Stocks as an Investment Option

Stocks
Student’s Name
Institutional Affiliation
Stocks
1) Explain the differences in stock trading between two different stock exchanges.
a. Identify two different stock exchanges in the United States.
Two different stock exchanges in the United States are the New York Stock Exchange (NYSE) and the NASDAQ.
b. Describe the similarities and differences between the two stock exchanges.
The NYSE is an auction-style market, where buyers and sellers interact to determine the price of a stock. It primarily lists large, established companies with a long history of steady earnings and growth. The NASDAQ, on the other hand, operates as a dealer market, where buyers and sellers trade through market makers who hold securities in inventory. It has a focus on technology and growth companies.
Similarities between the two exchanges include that they both offer a marketplace for buying and selling stocks, they are both regulated by the SEC, and they both provide access to publicly traded companies. Differences include their methods of trading and the types of companies they tend to list.
2) Explain how a company’s free cash flow impacts its growth potential. Cite the free cash flow of example companies.
a. Identify one company on each of the two stock exchanges you researched in 1.
One company listed on the NYSE is Johnson & Johnson and one company listed on the NASDAQ is Amazon.com.
b. Determine the free cash flow from 2019 and 2020 for each company.
According to Johnson & Johnson’s financial statements, the company had a free cash flow of $14.2 billion in 2019 and $13.7 billion in 2020. Amazon.com had a free cash flow of $31.0 billion in 2019 and $44.7 billion in 2020.
c. What inferences can you draw from the companies’ free cash flow?
A company’s free cash flow (FCF) refers to the amount of cash that a company generates after accounting for capital expenditures. Positive free cash flow indicates that a company has enough cash to fund its operations and finance growth initiatives. In the case of Johnson & Johnson, the company's free cash flow has remained relatively stable, indicating that it has a steady stream of cash flow to fund its operations. Conversely, Amazon.com’s free cash flow has increased significantly in 2020, indicating that the company has a strong cash position to fund growth initiatives and potentially make acquisitions.
3) Apply financial ratios to evaluate the strengths and weaknesses of stocks as investments.
a. Using the 2019 and 2020 financial statements for both stocks, prepare two financial ratios for each of the following categories: liquidity ratios, asset management ratios, and profitability ratios. You should have a total of six ratios for each stock, per year.
For Johnson &am...