Stocks

1
Stocks

• Chapter 9

2
Common Stock andPreferred Stock

• Section 9.1

3
Securities

• All investments
• Stocks
• Bonds
• Mutual Funds
• Options
• Commodities
• That are traded--bought and soldon securities
  exchanges or the over-the-counter market.
• These markets generally referred to as the Stock
  Market

4
Common Stock

• People buy and sell stock for one reason
• They want larger returns than they can get from
  more conservatives investments.
• Private Corporation
• Closely held corporation, shares owned by a
  relatively small group of people and are not
  traded openly in the stock market.
• Public Corporation
• Publicly held corporation, sells its shares
  openly in the stock markets where anyone can buy
  them.

5
Common Stock

• Why Corporations Issue Common Stock
• A form of equity
• Dividends not mandatory
• Voting rights and control of the company
• Proxy a document that transfers a stockholders
  voting rights to some one else.
• Preemptive right gives current stockholders the
  right to buy any new stock the corporation issues
  before the stock is offered to the general
  public.
• Proportion of ownership stable

6
Common Stock

• Why investors Purchase Common Stock
• Income from Dividends
• Dollar Appreciation of Stock Value
• Possibility of Increased Value from Stock Split
• Corporations split their stock so it can trade at
  an ideal price
• Stocks market price not guaranteed to increase

7
Preferred Stock

• You can buy preferred stock in addition to, or
  instead of common stock.
• Advantage of receiving cash dividends before
  common stock shareholders
• Knowledge of actual dollar amount of dividend
• Specific amount
• Percentage of par value
• Par Value X Dividend Rate Dividend

8
Preferred Stock

• Why Corporations Issue Preferred Stock
• Used less often then Common stock as a way of
  raising money
• Another method of financing that may attract more
  conservative investors
• Limited voting rights, usually only if the
  corporation is in financial trouble

9
Preferred Stock

• Why investors purchase preferred stock
• Middle Investment
• Yield on Preferred stock is generally lower than
  the yield on bonds but higher than the yield on
  common stock.
• Considered Safer
• Safer than common stock, not as safe as bonds
• Lack potential for growth

10
Preferred Stock

• To make Preferred Stock more attractive to
  investors
• Cumulative Preferred
• Unpaid dividends add up
• Convertible
• Exchange for Common Stock
• Participation Feature
• Share in corporations earnings with Common Stock
  shareholders

11
Evaluation of a Stock Issue

• Section 10.2

12
Blue-Chip Stocks

• Considered a safe investment that generally
  attracts conservative investors.
• Issued by the strongest and most respected
  companies.
• Leaders in an industry
• History of stable earnings
• Consistency of payments of dividends
• ATT, General Electric, Kellogg

13
Income Stock

• Pays higher than average dividends compared to
  other stock issues
• Buyers of preferred stock attracted to this type
  of common stock, dividend are predictable
• Type of stock issued by gas and electric
  companies
• Bristol-Myers Squibb, Dow

14
Growth Stock

• Issued by a corporation whose potential earnings
  may be higher than average earnings predicted for
  all the firms in the country.
• Generally do not pay dividends
• Companies engaged in activities that produce
  higher earnings and sales revenues
• Building new facilities, introducing high-quality
  products, or recognized research and development

15
Cyclical Stock

• Market value tends to reflect the state of the
  economy
• Products or services of these companies are
  linked directly to activities of a strong economy
• Investors try to predict the economies high and
  lows

16
Defensive Stock

• Remains stable during declines in the economy
• Steady earnings and can continue dividend
  payments even in periods of economic decline
• Many blue-chip stocks considered defensive stocks

17
Large Cap and Small Cap Stocks

• Large Cap Stock
• Has issued large number of shares of stock and
  has large amount of capitalization
• Small Cap Stock
• A stock issued by a company with a capitalization
  of 150 million or less
• Smaller companies issue these stocks, riskier
• Capitalization the total amount of stocks or
  bonds issued by a corporation.

18
Penny Stock

• Typically sells for less than 1 a share, can
  sell for as much as 10 a share.
• Issued by companies whose sales are very unstable
• Prices can go up and down wildly
• Hard to track
• Very risky, purchased only by investors who
  understand all risks

19
Sources of Evaluating Stock Investments

• Financial Section of the newspaper
• The Internet
• Stock Advisory Services
• Corporate news

20
Factors That Influence the Price of Stock

• Bull Market
• Investors optimistic
• Greater demand for stock
• Value of many stocks and market as whole
  increases
• Bear Market
• Investors pessimistic
• Decline in demand
• Value decreases

21
Numerical Measure of a Corporation

• Current Yield
• The annual dividend divided by the investments
  current market value
• Annual Dividend
• Current Market Value Current Yield
• Total Return
• Calculation that includes the annual dividend as
  well as increases/decreases of original price of
  investment
• Current ReturnCapital GainCurrent Return

22
Investment Theories

• Fundamental Theory
• Assumes that a stocks real value is determined
  by looking at the companys future earnings.
• Technical Theory
• Based on the idea that a stocks value is really
  determined by forces in the stock market itself.
• Efficient Market Theory (Random Walk)
• Investors have considered all of the available
  information as the make their decisions
• It is impossible for an investor to outperform
  the stock market average over a long period of
  time.

23
Numerical Measures of a Stock Investment

• Earnings Per Share
• Corporations net, or after-tax, earnings divided
  by the number of outstanding shares of common
  stock
• _____Net Earnings_
• Common Stock OutstandingEarnings per Share
• Price to Earnings Ratio
• The Price of one share of stock divided by the
  Corporations Earnings per Share
• Market Price per Share
• Earnings per Share PE Ratio

24
Buying and Selling Stocks

• Section 9.3

25
Primary Markets for Stock

• Primary Market
• A market in which an investor purchases
  securities form a corporation through an
  investment bank or some other rep. of the
  corporation.
• Investment Bank
• A financial firm that helps corporations to raise
  funds, usually by helping to sell new
  securities.
• The investors are commercial banks, insurance
  companies, pension funds, mutual funds, and the
  general public.
• Initial Public Offering-occurs when a company
  sells stock to the general public for the first
  time.

26
Secondary Markets for Stock

• After stocks are sold on the primary market, they
  are sold in the secondary market.
• Market for existing financial securities that are
  currently traded among investors
• Sold time and again to many different investors
  on securities exchanges or through the over the
  counter market

27
Secondary Markets

• Securities Exchanges
• marketplace where brokers who represent investors
  meet to buy and sell securities
• NYSE (New York Stock Exchange) 3,000
• AMEX (American Stock Exchange) 1,366
• Regional Exchanges
• Over-the-Counter Market
• A network of dealers who buy and sell stocks or
  corporations that are not listed on a security
  exchange.
• Most traded through NASDAQ MicroSoft 4,000

28
Secondary Markets for Stock

• Account Executives, or Stockbroker
• Licensed individual who buys or sells securities
  for clients.
• Deals with all types of securities, not just
  stocks, can handle an entire portfolio.
• Portfolio-all securities help by an investor
• Commission-fee charged by a brokerage firm for
  the buying and selling of a security
• Churning occurs when an account executive does a
  lot of buying and selling to generate commissions

29
Brokerage Firms

• Full-service
• Personalized service,
• Discount brokerage
• Online
• Biggest difference is the amount of commission
  you will be charged
• Research information
• Assistance in making an investment decision

30
Stock Transactions

• Market order-request to buy or sell at the
  current market value.
• Limit order-request to buy or sell a stock at a
  specified amount.
• Stop order-is a type of limit order to sell a
  particular stock at the next available
  opportunity after its market price reaches a
  specified amount.

31
Stock Transactions

• Computerized Transaction
• Commission Charges
• Minimum commission
• Additional Fees
• Round Lots-100 shares or multiples of 100
• Odd Lots-contains fewer than 100 shares of stock

32
Investment Strategies

• Long-Term Techniques
• Buy and Hold Technique
• Dollar Cost Averaging
• Direct investment and Dividend Reinvestment
• Short-Term Techniques
• Buying Stock on Margin
• Selling Short