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McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Identify the most important features of stock A Form of Equity Dividends Not Mandatory Voting Rights and Control of the Company Why Corporations Issue Common Stock TM 12-1
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. They can make money in three ways. –Income from dividends –Dollar appreciation of stock value. –Possible increased value from stock splits. Why Do Investors Purchase Common Stock? TM 12-2
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Procter & Gamble Stock Transaction TM 12-3 Assumptions 100 shares of common stock purchased January 18, 2005, sold January 18, 2007; dividends of $2.05 per share for the investment period. Costs when purchasedReturn when sold 100 $55 =$5, $65 =$6,500 Plus commission+ 55Minus commission-55 Total investment$5,555 Total return$6,445 Transaction summary Total return$6,445 Minus total investment-5,555 Profit from stock sale$ 890 Plus dividends+ 205 Total return for the transaction $1,095
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Investors in preferred stock receive cash dividends before common stock holders are paid any cash dividends. The dividend amount is either a stated amount of money for each share of preferred stock, or a percentage of the par value. Par value is an assigned dollar value that is printed on a stock certificate. Preferred Stock TM 12-4
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Cumulative feature. –Unpaid cash dividends accumulate and must be paid before any cash dividends are paid to the common stock holders. Conversion feature. –Can be traded for shares of common stock. Features of Preferred Stock TM 12-5
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. A logical place to start the evaluation process is with the classification of stock investments Blue Chip Stock. Income Stock. Growth Stocks. Cyclical Stock. Defensive Stock. Large Cap Stocks. Small Cap Stocks. Penny Stocks. Objective 2: Explain how you can evaluate stock investments TM 12-6
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. The following can be used to evaluate stock investments. –The Internet –Stock Advisory Services –Newspapers –Prospectus –Annual Reports –Government Sources –Business Periodicals Sources of Information TM 12-7
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Corporate earnings play a large part in the increase or decrease in value of a stock. Earnings per share are the corporation’s after-tax income divided by the number of outstanding shares of common stock. An increase in earnings is generally a healthy sign. Price-earnings (PE) ratio is the price of one share of stock divided by the earnings per share of stock. Numeric Measures That Influence Investment TM 12-8
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. The dividend yield is the annual dividend amount of income generated by an investment divided by the investment’s current market value. The total return for an investment is equal to the dividends plus capital gains. Numeric Measures That Influence Investment (continued) TM 12-9
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Buying and Selling Stocks Primary market. –A market in which an investor purchases financial securities via an investment bank, or other representative, from the issuer of those securities. Secondary market. –A market for existing financial securities that are currently traded among investors via brokers. Objective 4: Describe how stocks are bought and sold TM 12-10
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. A Securities Exchange is a marketplace where member brokers who represent investors, meet to buy and sell securities. The Nasdaq market is a network of dealers who buy and sell the stocks of 3,200 different companies not listed on a securities exchange. Securities Exchanges and Nasdaq TM 12-11
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. market order A market order is a request to buy or sell stock at the current market value. limit order A limit order is a request to buy or sell a stock at a specified price or price range. stop order A stop order is a request to sell a stock at the next available opportunity after its market price reaches a specified amount. A Sample Stock Transaction TM 12-12
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Transactions can be done on the phone or online. Brokerage firms have minimum commissions for buying and selling stock ranging, from $7 to $55, depending of the number of shares sold and the value of the stock. Full service and discount brokers charge more than online brokerage transactions, but online you have to make your own decisions. A Sample Stock Transaction (continued) TM 12-13
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Long-term techniques. –Buy and hold. –Dollar cost averaging. –Direct investment and dividend reinvestment plans. Short-term techniques. –Buying stock on margin (borrowing money). –Selling short (borrowing stock). –Trading in options (predetermined price). Objective 5: Explain the trading techniques used by long- term investors and short-term speculators TM 12-14
CHAPTER 12 Investing in Stocks. Types of Stock Nearly 50 million people in the United States own stocks. There are more than 34,000 publicly held corporations.
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