Only prepared from in(slide share) for teach. Not for business

1. Investment Management
Chapter 6-Investing in Stocks
and Bonds
Lectured by : Mr. HENG Leangpheng (MBA)
Tel: 095 433 369 / 081 895 695
E-mail: leangpheng.heng@yahoo.com
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2. Common Stock
Common stock represents a share of ownership
in a corporation.
A common shareholder’s claim on the firm is
said to be a residual claim, which means the
person shares in the assets and income of the
corporation.
Each shareholder has the right to vote for
members of the board of directors.
If a shareholder is unable to vote in person they
may do so by proxy.
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3. Stockholder Rights
Shareholders enjoy limited liability
If the firm issues a stock dividend stockholders
are entitled to a dividend.
They are also entitled to preemptive rights.
When companies sell additional shares of stock,
shareholders are entitled to maintain their
proportionate interest in the company.
In a stock split a shareholder is entitled to
maintain their proportionate share of ownership
in the corporation.
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4. The Stock Market
 The stock market has two parts:
• Primary market – where stocks are sold to the public for the first
time.
• Secondary market – where stocks that have already been issued
are traded between investors.
• As a part of going public in the primary market, a company goes
through an initial public offering.
• New stock issues are advertised in the financial press in the form
of a tombstone ad.
• Anyone interested in purchasing the stock can request a
prospectus. This document details all important information
about the stock and company.
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5. Securities Exchanges
Trading among investors can be accomplished
through an organized securities exchange. This
is a physical location where trading takes place
or through an electronic marketplace called the
over the counter market.
To effect trades a brokerage contacts the
representative at the exchange, and puts in the
bid price, then the ask price is relayed.
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6. Classifications of common stock6
Type of Stock Characteristics
Income stock Pays investors a regular dividend rather than concentrating on
the reinvestment of profits.
Growth stock One that compensates investors primarily through increases in
the value of the shares over time.
Blue Chip
Stock
One issued by large, stable, mature companies.
Cyclical
stock
This stock exhibits above average sensitivity to the business
cycles.

7. Market Capitalization
Market capitalization is the total value of a
company’s shares at its current market price.
Companies are referred to in three ways:
a. Large-cap – have market caps of $5 billion or
more.
b. Mid-cap – have $1 billion to $3 billion in market
cap.
c. Small-cap – generally has market cap of than $1
billion.
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8. Buying & Selling stock
 To determine how much to pay for a stock, look up the
current price. This can be done in The Wall Street Journal or
online.
 If you see the close price, this represents the price the stock
sold for at closing the previous day.
 Orders are normally made in round lots, or a unit of 100
shares.
 When you make a market order, you ask the broker to
execute your trade based upon the market price at the time
the buy is made.
 You can also place a limit order, whereby you limit the
amount per share you are willing to pay.
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9. Investors sometimes decide to sell short. This
occurs when they issue a sell order to their
broker but do not actually have the shares,
instead they borrow from their brokers account.
A stockbroker is a licensed professional who
facilities securities transactions for clients.
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10. Brokerage firms
 Full service brokers provide services such as account
management and investment research.
 Discount brokers, are generally much less expensive and
offer fewer services.
 You are required to open a brokerage account and
keep a certain amount of money in that account.
 If you don’t have enough money you can buy on
margin. Buying on margin means that you borrow funds
from the brokerage firm. However, if the price of the
stock falls you might get a margin call, a request to
repay the money at once.
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11. Stock Performance
 The two components of a stock’s rate of return are
dividend yield and capital gains yield.
Dividend yield = Annual dividend/Market price of stock
Capital gains yield = Annual change in price/Market price
of stock
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12. Stock Returns
 The most widely watched ratio is the earnings per share.
(EPS)
 EPS = After tax net income/Number of shares
outstanding. This can also be compared to the price-to-
earnings ratio.
 P/E ratio = stock price/eps
 The P/E ratio is used as a measure of future earnings
potential.
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13. Stock Indexes
 A stock market index tracks the performance of a
particular group of stocks.
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S & P 500 Index
Dow Jones
Industrial
Average (DJIA)
NYSE Composite
Index

14. Bonds
A bond is a type of financial security that
represents your long term loan of money to the
government or a company.
Bonds generally provide a lower rate of return to
investors than stocks, but they make up a large
portion of investors’ portfolios.
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15. Advantages of Bonds
Diversification – bond income can help offset
losses.
Predictable sources of income
Profit on price changes
Lower risk
Matching time horizon
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16. Bond Terminology
Term Definition
Prospectus A company must provide information about the offering.
Indenture Contract between the bondholder and the issuer of the bond.
Face Value Also known as par value, amount holder is repaid.
Maturity date This is when the bond comes due and will be repaid.
Coupon rate The fixed interest rate that the issuer pays the holder of the bond.
Call provisions A bond issuer wants to repay the bond early, they have the right to
call it and repay it.
Convertibility Allows a bondholder to convert the bond to shares of common
stock.
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17. Types of Bonds
 Corporate Bonds – long term interest bearing securities issued by a
corporation.
 U.S. Treasury Bonds – regularly issued by the U.S. government, with
various terms to maturity, these assist the government in financing the
national debt.
 Agency issues – when a federal agency, like Ginnie Mae, issues a bond
they are issued in large denominations and sold to institutional investors.
 Municipal bonds – a long term debt security issued by a state or local
entity. They are classified as either revenue or general obligation. Their
benefit is that they are tax exempt.
 Most corporate and government bonds are debenture, a legal term for
unsecured bonds. A secured bond is backed by some type of
collateral.
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18. Coupons & Risk
 A zero coupon bond makes no coupon payments, but is
instead discounted at the time of sale.
 Bonds are classified according to risk. Bonds are given
investment grades from Moody’s and S&P. These grades
help investors determine risk.
 A unique investment strategy that can be used with
bonds is laddering. It is a type of buy and hold investing
strategy in which you purchase a collection of bonds
with different maturities. Another type is maturity
matching, similar to laddering, but it requires that you
purchase assets with cash flows.
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19. Preferred Stock
Offers the advantage of paying a regular, fixed
dividend that takes precedence over dividends
to common stockholders.
It is issued by a company as a means of raising
capital. It is also called cumulative preferred
stock, because under this type of stock the
dividend accumulates for an investor.
Preferred stockholders are open to interest rate
risk, call risk and default risk.
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