The World of Stocks (session 2)

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The World of Stocks (session 2)

  1. 1. The World of Stocks “In the business world, the rear view mirror is always clearer than the windshield”. Warren Buffett
  2. 2. Agenda of the module 1 Stock 2 Types of Stock 3 Company Development Cycles 4 Mechanics of Stock Investing: Buying Stocks 5 Cash and Margin Trading 6 Getting the Low Down on Quotes 7 Types of Orders 8 Getting Started
  3. 3. 1 2 3 4 5 6 7 8 Stock • Another name for the shares, or partial ownership, of a corporation • There are 2 kinds of shares: common and preferred: – common shares: • larger potential rewards and larger potential losses • eligible to receive dividends, companies are not obliged to distribute a portion of their profits
  4. 4. 1 2 3 4 5 6 7 8 Stock – preferred shares: • hybrid between bonds and common stock, the more like a bond the more the return will reflect the return of a bond / the more like a stock the more the return like reflect the return on a stock • features of preferred may or may not include: – guaranteed dividends at regular intervals – limited dividends, does not rise relative to profits – voting superiority depending on agreement – possible convertibility into common stock or bonds – in case of bankruptcy preferreds get paid before common stock
  5. 5. 1 2 3 4 5 6 7 8 Stock • stock certificate: – legal document used to transfer ownership – includes stock’s issuer, shareholder’s name, corporate seal, number of shares it represents – each certificate is assigned a number by the Committee on Uniform Securities Identification Procedures (CUSIP) – par value is also found on the certificate: not the price you paid for the share (market price) • street name: when the brokerage holds your certificate for safekeeping
  6. 6. 1 2 3 4 5 6 7 8 Stock • stock certificate: – legal document used to transfer ownership – includes stock’s issuer, shareholder’s name, corporate seal, number of shares it represents – each certificate is assigned a number by the Committee on Uniform Securities Identification Procedures (CUSIP) – par value is also found on the certificate: not the price you paid for the share (market price) • street name: when the brokerage holds your certificate for safekeeping
  7. 7. 1 2 3 4 5 6 7 8 Type of Stock • No official list divides stocks into separate categories • Stocks are unofficially classified by: – size (primarily dependent on its market capitalization) • (multiply the number of outstanding shares X price) – sector (technology, industrial energy or biotechnology)
  8. 8. 1 2 3 4 5 6 7 8 Type of Stock • Using Market cap, stocks can be broken down into four size categories: – large-cap: blue chip (more than $ 5 billion) – AAPL, GE, MSFT,PG • Dow Jones Industrial Average is comprised of Blue Chip stocks • name comes from chips in poker with the highest value – mid-cap (500 million to 5 billion)- S&P 400 MidCap ($MID)
  9. 9. 1 2 3 4 5 6 7 8 Type of Stock • Market cap: – small-cap (150 million to 500 million) – Russell 2000 Index ($RUT) & S&P SmallCap 600 ($SML) • often undervalued because analysts have not began coverage • institutional investors often can not buy because smaller stocks do not meet fiscal requirements that govern the investments of many money managers and pension funds • http://www.smallcapnetwork.com/ – helps investors find undervalued and overlooked small cap stocks
  10. 10. 1 2 3 4 5 6 7 8 Type of Stock • Market cap: – micro-cap (less than 150 million) – penny stocks and stocks under $ 2 – extremely risky, many companies fail early on • http://www.otcmarkets.com/ho me
  11. 11. 1 2 3 4 5 6 7 8 Type of Stock • Another way to classify a stock is by its nature of its objectives: – income (conservative) • solid companies that offer slow but steady growth • regularly pay dividends • i.e. Exxon Mobil (XOM), Bank of America (BAC) – cyclical (conservative) • fluctuate in relation to the economy , seasons, events • good gauge of the economy • i.e. Alcoa (AA)
  12. 12. 1 2 3 4 5 6 7 8 Type of Stock • Nature of its objectives: – growth stocks (aggressive) • rarely pay dividends: prefer to reinvest profits for future growth • two kinds: established growth and emerging growth • i.e. Apple (APPL), Charles Schwab (SCH)
  13. 13. 1 2 3 4 5 6 7 8 Type of Stock • Nature of its objectives: – turnaround (aggressive) • suffered sever losses and are due for a turnaround • offer explosive growth • no guarantees and high risk • Warren Buffet favorite stockpicking method • i.e. Rite Aid Corp. (RAD), Net Flicks, Bank of America (BAC) – “lately”
  14. 14. 1 2 3 4 5 6 7 8 Type of Stock • Nature of its objectives: – green stocks (varies) • environmentally friendly and socially conscious i.e. Ben & Jerry’s (BJICA) • www.greenmoney.com or www.goodmoney.com • The advantages and disadvantages of each stock depend on your investment goals and risk tolerance
  15. 15. 1 2 3 4 5 6 7 8 Company Development Cycles 1. Private company: (birth) – fundamentals not easily discerned due to private nature – stock has limited availability – risk is generally high due to requirements: operating capital and lack or revenue – examples: Twitter, In n Out Burgers
  16. 16. 1 2 3 4 5 6 7 8 Company Development Cycles 2. Initial public offering: (childhood) – – – – stock performance not available (no technical analysis) IPO is subject to acceptance by investing community profitability may be years in coming long established companies, privately held, name recognition Example: Groupon, IPO of $700 million Facebook, IPO of $ 16 billion
  17. 17. 1 2 3 4 5 6 7 8 Company Development Cycles 3. Early-stage growth: (adolescence) – – – – rarely (if ever) pay dividends stocks in thus stage are considered aggressive critical stage of “make it or break it” example: Facebook (460 million shares/$ 16 billion/cap 125 billion-September 30, 2013), Skype 4. Successful growth: (adulthood) – – – – can start paying a percentage of their profits as dividends still needs to reinvest most of its profits back into company paid its dues to create a successful infrastructure examples: Google, Microsoft, Intel, Amazon
  18. 18. 1 2 3 4 5 6 7 8 Company Development Cycles 5. Mature company: (old age) – larger percentage of its profit is consistently paid out – needs to fight just as hard to stay in game – examples: GE, Proctor and Gamble
  19. 19. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Buying stocks: buying or going long is to make money in a rising bull market
  20. 20. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Buying stocks: – two ways to buy stocks: cash and margin • • • • cash is a straight debit from your account margin: brokerage lends you part of the purchase price maximum risk: price of the stock as it approaches zero maximum profit: unlimited – in volatile markets, traders hedge their positions with options or bonds
  21. 21. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Short Selling Stocks: – strategy used by George Soros in 1992: Black Wednesday • made $1 billion dollars from a $10 billion short position on the sterling • he was dubbed the man who broke the bank of England – can be used to take advantage of a drop in prices – you can borrow shares from your brokerage and sell them at a higher price and later buy them at a lower price to replenish them – cover the short: to buy shares of stock to replenish those borrowed from your brokerage to place a short sale
  22. 22. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Short Selling Stocks: • example of the mathematics of shorting: • • • • EMC is currently trading @ 85 ½ per share you want to short 100 shares you will receive 8,550 in your account for shorting to place the trade, most brokerages will require you to post a margin deposit of $150% or $12,825 ($8,850 x 1.5) • price drops to $75 • you profit $1,050 = $8,550 – 7,500 ($75 x 100 shares to close position)
  23. 23. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Short Selling Stocks: – holding a short position in the stock for over a year does not constitute a long term capital gain – capital gain shelters are for long term stockholders not short sellers – examples of short selling: Bank of England, Goldman Sacks – maximum risk: unlimited to the upside – maximum profit: limited to the full price of the stock shares as they fall to zero
  24. 24. 1 2 3 4 5 6 7 8 The Mechanics of Stock Investing • Short selling stocks: – differences between buying and short selling stock comes in the form of risk: short selling means unlimited risk and buying stock means limited risk – a good strategy if you are going to short sale is to use a combination of stocks and options to create a non-directional trade that make money regardless of whether the stock goes up or down
  25. 25. 1 2 3 4 5 6 7 8 Cash and Margin Trading • Cash trades – require that you put 100% of the money in cash – EMC goes from $85 ½ to $90 ½, so if you bought 100 shares you made a profit of $500, or a 5.8% return on investment (ROI) • ROI – the reward on a trade divided by the trade’s risk
  26. 26. 1 2 3 4 5 6 7 8 Cash and Margin Trading • Margin trades – allows you to put a percentage of the total cost of the trade amount in cash and the rest in “on account” – the term margin refers to the amount of money an investor must pay to enter a trade with the remainder of the cash being borrowed from the brokerage firm: the shares you have bought secure the trade
  27. 27. 1 2 3 4 5 6 7 8 Cash and Margin Trading • Margin trades – margin account is usually required for short positions and options trading – brokerages are usually willing to let you borrow 50% of a trade’s cost but require a certain amount of money be left untouched in your account to secure the loan – this money is referred to as a margin requirement
  28. 28. 1 2 3 4 5 6 7 8 Cash and Margin Trading • Margin trades – if the stock you bought goes down, you receive a margin call – based on SEC rules and clearing firms, margin equals 50% of the amount of the trade – at this rate margin accounts give traders 2 to 1 buying leverage – if the price of the stock falls below 75% of the total value of the total initial investment, the trader receives a margin call from the broker
  29. 29. 1 2 3 4 5 6 7 8 Cash and Margin Trading • Margin trades – brokers may set their own margin requirements, but they are never less than 75% - the amount required by the Fed – margin interest is cheaper than most loans , as it is a secure loan – margin on short selling is extremely expensive, cost of stock plus 50%
  30. 30. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – there are hundreds of websites that provide quote, some real time (eSignal – www.dbc.com) while more are delayed (15 to 20 minutes) – example: www.optionetics.com - Qualcomm (QCOM) – bid: the highest price a prospective buyer is prepared to pay (floor trader) – off floor trader buys at the ask price – ask: the lowest price acceptable to a prospective seller (floor trader) – off floor trader sells at the bid price – the quote price gives you a general feel for the stock, but if you want to know the stock you must look deeper than that – off floor trader buys at the ask price and sells at the bid price
  31. 31. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – snapshot quote is just the beginning of the process, but it will combine the basic elements of the three basic analytical approaches: fundamental, technical and sentiment
  32. 32. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – Quote terms Definitions • • • • • • • Last – last price that the option/stock traded at Open – price of the first transaction of the current day Change – amount last sale differs from previous closing % Change – percentage price change from previous day High – highest price for current trading day Low – lowest price for current trading day Bid – highest price a prospective buyer (floor trader) is prepared to pay • Ask – lowest price acceptable to a prospective seller (floor trader)
  33. 33. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – Quote terms Definitions • • • • • • • • 52-Week High – the highest stock price in the past 52 weeks 52 Week Low – the lowest stock price in the past 52 weeks Earnings per Share – net pre-tax profit divided by the shares Volume – total number of shares traded that day Share Outstanding – total number of shares the Co. issued Market Cap – shares outstanding multiplied by the price P/E Ratio – stock price divided by the earnings per share Exchange – indicates where a company lists its shares
  34. 34. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – fundamental analysis: • trading approach that uses economic and production data to determine company’s fair value • forecast future stock price movements based on the balance sheet and income statements, past records of earnings, sales, assets, management, products and services (example: US vs. Europe when it comes to emphasis on questions from VC’s)
  35. 35. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – technical analysis: • based on the theory that market prices display repetitive patterns that can be traced and used to forecast future stock price movement • analyze chart patterns and statistics generated by market activities , such as, past prices, volume, momentum and stochastic
  36. 36. 1 2 3 4 5 6 7 8
  37. 37. 1 2 3 4 5 6 7 8 Getting the Low Down on Quotes – sentiment analysis: • attempt to gauge investor sentiment by analyzing the subconscious of the market place through the use of specific psychological market criteria • the interpretation is not cut and dried, hence the utilization of psychological market indicators • depends on a trader’s unique interpretation of the facts
  38. 38. 1 2 3 4 5 6 7 8 Types of Order • As a trader you have to find the right trade and use the right order technique that will enhance the trade’s success • The two most popular ones are the market order and the limit order – at-even order: wait until the market gets to the right price for your trade to be placed – at-the opening order: executed at the opening of the market or be cancelled – day order: remain good only for the duration of the day
  39. 39. 1 2 3 4 5 6 7 8 Types of Order – good til cancelled: remain in effect until executed or explicitly cancelled – immediate or cancel order: must be executed in whole or part as soon as entered, any part not executed is automatically cancelled – fill or kill orders: must be executed immediately or by a specific date as a whole order, if not order is cancelled – limit order: specify a maximum buying or a minimum selling price – limit-buy-order: must be executed below current price
  40. 40. 1 2 3 4 5 6 7 8 Types of Order – limit-sell-order: must be executed above current price – market-on-order: must be executed during the opening of trading – market-on-close-orders: must be executed during the closing of trading – market-orders: the most common type at the price given at the time the order reaches the market / only order that guarantees execution – market-if-touched-orders: combined market and limit orders, where the order becomes market order when the options or stocks reach a specified price
  41. 41. 1 2 3 4 5 6 7 8 Types of Order – market-if-touched-buy-orders: become buy market orders when the options or stock fall below the current price – market-if-touched-sell-orders: become sell orders when the options or stocks rise above the current price – stop-orders: used to limit risk, they become market orders when the options or stocks reach a certain price – buy-stop-orders: become market buy orders upon trade at or above the specified price
  42. 42. 1 2 3 4 5 6 7 8 Types of Order – sell-stop-orders: become market sell orders upon trade at or below the specified price – stop-limit-orders: an extension of stop orders, where the activated order becomes a limit order instead of a market order
  43. 43. 1 2 3 4 5 6 7 8 Getting Started • Time should be considered along with risk • The trick is to invest according to your personal time frame, so that you are not creating a market risk • When markets go up, it is called a bull-market, because bulls buck up with their horns
  44. 44. 1 2 3 4 5 6 7 8 Getting Started • When markets go down, it is called a bear market, because bears paw swat down with their paws • Create a portfolio of stocks that best suits your particular needs, time horizon and risk tolerance – known as your “investment profile”
  45. 45. 1 2 3 4 5 6 7 8 Getting Started • Categories of stock: – – – – – income: utility stocks growth and income: blue chip stocks with a dividend growth: mid sized to large cap stocks aggressive growth: small to mid-cap stocks speculative: start-ups, turnaround situations • great potential lies in identifying growth companies with mid to large capitalization • future prospects of high tech stocks
  46. 46. THANK YOU VERY MUCH

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