Common Stock Trading Case Study

1) What are the differences between common and preferred stocks?

The differences between common stocks and preferred stocks usually involve the role of preference, or order. When it comes to dividend payments from a company, preferred stocks have priority over common stocks, meaning that your odds of getting a dividend payment from the company are considerably higher if you have preferred stock versus common stock. Also, if the company needs to be liquidated to pay off debt or finance operations, preferred stock takes precedence over common stock.

When investing in preferred stocks, an investor usually knows how much return they will be receiving because it is fixed; the value of a preferred stock is sensitive to changes in interest rates.

The most popular index that follows U.S. blue chips is the Dow Jones Industrial Average. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

3) What is a stock split?

A stock split is a decision by a company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.

Another type of stock split is the reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted (many stock exchanges will delist stocks if they fall below a certain price per share). For example, in a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would now become two million shares outstanding at $2.50 per share. In both cases, the company is worth $5

The most obvious place to spot a split is in the price per share; 2) look at the number of shares and value of your investment. If you own shares of a company and notice a big change in the price per share, check the number of shares in your account and the overall value. If the number of shares has changed, but the value hasn't, the stock has split; 3) check the headlines and the financial news; 4) find the historical chart that shows splits. Most charting services automatically adjust their data for a split so there is no discontinuity in the chart. However, some services, such as Yahoo Finance, will show where splits have occurred if you select this filter option; or 5) Ask investor relations in the company. Almost all publicly traded companies have websites with an investor relations area. A recent stock split should be easy to find.

4) What is a proxy?

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of a firm.

5) Distinguish between capital gains and