Faculty of Foreign Languages – Department of Business English Banking & Finance
Full Name: Đinh Thủy Tiên Class: 64A.NNA Student Code: 11226248
Mark:
TEST 7
TOPIC 6: THE STOCK MARKET
SECTION 1: Fill in the gaps
Task 1: Fill in the gaps in the text below using the correct terms from the given table. Each term can
only be used once, and five terms will not be used. (gtr 182)
account dividends future networks characteristics
valuation adjust security investors fluctuations
constant assumption highest location indefinitely
companies available practical estimate interactions
business formal exchanges errors electronic
There are both formal exchanges and over-the-counter (OTC) markets. Formal (1) _exchanges___
are characterized by a physical (2) _location___ where trading occurs. In contrast, the OTC market
functions mainly through telephone and computer (3) _networks___. Generally, larger (4)
_companies___ trade on formal exchanges, while smaller companies trade in the OTC market,
though there are numerous exceptions. Recently, (5) __Electronic__ Communication Networks
(ECNs) have started to take over a substantial share of the (6) _business___ that traditionally
belonged to stock exchanges. These electronic platforms are expected to become increasingly
important in the (7) _future___.
Stocks are evaluated based on the present value of their (8) _dividends___. However, accurately
predicting these dividends is challenging, leading to significant (9) _errors___ in valuation. The
Gordon growth model offers a simplified approach to determining stock value, assuming dividends
grow at a (10) __constant__ rate (11) _indefinitely___. Despite the uncertainties about future
dividends, this (12) ___assumption_ is often the most (13) _practical___ one available.
Another way to (14) _estimate___ a stock's price is by multiplying the company's earnings per share
by the industry price-earnings ratio, which can be (15) _adjusted___ to (16) _account___ for the
firm's specific (17) _characteristics___.
The actual setting of prices in the market is driven by the (18) _interactions___ among traders. A
trader who values a (19) __security__ the most, due to either reduced uncertainty about cash flows or
higher estimated cash flows, will be willing to pay the highest price. As new information becomes
available, investors will adjust their estimates of a security's true value and buy or sell based on how
the market price aligns with their (20) __valuation__. Given that small changes in estimated growth
rates or required returns can lead to significant price fluctuations, it's no surprise that markets are
often volatile.
Task 2: Fill in the gaps in the text below using the correct terms from the given table. Each term can
only be used once, and five terms will not be used.
security fluctuations Electronic expected characteristics
valuation dividends estimate investors price-earnings ratio
traders exchange fundamental dividends growth telecommunication
Earnings fixed rate investment operations risk premium
Faculty of Foreign Languages – Department of Business English Banking & Finance
volatile available prices impact growth
There are both formal exchanges and over-the-counter (OTC) markets. Formal exchanges
have a physical location where trading occurs, while the OTC market operates primarily
through telephone and (1) _telecommunication___. Typically, larger companies trade on
formal exchanges, and smaller companies trade in the OTC market, though there are many
exceptions. Recently, (2) _Electronic___ Communication Networks (ECNs) have taken a
substantial share of the business traditionally handled by stock (3) _exchange___. These
electronic platforms are (4) __expected__ to become increasingly (5) _volatile___ in the
future.
Stocks are valued based on the present value of their (6) _dividends___. However, predicting
these dividends accurately is difficult, leading to significant errors in (7) _valuation___. The
Gordon growth model provides a simplified method for determining stock value by assuming
dividends grow at a (8) _fixed rate___ indefinitely. Despite uncertainties about future
dividends, this assumption is often the most practical one (9) __available__.
Another method to (10) __estimate__ a stock's price involves multiplying the (11) _
fundamental___ earnings per share by the (12) _price-earnings ratio___, adjusted for the
firm's specific (13) _characteristics___. Market prices are set by trader interactions. A trader
who values a (14) _security___ the most, due to either reduced uncertainty about cash flows
or higher estimated cash flows, will pay the highest price. As new information becomes
available, (15) _investors___ adjust their estimates of a security's true value and buy or sell
based on how the market price aligns with their valuation. Small changes in estimated (16)
_growth___ rates or required returns can cause significant price (17) _fluctuations___,
contributing to market volatility.
The rapid advancements in technology and communication have significantly influenced
trading practices and market dynamics. For instance, the rise of ECNs has streamlined trading
processes, reducing the reliance on traditional (18) exchange floors. This evolution highlights
the importance of adaptability in the financial markets. Furthermore, the constant influx of
new information and its (19) _impact___ on stock prices underscore the need for investors to
stay informed and agile. Understanding the intricacies of market (20) _operations___ and
valuation methods is crucial for navigating the complex world of investments.
SECTION 2: True/False
1. Common stock represents ownership in a company and entitles shareholders to vote on corporate
matters. T tr164, 302
2. The primary market is where new securities are issued and sold to investors. T – tr18 gtr gốc
3. An initial public offering (IPO) is the first sale of stock by a private company to the public. T-
tr142
4. Preferred stockholders typically have voting rights. F – tr165
Preferred stockholders typically do not have voting rights.
5. The secondary market is where companies issue new stocks. F- tr142
The secondary market is where investors buy and sell existing stocks
Faculty of Foreign Languages – Department of Business English Banking & Finance
6. The price of a stock in the secondary market is determined by the issuing company. F
The price of a stock in the secondary market is determined by supply and demand among investors.
7. Stock market indexes track the performance of a group of stocks. T- tr177
8. Stock prices can be influenced by company performance, economic conditions, and investor
sentiment. T
9. Blue-chip stocks are shares of large, reputable companies with a history of stable performance. T
10. Dividends are guaranteed payments to shareholders. F- tr 164
Dividends are payments to shareholders, but they are not guaranteed.
11. Over-the-counter (OTC) markets only trade government securities. F- tr167
Over-the-counter (OTC) markets trade a variety of securities, including government securities,
corporate bonds, and stocks not listed on formal exchanges.
12. All stocks pay dividends. F
Not all stocks pay dividends.
13. A bull market is characterized by rising stock prices and investor optimism. T
14. Maximizing the price of a share of the firm's common stock is the equivalent of maximizing the
wealth of the firm's present owners. T
15. Initial public offerings (IPOs) can be underwritten by investment banks. T- gtr gốc tr156
16. The stock market is completely immune to economic and political events. F
The stock market is not completely immune to economic and political events.
17. Preferred stock dividends must be paid before any interest payments on bonds. F- tr165
“before”-> after
Preferred stock dividends must be paid before common stock dividends, but interest payments on
bonds are typically paid before preferred stock dividends.
18. A bear market occurs when stock prices rise for a sustained period. F- tr314, 315 gtr gốc
A bear market occurs when stock prices fall for a sustained period.
19. Stocks represent ownership shares in a company. T- tr164
20. A stockholder owns a percentage interest in a firm, consistent with the percentage of outstanding
stock held. T- tr164, 302
21. Investors can earn a return from stock in one of two ways: Either the price of the
stock rises over time, or the firm pays the stockholder dividends. T- tr164, 302
22. The bid price is the price at which a seller is willing to sell a stock. F- tr306 gtr gốc
bid price (the price they pay for stocks) and ask price (the price they sell the stocks for).
23. Stock prices remain constant throughout the trading day. F-
Stock prices fluctuate throughout the trading day.
24. Day trading is the safest way to invest in the stock market. F
Day trading is not necessarily the safest way to invest in the stock market.
25. One distinction between stock and bonds is that stock does not mature. T- tr164 , 302
26. A share of common stock in a firm represents an ownership interest in that firm. T- tr164, 303
27. An IPO is sold in the secondary market. F- tr142
Secondary-> primary
28. All other things being the same, if the firm raises funds by selling common stock, it will increase
its degree of financial leverage. F
If the firm raises funds by selling common stock, it will decrease its degree of financial leverage.
29. Bond is riskier than stocks because stockholders have a lower priority than bondholders when the
firm is in trouble. F- tr164, 304
Stocks are riskier than bonds because stockholders have a lower priority than bondholders when the
firm is in trouble.
30. Common stockholders vote, receive dividends, and hope that the price of their stock will rise. T-
tr164 , 303
Faculty of Foreign Languages – Department of Business English Banking & Finance
31. Preferred stockholders do not usually vote unless the firm has failed to pay the promised
dividend. T- tr165 , 304
32. Preferred stockholders hold a claim on assets that has priority over the claims of common
shareholders but after that of creditors such as bondholders. T- tr165
33. Common stockholders hold a claim on assets that has priority over the claims of preferred
shareholders but after that of creditors such as bondholders. F- tr165
Preferred stockholders hold a claim on assets that has priority over the claims of common
shareholders but after that of creditors such as bondholders.
34. Preferred stockholders hold a claim on assets that has priority over the claims of common
shareholders and that of creditors such as bondholders. F, that=> after that- tr165
35. One distinction between stock and bonds is that bonds don’t mature. F- tr164
Stock does not mature
36. The bid price is the price they pay for stocks T- tr306 gtr gốc
bid price (the price they pay for stocks) and ask price (the price they sell the stocks for).
37. The ask price is the price they sell the stocks for. T- tr306 gtr gốc
bid price (the price they pay for stocks) and ask price (the price they sell the stocks for).
38. Preferred stockholders do not usually vote if the firm has failed to pay the promised dividend. F-
tr165
If -> unless
39. Stock is riskier than bonds because stockholders have a lower priority than bondholders when the
firm is in trouble, the returns to investors are less assured because dividends can be easily changed,
and stock price increases are not guaranteed. T- tr164, 302
SECTION 3: Answer the questions
Task 1:
Question 1: How can a company use an initial public offering (IPO) to raise capital?
A company can raise capital through an Initial Public Offering (IPO) by selling shares of stock to
the public for the first time. The company issues new shares and receives the funds from investors
in exchange for the shares. This allows the company to raise a significant amount of capital to
fund business operations, expand, pay off debt, or invest in new projects.
Question 2: Compare common stock and preferred stock.
Common Stock: Represents ownership in a company, with voting rights and potential dividends,
but dividends are not guaranteed. Common shareholders are the last to be paid in case of
liquidation.
Preferred Stock: Represents a form of ownership, but typically without voting rights. Preferred
stockholders have priority over common stockholders in terms of dividend payments and
liquidation payouts. Dividends are often fixed, making it a more stable income investment.
Question 3: What basic principle of finance can be applied to the valuation of any investment asset?
The basic principle of finance that can be applied to the valuation of any investment asset is the
time value of money (TVM). This principle suggests that the value of money today is higher than
its value in the future due to the potential to earn interest or returns. Future cash flows from an
investment must be discounted to their present value to determine the asset's value.
Question 4: How can an individual investor use diversification to reduce risk in their stock portfolio?
An individual investor can reduce risk by diversifying their stock portfolio, meaning they invest
in a variety of stocks across different industries, sectors, or asset classes. By holding a diverse set
of investments, the overall risk is reduced because the performance of different stocks may not be
correlated. When some stocks perform poorly, others may perform well, balancing out potential
losses.
Task 2:
Faculty of Foreign Languages – Department of Business English Banking & Finance
Question 1: Identify the cash flows available to an investor in stock. How reliably can these cash
flows be estimated? Compare the problem of estimating stock cash flows to estimating bond cash
flows. Which security would you predict to be more volatile?
Cash Flows from Stock: Investors receive cash flows in the form of dividends (if the company
pays them) and capital gains (profit from selling the stock at a higher price than its purchase
price).
Reliability of Estimating Cash Flows: Stock cash flows are less predictable than bond cash flows.
Dividends can fluctuate or be eliminated, and capital gains depend on the stock market's
performance, which is influenced by many external factors.
Comparison: Estimating bond cash flows is more predictable because bonds have fixed interest
payments and a set maturity date, meaning investors know when and how much they will receive.
In contrast, stock cash flows are uncertain, making stocks more volatile than bonds.
Question 2: Discuss the features that differentiate organized exchanges from the over-the-counter
market.
Organized Exchanges: These are centralized markets (such as the NYSE or NASDAQ) where
securities are listed and traded on a formal exchange. The trading process is regulated, with strict
rules and oversight, and transactions are transparent.
Over-the-Counter (OTC) Market: This is a decentralized market where securities are traded
directly between parties, often via telephone or electronic systems, without a centralized
exchange. It is less regulated, and transactions are generally less transparent than those on
organized exchanges.
Question 3: What distinguishes stocks from bonds?
Stocks represent ownership in a company and give shareholders voting rights and potential
dividends, but they carry higher risk and no guaranteed returns. In case of liquidation,
shareholders are paid last.
Bonds represent a loan to the company or government. Bondholders receive fixed interest
payments and are repaid their principal at maturity. Bonds have lower risk compared to stocks,
but they typically offer lower returns.
Question 4: How do stock market indices like the S&P 500 help investors in making portfolio
decisions?
Stock market indices, such as the S&P 500, provide a benchmark for the overall market
performance, representing a broad spectrum of stocks in various sectors. Investors use these
indices to assess the market’s direction, compare individual stock or portfolio performance, and
make decisions about whether to adjust their portfolio based on market trends.
Task 3:
Question 1: A new law is passed increasing corporate taxes significantly. What is the likely reaction
of the stock market to this news?
The stock market is likely to react negatively to the news of increased corporate taxes, as higher
taxes reduce a company's profitability, which could lead to lower earnings and dividends for
shareholders. Investors may sell stocks in anticipation of reduced future returns.
Question 2: A well-known stock market analyst upgrades a major tech company from “hold” to
“buy”. How might this impact the company’s stock price?
An upgrade from "hold" to "buy" by a well-known analyst is likely to increase the company’s
stock price as it signals confidence in the company's future prospects. Investors may interpret this
as a sign that the company is expected to perform well, prompting them to buy shares, thus
driving up the price.
Question 3: ACB Bank’s earnings report shows higher-than-expected profits for the quarter. How is
this likely to affect the company’s stock price, and why?
Faculty of Foreign Languages – Department of Business English Banking & Finance
If ACB Bank’s earnings report shows higher-than-expected profits, it is likely to increase the
stock price. Positive earnings surprises indicate that the company is performing better than
anticipated, which could lead investors to buy shares, driving up demand and the price.
Question 4: The Federal Reserve announces a cut in interest rates. How might this affect stock prices
in general?
A cut in interest rates by the Federal Reserve generally leads to higher stock prices. Lower
interest rates make borrowing cheaper, which can stimulate economic activity and increase
corporate profits. Additionally, lower rates make bonds and other fixed-income investments less
attractive, causing investors to shift their money into stocks.
