Introduction to Investments

1
Introduction to Investments

• By Ron Mandel

2
Overview

• Stocks
• types of stocks
• Markets
• terms
• ratios
• Bonds
• Mutual funds

3
Stocks

• Shares represent units of ownership in a business
• Fluctuate in value over time
• Allow companies to raise money in the stock
  market

4
Stock Markets

• Stock markets are vital to economy because
• Act as an indicator of where economy is headed in
  six months
• Give young companies the opportunity to grow
• Connect investors money with the businesses that
  need it
• Method of investing in our future
• Provide us with a convenient way of investing in
  foreign countries, and foreigners with a way to
  invest in Canada
• Provide certain types of investors with income

5
Stock Markets

• Stock market vs. stock index
• North American indices
• Dow Jones Industrial Average American
• Nasdaq - American
• SP 500 (Standard Poors) - American
• SP TSX Composite Index Toronto
• Wilshire 5000 American

6
Types of Stocks

• Blue chips - large, well-established companies
• Examples IBM, McDonalds, Coca Cola, General
  Electric
• History of consistent performance
• Usually pay out dividends
• Growth companies - potential for serious growth
• Examples eBay, Amazon.com, Oracle, Gateway,
  Amgen
• A bit more risky and volatile than blue chips
• Typically invest profits back into the business
  (expanding the business)

7
Types of Stocks

• Value stocks a bargain because
• Examples Sears, Vodafone, Vishay Intertechnology
• Recently experienced a negative event
• Are in an industry that is not hot at the moment
• Investors have simply overlooked them
• Penny stocks are those which are worth less than
  5
• Examples Junior mining companies and start-up
  techs
• Riskiest type of stock (most volatility)
• Most potential for price appreciation
• Many of the biggest companies started out as
  penny stocks

8
Market Capitalization

• Large-caps - market caps of more than 10 billion
• Usually well established companies with a
  successful past
• Not always old companies
• Most stable stocks of the four categories
• Mid-caps - market caps of 2 billion - 10
  billion
• Sometimes they have a lot of room for growth
• Other times they have already done most of their
  growing

9
Market Capitalization

• Small-caps - market caps of 150 million - 2
  billion
• Relatively new companies
• They have already proven they have potential
• There is quite a bit of risk with these
  investments
• Micro-caps - market caps of less than 150
  million
• For some investors, the fewer advantages of
  micro-caps outweigh the many disadvantages
• Riskiest of the four categories

10
Miscellaneous

• Volume number of shares traded
• Volatility measures fluctuations in price
• Dividends a portion of net income paid in cash
  to investors
• Research has proven that stocks are best
  investment for the long run (12)
• Most of the worlds richest people have made
  their wealth via the stock markets

11
Financial Ratios

• Allow us to
• Assess the financial strength of companies
• Measure return on investment
• Understand relationships between different
  accounts on the financial statements
• Compare similar companies

12
Key Ratios

• Price to Earnings (P/E)
• Price per Share/Earnings per Share
• Earnings per Share (EPS)
• One of most common
• Varies among industries
• Dividend Yield
• Dividend/Share price
• Varies among industries
• Watch out for very high yields
• Great source of income

13
Key Ratios

• Price to Sales
• Price per Share/Sales per Share
• Useful ratio when there are no earnings
• Book Value per Share
• (Tangible Assets Liabilities)/ of Shares
• Price to Book Value ? Price/(Book Value per
  Share)
• Net Profit Margin
• Percentage of Sales that are left over as net
  profit

14
Key Ratios

• Return on Equity
• Net Income/Shareholders Equity
• Debt to Equity
• Varies among industries
• Affects ability of companies to borrow

15
Bonds

• A loan of which you are the lender
• The issuer pays interest on the principal
• Maturity the date in the future when the
  principal will be repaid
• Yield of principal paid as interest
• Government bonds vs. Corporate bonds
• Perceived as conservative investments
• Can be used aggressively

16
Mutual Funds

• A collection of stocks and/or bunds
• Supposed to provide diversification
• Allow you to profit from experience of management
• Management fees cut into appreciation
• Trillions of dollars are invested in mutual funds
  half the households in the U.S.
• Effective for passive investors

17
Conclusion

• Stocks are the best investment for the long-term
• In general, a long-term strategy is most
  effective
• During tough times, more scrutiny is required
• Investing is not easy, but with education, can
  provide for a beautiful retirement