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Stocks 105: The Purpose of a Company

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1.
All else equal, if a company's total number of shares outstanding is increasing, your ownership stake in that company is _______.
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Decreasing. As a company adds shares outstanding, your ownership interest in the firm decreases. Shareholders can benefit more from owning one share of a billion-dollar company that has only 100 shares (a 1% ownership interest) than by owning 100 shares of a billion-dollar company that has a million shares outstanding (a 0.01% ownership interest).
2.
A company's return on stock is calculated by _______.
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Adding capital gains and dividends. This is also known as total return.
3.
According to Benjamin Graham, the father of value investing, in the long run the market is like a _______.
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Weighing machine. In the long run, the market sees the substance of a company rather than its popularity. A weighing machine assesses the substance of a company.
4.
In return for getting a relatively low rate of return on their bond investments, bondholders enjoy _______ shareholders.
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Less risk than. Besides less risk, they also get an earlier claim on a company's assets should it go bankrupt.
5.
Which of the following best defines a stock?
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A stock is an ownership interest in a company. Although companies receive money from stock offerings, it is more important to remember that a stock represents a stake in a company. Stocks should not be considered vehicles for speculative trading.