Managing Personal Finances - Investing in Stocks

1. © 2010 South-Western, Cengage Learning
Chapter
© 2016 South-Western, Cengage Learning
17.1 Evaluating Stocks
17.2 Buying and Selling Stocks
Investing in
Stocks
17
© 2016 South-Western, Cengage Learning

2. © 2010 South-Western, Cengage Learning SLIDE 2
Chapter 17
Lesson 17.1
Evaluating Stocks
Learning Objectives
LO 1-1 Describe features of stock and types
of stocks.
LO 1-2 Explain how to value a stock and
decide a fair price to pay for a stock
purchase.
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3. © 2010 South-Western, Cengage Learning SLIDE 3
Chapter 17
Owning Stock
 A public corporation is a company whose
stock is traded openly on stock markets.
 People who own shares of stock are called
stockholders, or shareholders, of the
corporation.
 Two ways to profit from owning stock:
 Dividends are money paid to stockholders from the
corporation’s earnings (profits).
 Capital gain is an increase in the value of the stock
over time.
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4. © 2010 South-Western, Cengage Learning SLIDE 4
Chapter 17
Common Stock
Common stock represents a type of
stock that pays a variable dividend and
gives the holder voting rights.
A proxy is a stockholder’s written
authorization to transfer his or her voting
rights to someone else, usually a
company manager.
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5. © 2010 South-Western, Cengage Learning SLIDE 5
Chapter 17
Preferred Stock
 Preferred stock represents a type of stock
that pays a fixed dividend but has no voting
rights.
 Preferred stockholders earn the stated
dividend, regardless of how the company is
doing.
 Preferred stock is less risky than common stock.
 Dividends on preferred stock may be lower than the
dividends the common stockholders would earn, if
the company is thriving over time.
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6. © 2010 South-Western, Cengage Learning SLIDE 6
Chapter 17
Income stocks
Growth stocks
Blue chip stocks
Emerging stocks
Cyclical stocks
Defensive stocks
Types of Stock Investments
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7. © 2010 South-Western, Cengage Learning SLIDE 7
Chapter 17
Income Stocks and Growth Stocks
Income stocks are stocks that have a
consistent history of paying high
dividends.
Growth stocks are stocks in
corporations that reinvest their profits into
the business so that it can grow.
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8. © 2010 South-Western, Cengage Learning SLIDE 8
Chapter 17
Emerging Stocks
and Blue Chip Stocks
Emerging stocks are stocks in young,
often small corporations that have higher
overall risk than stocks of companies that
have been successful for many years.
Blue chip stocks are stocks of large,
well-established corporations with a solid
record of profitability.
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9. © 2010 South-Western, Cengage Learning SLIDE 9
Chapter 17
Defensive Stocks
and Cyclical Stocks
A defensive stock, or non-cyclical stock,
is one that remains stable and pays
dividends during an economic decline.
Cyclical stocks do well when the
economy is stable or growing but often
do poorly during recessions, when the
economy slows down.
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10. © 2010 South-Western, Cengage Learning SLIDE 10
Chapter 17
Valuing Stock
The par value is an assigned dollar
value given to each share of stock.
Market value is the price for which the
stock is bought and sold in the
marketplace.
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11. © 2010 South-Western, Cengage Learning SLIDE 11
Chapter 17
Stock Price
Factors that affect price include:
The company’s earning power
Interest rates
The market
Earnings per share
Stock market conditions
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12. © 2010 South-Western, Cengage Learning SLIDE 12
Chapter 17
Return on Investment
 You should consider both dividends and any
increase in the price of the stock (capital gain)
when computing the return on your investment.
 Your profit is the difference between what you
paid for the stock and what you sold it for, plus
any dividends you earned.
 To compute the total costs, add any
commission you paid to the stockbroker to the
purchase price of the stock.
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13. © 2010 South-Western, Cengage Learning SLIDE 13
Chapter 17
Stock Indexes
A stock index is a benchmark that
investors use to judge the performance
of their investments.
Examples of commonly used indexes
include:
Dow Jones Industrial Average
Standard & Poor’s 500
NASDAQ Composite Index
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14. © 2010 South-Western, Cengage Learning SLIDE 14
Chapter 17
Lesson 17.2
Buying and Selling Stock
Learning Objectives
LO 2-1 Describe the channels involved in
buying and selling stocks.
LO 2-2 Describe short-term and long-term
strategies for buying and selling stocks.
LO 2-3 Explain how to read the stock
listings and stock indexes.
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15. © 2010 South-Western, Cengage Learning SLIDE 15
Chapter 17
The Securities Market
A securities exchange is a marketplace
where brokers who are representing
investors meet to buy and sell securities.
The over-the-counter (OTC) market is a
network of brokers who buy and sell the
securities of corporations that are not
listed on a securities exchange.
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16. © 2010 South-Western, Cengage Learning SLIDE 16
Chapter 17
Investing Strategies
Short-term techniques
Buy on margin
Sell short
Long-term techniques
Buy and hold
Dollar-cost averaging
Direct investment
Reinvesting dividends
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17. © 2010 South-Western, Cengage Learning SLIDE 17
Chapter 17
Buy on Margin
 You can borrow money from your broker to buy stock if
you open a margin account and sign a contract called a
margin agreement.
 Leverage is the use of borrowed money to buy
securities.
 When the market value of a margined stock decreases
up to 25% of the original purchase price, the investor
will receive a margin call from the broker.
 The investor must pledge additional cash or securities
to serve as collateral for the loan.
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18. © 2010 South-Western, Cengage Learning SLIDE 18
Chapter 17
Sell Short
 Short selling is selling stock borrowed from a
broker that must be replaced at a later time.
 To sell short, you borrow a certain number of
shares from the broker.
 You then sell the borrowed stock, knowing that
you must buy it back later and return it to the
broker.
 You are betting that the price will drop, so that
you can buy it back at a lower price than you
sold it for, thus making a profit.
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19. © 2010 South-Western, Cengage Learning SLIDE 19
Chapter 17
Long-Term Investing Techniques
Buy and hold
Dollar-cost averaging
Direct investment
Reinvesting dividends
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20. © 2010 South-Western, Cengage Learning SLIDE 20
Chapter 17
Buy and Hold
 Most investors consider stock purchases as
long-term investments.
 All stocks go up and down, but over a number
of years, the overall trend of nonspeculative
stocks (stocks with a low degree of risk) is
moderately up.
 If you “buy and hold” stocks for many years,
you can ride out the down times.
 When you are ready to sell years later, most
likely your stock will have gained value.
 Many stocks pay dividends, so you are earning
income while you hold the stock.
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21. © 2010 South-Western, Cengage Learning SLIDE 21
Chapter 17
Stock Split
 A stock split is an increase in the number of
outstanding shares of a company’s stock.
 When a company increases its number of outstanding
shares, it lowers the selling price in direct proportion.
 A stock split lowers the selling price of the stock,
making the shares more affordable and encouraging
investors to buy more.
 As investors buy more stock at the lower price, the
share price often rises.
 If you held the stock before the split, then this price
increase makes your stock worth more.
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22. © 2010 South-Western, Cengage Learning SLIDE 22
Chapter 17
Dollar-Cost Averaging
The dollar-cost averaging technique
involves the systematic purchase of an
equal dollar amount of the same stock at
regular intervals, regardless of share
price.
The result is usually a lower average cost
per share.
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23. © 2010 South-Western, Cengage Learning SLIDE 23
Chapter 17
Direct Investment
You can save money using direct
investment, or buying stock directly from
a corporation.
By buying directly, you avoid brokerage and
other purchasing fees.
You may also be able to obtain shares at
prices lower than on open exchanges.
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24. © 2010 South-Western, Cengage Learning SLIDE 24
Chapter 17
Reinvesting Dividends
Dividend reinvestment means using
dividends previously earned on the stock
to buy more shares.
Buying stock this way avoids a broker fee
and other costs that apply, such as
taxes, when you receive cash dividends
on the stock.
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25. © 2010 South-Western, Cengage Learning SLIDE 25
Chapter 17
Reading the Stock Listings
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26. © 2010 South-Western, Cengage Learning SLIDE 26
Chapter 17
Stock Progress Chart
Stock
Names
Closing Prices for 10 Days
Total
Change
(+ or –)1 2 3 4 5 6 7 8 9 10
1. Eagle 28.00 28.12 29.00 28.00 27.00 28.00 28.50 29.00 29.50 30.00 +2
2. Glastn 38.00 40.00 41.00 41.50 –– 40.00 39.00 38.00 38.00 38.00 0
3. Karbr pf 61.00 61.25 61.13 61.00 61.38 61.00 62.00 62.38 61.00 61.13 +.13
4. Maxln 50.13 49.00 50.00 50.25 51.00 51.00 51.13 52.00 52.00 53.50 +3.37
5. Totlmb 10.00 11.00 11.13 11.50 11.00 10.88 10.00 9.00 8.00 8.50 –1.50
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