Chapter 12 Investing in Stocks Copyright   © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Investing in Stocks <ul><li>Identify the most important features of common and preferred stock. </li></ul><ul><li>Explain ...
Objective 1  Identify the Most Important Features of Common and Preferred  Stocks <ul><li>Common and Preferred Stocks </li...
<ul><li>Common Stock = most basic form of corporate ownership  </li></ul><ul><li>Stock = equity financing </li></ul><ul><l...
<ul><li>Investors can make money in three ways </li></ul><ul><ul><li>Income from dividends  </li></ul></ul><ul><ul><ul><li...
Dividend Dates <ul><li>Declaration date = Board of Directors votes  to pay a dividend </li></ul><ul><li>Record date = a st...
Preferred Stock <ul><li>Hybrid Security </li></ul><ul><ul><li>Known cash dividend  is about equal to bond interest </li></...
Features of Preferred Stock <ul><li>Cumulative preferred stock </li></ul><ul><ul><li>Unpaid cash dividends accumulate </li...
Objective 2 Explain How You Can  Evaluate Stock Investments <ul><li>Evaluate the company and the industry </li></ul><ul><l...
Where Can You Find a Stock Quote, and What Does One Look Like? <ul><li>Print sources  </li></ul><ul><ul><li>The Wall Stree...
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...
E valuating a Stock Issue <ul><li>Stock Advisory Services </li></ul><ul><li>Research materials = good supplement to other ...
Corporate News <ul><li>Prospectus lists all necessary information as dictated by the Federal government </li></ul><ul><li>...
Objective 3 Analyze the Numerical Measures that Cause a Stock to Increase or Decrease in Value <ul><li>Corporate earnings ...
Numeric Measures That  Influence Investment <ul><li>Price-earnings ratio  (PE)  </li></ul><ul><ul><li>Price per share of s...
Other Factors than Influence the Price of a Stock  <ul><li>Dividend yield   </li></ul><ul><ul><li>Annual dollar dividend d...
Objective 4 Describe   How Stocks are Bought and Sold <ul><li>Primary Market </li></ul><ul><li>Investor buys securities fr...
How Stocks are Bought and Sold <ul><li>Secondary Market </li></ul><ul><li>Market for existing financial securities  </li><...
Secondary Markets for Stocks <ul><li>Securities Exchanges   (NYSE) </li></ul><ul><li>Marketplace where members, representi...
Secondary Markets for Stocks <ul><li>The Over-the-Counter (OTC) market  (NASDAQ) </li></ul><ul><li>Network of dealers who ...
Brokerage Firms and  Account Executives <ul><li>Account executive (stockbroker)  </li></ul><ul><ul><li>Licensed individual...
Discount vs. Full Service Brokers Service vs. Cost <ul><li>How much advice do you want? </li></ul><ul><li>Can you buy and ...
Computerized Transactions <ul><li>Reasons that justify trading online </li></ul><ul><li>Size of investment portfolio </li>...
Stock Transaction Orders <ul><li>Market order   </li></ul><ul><ul><li>Request to buy or sell stock at the current market v...
Commission Charges <ul><li>Brokerage minimum commissions  </li></ul><ul><ul><li>Range =  $7 to $35 </li></ul></ul><ul><ul>...
Objective 5 Explain the Trading Techniques Used by Long-term Investors and Short-term Speculators <ul><li>Long-Term Invest...
Dollar Cost Averaging <ul><li>Long-term technique </li></ul><ul><li>Invest equal dollar amount in the same stock  at equal...
Short-Term Investment Strategies <ul><li>Buying stock on margin  </li></ul><ul><ul><li>Borrowing money from broker </li></...
Short-Term Investment Strategies <ul><li>Trading in options </li></ul><ul><ul><li>Option = the right but not the obligatio...
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Chapter 12

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  • Or see exhibit 12-5
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  • Chapter 12

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

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