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Chapter 12
 

Chapter 12

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  • Or see exhibit 12-5
  • Or see exhibit 12-5

Chapter 12 Chapter 12 Presentation Transcript

  • Chapter 12 Investing in Stocks Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  • Investing in Stocks
    • Identify the most important features of common and preferred stock.
    • Explain how you can evaluate stock investments.
    • Analyze the numerical measures that cause a stock to increase or decrease in value.
    • Describe how stocks are bought and sold.
    • Explain the trading techniques used by long-term investors and short-term speculators.
    Chapter Objectives 12-
  • Objective 1 Identify the Most Important Features of Common and Preferred Stocks
    • Common and Preferred Stocks
    • Two concerns for beginning investors
      • Where to get the information
      • What the information means
    12-
    • Common Stock = most basic form of corporate ownership
    • Stock = equity financing
    • Reasons why corporations issue Stock
      • Raise money to start or expand business
      • Pay ongoing business expenses
      • Need not repay the money
      • Dividends not mandatory
        • Board of Directors votes each dividend payment
    • But:
      • Shareholders have voting rights; control of the company
      • Dividends are NOT tax deductible
    Why Corporations Issue Common Stock 12-
    • Investors can make money in three ways
      • Income from dividends
        • Cash
        • Shares of stock
      • Dollar appreciation of stock value
        • Price appreciation
        • Capital gain
      • Possible increased value from stock splits
        • No guarantee price will go up after a split
    Why Corporations Issue Common Stock 12-
  • Dividend Dates
    • Declaration date = Board of Directors votes to pay a dividend
    • Record date = a stockholder must be registered on the firm’s books to receive the dividend
    • Ex-Dividend date = 2 nd day before the record date stock begins to trade without the dividend
      • Investors buying after the ex-div date do not receive the dividend
    • Payment date = dividend is paid
    12-
  • Preferred Stock
    • Hybrid Security
      • Known cash dividend is about equal to bond interest
      • Equity position is about equal to common stock but usually non-voting
    • Dividends paid before common stock
      • Dividend may be omitted
    12-
  • Features of Preferred Stock
    • Cumulative preferred stock
      • Unpaid cash dividends accumulate
      • Must be paid before any cash dividends are paid to common stockholders
    • Convertible preferred stock
      • Can be traded for shares of common stock
      • Provides investor with added safety of preferred stock and greater speculative gain through conversion to common stock
    12-
  • Objective 2 Explain How You Can Evaluate Stock Investments
    • Evaluate the company and the industry
    • The Internet
      • Firm’s home page more current than printed materials
      • http://finance.yahoo.com
        • Research on a company
        • Stock screener to help choose investments
    • Professional advisory services
      • http://www.standardpoors.com/
      • www.mergentonline.com
      • http://www.valueline.com
    12-
  • Where Can You Find a Stock Quote, and What Does One Look Like?
    • Print sources
      • The Wall Street Journal http ://www.wsj.com
      • The local newspaper
    • Online sources:
      • http://finance.yahoo.com
      • http://www.thestreet.com
      • http://money.cnn.com
      • http://moneycentral.msn.com/investor
    12-
  • Common Stock Price Quotes Online at http://finance.yahoo.com First enter stock symbol Resulting screen 12-
  • Common Stock Price Quotes Last trade price = $44.37 Annual dividend = $1.68 P/E = 15.41  Earnings per share = 44.37/15.41 = $2.8793 12-
  • E valuating a Stock Issue
    • Stock Advisory Services
    • Research materials = good supplement to other sources of information
    • Most charge a fee
    • Three most popular:
      • Standard and Poor’s reports
      • Value Line
      • Mergent’s Handbook of Common Stock
    12-
  • Corporate News
    • Prospectus lists all necessary information as dictated by the Federal government
    • All publicly traded corporations send their stockholders an annual report
    • Securities and Exchange Commission website ( http:// www.sec.gov )
    • Business periodicals:
      • BusinessWeek, Fortune, Forbes, Money, Kiplinger’s Personal Finance Magazine
    12-
  • Objective 3 Analyze the Numerical Measures that Cause a Stock to Increase or Decrease in Value
    • Corporate earnings
      • One of the most significant factors in changes in the value of a stock
    • Earnings per share (EPS)
      • Corporation’s after-tax income divided by the number of outstanding shares of common stock
      • EPS Increase = generally a healthy sign
    12-
  • Numeric Measures That Influence Investment
    • Price-earnings ratio (PE)
      • Price per share of stock divided by the firm’s earnings per share
      • How much an investor is paying for a company’s earning power
      • P/E > 20  investor optimism
      • P/E < 20  lower earnings expectations
      • Compare to firms in same industry
    • Projected Earnings
      • EPS and PE based on historical data
      • Future expectations more relevant
    12-
  • Other Factors than Influence the Price of a Stock
    • Dividend yield
      • Annual dollar dividend divided by current price per share
      • Dividend yield increase = healthy sign
    • Total return
      • Dividends plus capital gains
      • Cash income + Price appreciation
    • Book value per share
      • (Assets – Liabilities)/ # shares
      • Market price per share should be > book value
    12-
  • Objective 4 Describe How Stocks are Bought and Sold
    • Primary Market
    • Investor buys securities from issuer of those securities via an investment bank
      • Investment bank = financial firm that assists corporations in raising funds, usually by helping sell new security issues (underwriting)
    • IPO = when a corporation sells stock to the general public for the first time
    • Key factor:
      • Cash from security sales goes to issuing company
    12-
  • How Stocks are Bought and Sold
    • Secondary Market
    • Market for existing financial securities
    • Traded among investors via brokers and dealers
    • Markets
      • Stock exchanges
      • Over-the-counter markets
    12-
  • Secondary Markets for Stocks
    • Securities Exchanges (NYSE)
    • Marketplace where members, representing investors, meet to buy and sell securities
    • Securities sold on an exchange must be listed, or accepted for trading, on that exchange
    • “ The Listed Market” = NYSE
    • “ Specialist” buys or sells
    • a particular stock
    12-
  • Secondary Markets for Stocks
    • The Over-the-Counter (OTC) market (NASDAQ)
    • Network of dealers who buy and sell the stocks of companies from inventory
      • Dealer = “Market Maker”
    • NASDAQ = electronic marketplace for over 3,200 companies
    12-
  • Brokerage Firms and Account Executives
    • Account executive (stockbroker)
      • Licensed individual who buys and sells securities for his or her clients
    • Churning
      • Excessive buying and selling of securities to generate commissions
      • Illegal under SEC regulations
    12-
  • Discount vs. Full Service Brokers Service vs. Cost
    • How much advice do you want?
    • Can you buy and sell stocks over the phone
    • Can you trade stocks online?
    • Where is the nearest office located?
    • Toll-free number for customer use?
    • How often are statements issued?
    • Is there a charge for statements, research reports, and other financial reports?
    • Are there any fees in addition to the commissions to buy and sell?
    12-
  • Computerized Transactions
    • Reasons that justify trading online
    • Size of investment portfolio
    • Ability and desire to manage own portfolio
    • Ability to monitor investments closely
    • Capability of computer and software
    12-
  • Stock Transaction Orders
    • Market order
      • Request to buy or sell stock at the current market value
    • Limit order
      • Request to buy or sell a stock at a specified price
    • Stop order (Stop-loss order)
      • Request to sell a stock at the next available opportunity after its market price reaches a specified amount
    12-
  • Commission Charges
    • Brokerage minimum commissions
      • Range = $7 to $35
      • Depends on the number of shares traded and stock value
    • Full service vs. discount brokers
      • Full service fees >
      • Online broker  little advice or service
    12-
  • Objective 5 Explain the Trading Techniques Used by Long-term Investors and Short-term Speculators
    • Long-Term Investment Strategies
    • Buy and hold
    • Dollar cost averaging
    • Direct investment and dividend reinvestment plans (DRIPS)
      • http://www.directinvesting.com
      • http://www.dripcentral.com
    12-
  • Dollar Cost Averaging
    • Long-term technique
    • Invest equal dollar amount in the same stock at equal intervals
    • Goals:
      • Minimize average cost per share
      • Avoid “Buy High – Sell Low”
    12-
  • Short-Term Investment Strategies
    • Buying stock on margin
      • Borrowing money from broker
      • Margin requirement set by the Fed
      • “ Bullish”
    • Selling short
      • Borrowing stock
      • “ Sell high, buy low”
      • “ Bearish”
    12-
  • Short-Term Investment Strategies
    • Trading in options
      • Option = the right but not the obligation to buy or sell a stock at a predetermined price during a specified period of time
        • Call option
          • Right to buy
          • “ Bullish”
        • Put option
          • Right to sell
          • “ Bearish”
      • Not for amateurs or beginning investors
    12-