high
quality companies with years of strong profits and steady dividend payments. They are also
some of the safest stocks to invest in. Because the companies are large, stable investments, they
dont have as much room to grow. This usually results in steady stock prices, but less upside for
investors. As a result, historical returns for very large companies have trailed the returns of
smaller companies.

Income Stocks
Income stocks are often times related to Blue Chip stocks. They are stable companies that pay
large dividends. Older people who are retired often buy stocks in these stable income
companies since it provides them with a steady income stream in the form of dividends
(although I think thats a poor reason). When you combine the dividend payments with the
appreciation in stock price, these stocks often provide retirees with more money than they can
earn by investing in bonds or other fixed income investments. Of course, this comes with higher
risk that the stock price will fall in a market downturn.

Many energy and utility companies pay high dividends and are a good example of income
stocks.

Value Stocks

Value stocks are the stocks of companies that usually have one or more of the following:

Low price-to-earnings ratios

Low price-to-book ratios
Low price-to-dividend ratios
Low price-to-sales-and-cash-flow ratios
In other words, they are under priced when compare to other like companies in the market.
Sometimes this is a result of distress or financial problems. Other times, it may be due to
investor behavior and cyclical trends.

Growth Stocks

Growth stocks are stocks of companies with profits that are increasing quickly. This increase in
profits is reflected in the rise in the companys stock price. These companies often reinvest the
profits and pay little to no dividends to stock owners. In doing so, they hope that the growth in
stock price is enough to keep stockholders on board.
Based On Size

Market capitalization (market cap) is simply a way of referring to the size of a company in a
manner that allows you to compare companies in different industries.

You compute market cap by multiplying the number of outstanding shares by the current stock
price. For example, if a company had 100 million shares of common stock outstanding and a
current stock price of $50 per share, its market cap would be $5 billion (100 million x $50).

Investors usually categorize companies under one of these labels although there is not
universal agreement on the exact cutoffs.

Mega-cap: Over $200 billion

Large-cap: Over $10 billion
Mid-cap: $2 billion$10 billion
Small-cap: $250 million$2 billion
Micro-cap: Below $250 million
Nano-cap: Below $50 million
 The size of a company is very important in stock pricing. Investors often talk about investing is
small, mid, or large cap mutual funds. This means that the mutual fund only invests in
companies of a certain size.

3. Assume that you have Php 50 000 investable cash in five kinds of stocks for a period of two
years. Which stock would you choose? Explain.

4. Why should trading on margin be avoided?

Buying on margin comes with risks.The biggest risk you have when buying on margin is that you
don't know, with any certainty at least, that the stock you purchased or short-sold will do what
you expect. Even the best stock pickers in the world are wrong around a third of the time, which
means there's a lot of inherent risk in playing with margin.

For example, if the value of your investment(s) declines you may be required to deposit
additional capital to cover your margin. In fact, it's possible to lose more money than your initial
investment when buying on margin. Let's remember that margin is nothing more than a loan
you've accepted from your broker. If your account equity isn't high enough to maintain your
position, your broker will often allow a week to add additional funds to satisfy your "margin call"
or "house call," otherwise it will liquidate some, or all, of your position. Ultimately, the broker
needs to protect its loan, which means it will have no qualms about liquidating your position if
you're not in compliance.

Another oft-overlooked disadvantage of buying on margin is that you'll owe interest on your
loan. Just like with any bank, the higher the amount of the loan, or the more you trade, the
lower your interest rate will be. But, make no mistake about it; your margin rate will be
substantially higher than the prime rate. Currently, most investors buying on margin will owe
about 8% per year on the amount they borrow. If you don't believe you'll make at least 8% per
year, then investing with margin may be a poor idea.

Although, one caveat worth noting here is that you may qualify for a tax break based on the
amount of interest you pay from your margin usage. This helps lessen the sting of your monthly
interest payments (which are automatically collected by your brokerage firm) a bit, but it's still a
major risk to consider when buying on margin.
5. How may an investor minimize risk from stock investment? Expalin.

There are five steps to doing this:

1. Understand how much value a company creates value for its owners now and its potential to
create value in the future (successful value investors value growth).
2. Learn how to make insightful, testable estimates of a companys value.
3. Understand what incoming information would materially change your estimate of a companys
value and how to incorporate that information into your valuation estimate.
 4. Only invest in companies when you can do so for a price much less than the value the firm will
likely create (see the video below for our improved take on margin of safety).
5. Understand how to allocate investment capital prudently and how to measure and manage
leverage so that you are not forced to make a bad decision due to a lack of liquidity.

If you are invested in the markets, you are exposed to market drops. Yes, there are ways to hedge a
portfolio using option contracts (protective puts), short sales, and holding bonds or cash in reserve, but
all of these methods are in fact just elements of point five above. In addition, considering point four
above, an intelligent investor should welcome market drops because it provides more chances to invest
in companies that are trading at prices much less than their values.

In short, the best way to avoid risk is by developing a sound intellectual framework for making good
investment decisions and by keeping your emotions in check during times of market stress so that your
sound decision-making framework can work to your benefit.

Great investors are great because of the decisions they make when prices fall.