Investing Questions

Investing Questions - Investing Section-Discussion...

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Investing Section-Discussion Questions General Investing Questions I. What should a person do before they begin investing? A person should look at their financial situation and figure out what investments best suit their needs. Need to make sure their debt is controlled, insurance needs are met, emergency fund in place, tax deferred account maximized (put in at least the amount the company will match). Must know the goals of investment (ie looking to make a fast return or looking to invest for retirement). II. Why do companies issue stock? Companies issue stock to raise capital. They raise capital to fund projects and hopefully earn a positive return on there activities. They can then take the earnings from the capital and distribute them to stockholders through the issuance of dividends. IPO’s could occur from a founder trying to cash in on previous investment or work. III. Why do investors purchase common stock? Investors purchase common stock to share in companies profits. They hope to either earn a return on their investment through dividends or increases in the stocks value on the secondary market. Investing in stock to beat the market inflation rate. IV. What are some of the classifications of stock investments? Blue chip stock- a stock that typically attracts conservative investors, a company that has had steady earnings over an extended period of time. Income stock- a stock that pays higher than average dividends; must have a steady predictable source of income. Growth stocks- issued by a company that has the potential to earn a higher than average profits. Cyclical stock- a stock that follows the market advances and declines. Defensive stock- Seasoned issue- A company that already has an established market for their securities and releases more securities to the public. Also called a follow on offering. Secondary offering- Shares that have been in the market and are being resold to investors (treasury stock). V. Why do companies issue bonds? Companies issue bonds to raise capital to fund projects that hopefully will earn a higher return than the rate at which they borrowed. They might not be able to sell anymore stock. Also the interest paid from bonds is deductible. Corporations and governments sometimes state what their plan is for using the money raised by the bonds. 1
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VI. Why do investors purchase bonds? Investors purchase bonds as a safer investment than stocks. Bonds are debt owed to you by a company and depending on the company they don’t have a high default risk. You can earn a steady stream of cash flows through the interest payment or sell the bond when the interest rates change to earn a premium on the price you paid for the bond. Bonds are purchased in order to diversify their portfolios. Some bonds are tax exempt. Value of the bond rests on the credit worthiness of the underlying company. VII.
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Investing Questions - Investing Section-Discussion...

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