Stocks/Bonds

1
Stocks/Bonds

• What are stocks?
• Equity, meaning you are part owner of the company
• Pay dividends based on profits
• What are bonds?
• Pay interest whether they make profit or not
• A debt security used to raise money
• Interest rate stays the same over term of the
  bond
• Value of bond will go up as interest rates go
  down and vise versa
• With stocks and bonds, cannot lose more than
  you invest

2
Types of Stocks

• Blue Chip Stocks established companies with
  long record of earnings growth and dividend
  payment high grade investment
• Company loses this rating if it stops paying
  dividends for a while
• Value stock - is stock with share prices that are
  inexpensive compared to their current earnings.
  Value investors rely on fundamental analysis to
  determine which stocks are undervalued.
• Growth Stocks the stock of a company whose
  earnings are growing faster than the rate of
  general business activity.
• Growth stocks dont usually pay dividends as the
  company would rather reinvest earnings back into
  the company
• Risky

3
Types of Stocks

• Income stock - is the stock of a well-established
  company that is relatively mature. The company
  pays out a good part of its earnings as
  dividends. These companies grow more slowly than
  growth stocks. Investors who are interested in
  receiving income now instead of investing only
  for the future might purchase income stocks.
• Utility Stock pays regular dividends and some
  growth usually power companies such as electric
  and gas companies
• low risk investments (usually)
• Preferred Stock pays a stated dividend, must
  pay dividend before any dividends paid to common
  stock holders on liquidation, get paid before
  common stock holders
• some growth but not usually as much as common
  stocks usually dont have voting rights

4
Types of Stocks

• Small company stock called small caps - is
  the stock of a relatively small company with
  market value of its outstanding shares (called
  market capitalization) between 300 million and
  2 billion. Small-cap stocks have the potential
  for big gains but also have a higher risk of the
  company failing or being poorly managed.
• Medium company stock -Called mid-caps - is the
  stock of a medium size company with market
  capitalization between 2 billion and 10
  billion. Mid-caps have a greater potential for
  growth than larger companies but carry less risk
  than small companies
• Large company stock Called large-caps - is
  the stock of a large size company with market
  capitalization of 10 billion or more. The price
  of Large-cap stock is usually higher than mid or
  small-cap stocks because of the lower risk.
  Large-caps usually pay dividends and dont always
  have the potential for growth.

5
Investing in Common Stock

• Diversification dont put all eggs in one
  basket
• invest in different types of a type of an asset
  category
• Blue chips, growth, small cap, large cap, mid
  cap, different industries or sectors
• Asset Allocation invest in different types of
  assets
• Stocks, bonds, real estate, businesses, CDs

6
Investing in Common Stock

• Long-Position buy the stock and hold it more
  likely to make money this way
• dont pay as much in commissions as you do when
  you sell often
• Selling Short opposite strategy, betting that
  the market is going down
• may have to come up with more money and take a
  loss if price goes up

7
Investing in Common Stock

• Dollar Cost Averaging (2 ways)
• the whole purpose is to buy over time
• Buy same number of shares each time you buy then
  average over time how much it costs for that
  number of shares during the whole time
• hard for people to do sometimes because dont
  know how to budget for unknown amounts in the
  future
• Only invest a specific dollar amount each time
  you buy then average how many shares you get
  over time since dollar amount invested stays the
  same
• easier to budget for harder to do with stocks

8
Reading a Stock Quote

• 52 week Ticker P/E Vol.
  High Low Close Change
• High Low 100s
• 70.25 41.44 WalMart WMT 35 86424 49.38 46.38
  49.00 2.13
• Since the change from the day was up 2.13,
  yesterday the stock closed at 46.87 (49.00-2.13)

9
Types of Bonds

• Municipal Bonds issued by states, cities,
  school boards, etc.
• Interest is tax free at Federal Level and if you
  buy them from locations in your state of
  residence, they are income tax free at the state
  level
• Corporate bonds issued by corporations
• Mortgage most secure backed by land and
  buildings
• Debentures least secure not backed by specific
  assets
• Convertible bonds can be converted into a
  specific number of the companys stock

10
Types of Bonds (continued)

• Zero coupon bonds bonds that are sold at a
  discount and pay no interest
• Coupon rate is the rate of interest a bond pays
  so a zero coupon bond pays no interest
• However, the government treats the increase in
  value of the bond each year and taxes you even
  though you have not received any money
• Use only inside a tax-deferred account like an
  IRA or with children that have less than 700
  (2000) in investment income

11
Reading a Bond Quote

• Symbol Int. Maturity Yield Vol. Price
  Change
• ATT 51/801 5.2 30 991/8 5/32
• Coupon or Interest rate is 5 1/8 (.05125)
• Matures in 2001
• Price is in hundreds and bonds are worth 1000 so
  you need to multiply the answer by 10
• 99 1/8 99.125 99.125x10991.25 for a bond
  worth 1,000 at maturity
• Yesterdays price was 992.81 ((99.125.156)x10)

12
Treasury Bills, Bonds Notes

• Bills 3, 6 and 12 months
• Bonds long-term usually 30 years
• Notes currently 2, 5, and 10 year maturity
• None are subject to state income taxes but they
  are subject to federal income taxes
• Very safe, but low returns

13
Mutual Fund Terms

• Open-End Funds
• number of outstanding shares varies (no limit)
• shares are purchased and redeemed through the
  fund deal with the company
• price of shares is based on NAV (net asset value
  value of portfolio/ of shares outstanding
• Closed-End Funds
• number of outstanding shares is fixed
• shares are traded in the market just like a stock
• price of shares is based on market conditions

14
Open-End Funds

• Ability to diversify
• Easy to reinvest and dollar cost average
• Easier to meet risk tolerance with a variety of
  fund types
• High marketability
• Can take it as income in retirement

15
Loads

• Load sales charges on mutual funds 5-8
• front-end load when purchase
• back-end load when sell
• most of time will decrease the longer you hold
  the fund
• Some companies charge both
• low-load funds one to three percent
• no-load funds so you only pay NAV for these
  funds

16
Fees

• Management Fees charged to cover the cost of
  managing or administering the mutual funds on
  top of commission
• 12b-1 Fees fee charged annually to pay for the
  marketing and distribution of mutual funds
  usually 1 or less of fund assets.

17
Distributions

• Dividends - income paid to investors out of
  profits earned by the mutual fund
• made when fund distributes dividend income after
  deducting operating expenses from the interest
  and dividend income received from securities
  owned
• Capital Gains Distribution the net gains that a
  fund realizes on its sale of securities from its
  portfolio during the year
• Have to pay taxes even if you reinvest in the
  fund

18
Basic Types of Mutual Funds

• Aggressive Growth
• Growth
• Growth and Income
• Balanced
• Bond
• Money Market
• Sector
• International
• Global

19
Reading a Mutual Fund Quote

• Name NAV Change Yield
• Vanguard
• Welth 28.81 .08 5.9
• 500idx 128.44 .65 -4.4
• Some papers will use NL to identify no-load
  stocks.