Question

Common Stock, Preferred Stock, and IPO

1. What is the maximum return you can earn by purchasing common? What is the minimum return you can make?

2. What are the maximum and minimum returns on a preferred stock investment?

3. What is an IPO and who gets the money raised in an IPO?

4. Who gets paid when you buy common shares of stock online?

5. Rank common stock, preferred stock, and IPOs in order of risk. Explain your decision.

6. Why would you want to invest in more than one stock at a time?

7. You hear the following statement on the news: “You lose a little money every time you trade.” What does this describe?

8. Company B has invested an enormous amount of money in environmentally responsible projects and reducing its own pollution. Company C has decided that they will only reconsider their environmental impact if one of their practices is illegal. Which company would you invest in? Why?

Basic Option Trading Strategies

9. What is the covered-call strategy? What type of investment vehicle is the covered-call strategy similar to? Draw a picture and explain your reasoning.

10. Find three options strategies that could be useful if you think that markets will move a lot, but you are not sure if they will move up or down. Explain each one and draw them below

Answer 1

Answering first 4:

1. What is the maximum return you can earn by purchasing common? What is the minimum return you can make?

The common stocks maximum return is not capped. Non-capped return means theoretically we can have unlimited profit hence maximum return is not defined.

Minimum return a common stock can earn is up to -100%. Total investment can be eaten up. Sometimes investors earn negative return when they sell their common stock at lower than the price they purchased it and that negative return go up to -100% means entire value of capital is lost.

In case of insolvency the 100% loss is possible.

2. What are the maximum and minimum returns on a preferred stock investment?

Maximum return is up to value of preference dividend paid for the not tradable preferred stock and;

In case preferred stock which is tradable then the maximum return will be tuned up to the capital appreciation of preferred stock depending upon the market perception based on yield and its return. (Return = Capital appreciation – Investment)

Minimum return: In case of insolvency up to 100% loss is possible.

3. What is an IPO and who gets the money raised in an IPO?

IPO is initial public offer; the companies issue fresh shares to raise additional capital. Initial public offer is basically application issued by the company and the application money goes to company. Application is nothing but application for common stocks and company allot stock based on lottery system or any best decided method. This happens in primary market.

4. Who gets paid when you buy common shares of stock online?

When we buy common stock the investor of those common shares gets the money. It is the investor who finally holds the share. This happens in secondary market.