1. 12 Investing in Stocks
Stocks – shares of ownership in the assets and earnings of a business corporation.
Common Stock – the most basic form of ownership of a corporation.
Shareholder – the owner of a stock.
Voting Rights – proportionate authority to express a choice in matters affecting the company.
Proxy – written authorization given by shareholder to someone else to represent him or her and vote his or her shares at a stockholder’s meeting.
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2. Objective 1 Identify the Most Important Features of Common and Preferred Stocks
Two types of stock
Common Stock- provides investors with an ownership interest in a corporation or (growth oriented)
Preferred Stock- a cross between a stock and a bond (income oriented)
On average, common stocks have outperformed all other assets over time
Need to be patient and do research
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3. Why Corporations Issue
Common Stock
Common Stock = most basic form of corporate ownership
Stock = equity financing
Reasons why corporations issue stock
Raise money to start or expand business
Pay ongoing business expenses
Need not repay the money (like bonds)
Dividends (distributions to shareholders) not mandatory
Board of Directors votes each dividend payment
But:
Shareholders have voting rights; control of company
Management must often make concessions
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4. Why Investors Purchase
Common Stock
Investors can make money in three ways
Income from dividends
Dollar appreciation of stock value
Price appreciation = capital gain
Possible increased value from stock splits
No guarantee price will go up after a split
Stock Split – when the shares of stock owned by existing shareholders are divided into a larger number of shares; done to change (lower) price
Example: 2:1- twice as many shares worth half as much
A reverse stock split results in smaller number of shares.
Example: 1:2- half as many shares worth twice as much
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5. Dividend Dates
Declaration Date = Board of Directors votes to pay a dividend (usually quarterly)
Record Date = A stockholder must be registered on the firm’s books to receive the dividend
Ex-Dividend Date = 2nd day before the record date; stock begins to trade without the dividend
Investors buying after the ex-dividend date do not receive a dividend for that quarter
Payment Date = Dividend is paid to investors
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6. Preferred Stock Hybrid Security Dividends paid before common stock
Known cash dividend is about equal to bond interest
Equity position is about equal to common stock but usually non-voting; low % of all stock issued
Dividends paid before common stock
Dividend may be omitted
Cumulative Preferred Stock
Unpaid cash dividends accumulate
Must be paid before any cash dividends are paid to common stockholders (versus noncumulative preferred stock)
Convertible Preferred Stock
Can be traded for shares of common stock
Provides investor with added safety of preferred stock and greater speculative gain through conversion to common stock
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7. Classifications of Stocks
Income Stock – may not grow too quickly, but pays a cash dividend higher than that offered by most companies year after year.
Example: utility companies
Growth Stock – a company that offers the promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings in all economic conditions.
Example: technology companies

8. More Classifications of Stocks
Speculative Stock – a company that has a potential for substantial earnings in the future.
Blue-Chip Stocks – a company that has been around for a long time, has a well-regarded reputation, dominates its industry, and is known for being a solid, relatively safe investment.
Value Stock – a company with stock that is selling for less than the true worth of its assets.

9. Other Characterizations for Common Stocks (continued)
Cyclical Stocks – stock from a company whose profits are greatly influenced by changes in the economic business cycle.
Examples?
Countercyclical (or Defensive) Stocks – stock from a company that performs well even in an environment characterized by weak economic activity.

10. Objective 2 Explain How You Can Evaluate Stock Investments
The Internet
Firm’s home page more current than printed materials
Stock Advisory Services
Most charge a fee
Three most popular: Standard and Poor’s reports, Value Line and Mergent’s Handbook of Common Stock
Prospectus- Lists all necessary information as dictated by the Federal government
Annual Report- All publicly traded corporations send to their stockholders
Securities and Exchange Commission Web site (
Business Periodicals:
Business Week, Fortune, Forbes, Money, Smart Money, Kiplinger’s Personal Finance Magazine
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11. Objective 3 Analyze the Numerical Measures that Cause a Stock to Increase or Decrease in Value
Corporate Earnings
One of the most significant factors in changes in the value of a stock
Earnings per share (EPS)
Formula: Corporation’s after-tax income divided by number of outstanding shares of common stock
Example: $5,000,000/10, = $0.50
EPS Increase = generally a healthy sign
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12. Numeric Measures That Influence Investment
Price-Earnings Ratio (PE)
Price per share of stock divided by the firm’s earnings per share
Example: $10 price/0.50 EPS = a PE ratio of 20
Tells how much an investor is paying for a company’s earning power
P/E > 20  investor optimism
P/E < 20  lower earnings expectations
Compare to firms in same industry
Projected Earnings
EPS and PE based on historical data
Future expectations more relevant
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13. Common Stock Price Quotes
Or see exhibit 12-5
Last trade price = $ Annual dividend = $1.68
P/E = Earnings per share = 44.37/15.41 = $2.8793
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14. Other Factors than Influence the Price of a Stock
Dividend Yield
Annual dollar dividend divided by current price per share
Dividend yield increase = healthy sign
Total Return
Dividends plus capital gains
Cash income + Price appreciation
Book Value per Share
(Assets – Liabilities)/ # shares (net worth of company)
Market price per share should be > book value
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15. Objective 4 Describe How Stocks are Bought and Sold
Primary Market
Investor buys securities from issuer of those securities via an investment bank
Investment bank = financial firm that assists corporations in raising funds, usually by helping sell new security issues (underwriting)
IPO = when a corporation sells stock to general public for first time
Cash from security sales goes to issuing company
Generally considered a high-risk investment
Secondary Market
Market for existing financial securities
Traded among investors via brokers and dealers
Markets
Stock exchanges (NYSE, foreign securities exchanges)
Over-the-counter markets
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16. Secondary Markets for Stocks
Securities Exchanges (NYSE)
Marketplace where members, representing investors, meet to buy and sell securities (almost 4,000 companies)
Securities sold on an exchange must be listed, or accepted for trading, on that exchange
“The Listed Market” = NYSE
“Specialist” buys or sells a particular stock
The Over-the-Counter (OTC) Market (NASDAQ)
Network of dealers who buy and sell the stocks of companies from inventory (several thousand companies)
Dealer = “Market Maker”
NASDAQ = electronic marketplace for over 3,200 companies
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17. Brokerage Firms and Account Executives
Account Executive (Stockbroker)
Licensed individual who buys and sells securities for his or her clients
Churning
Excessive buying and selling of securities to generate commissions
Illegal under SEC regulations
Can be difficult to prove; clients subject to arbitration
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18. Discount vs. Full Service Brokers Service vs. Cost
How much advice do you want?
Can you buy and sell stocks over the phone?
Can you trade stocks online?
Where is the nearest office located?
Toll-free number for customer use?
How often are statements issued?
Is there a charge for statements, research reports, and other financial reports?
Are there any fees in addition to commissions to buy and sell?
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19. Computerized Transactions
Reasons that justify trading online:
Size of investment portfolio
Ability and desire to manage own portfolio
Ability to monitor investments closely
Capability of computer and software
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20. Stock Transaction Orders
Market Order
Request to buy or sell stock at the current market value
Limit Order
Request to buy or sell a stock at a specified price
Stop Order (Stop-loss order)
Request to sell a stock at the next available opportunity after its market price reaches a specified amount
Can lose a lot of money in a “flash crash”
Brokerage minimum commissions
Range = $7 to $35
Depends on the number of shares traded and stock value
Full service vs. discount brokers
Full service fees > 1% to 2% of transaction amount
Online broker little advice or service
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21. Long-Term Investment Strategies
Objective 5 Explain the Trading Techniques Used by Long-term Investors and Short-term Speculators
Long-Term Investment Strategies
Buy and hold
Dollar cost averaging
Direct investment and dividend reinvestment plans (DRIPS)
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22. Dollar Cost Averaging Long-term technique
Invest equal dollar amount in the same stock at equal intervals
Goals:
Minimize average cost per share
Avoid “Buy High – Sell Low”
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23. Short-Term Investment Strategies
Buying Stock on Margin
Borrowing money from broker
Margin requirement set by the Fed
“Bullish” (expect stock price increase)
Selling short
Borrowing stock to sell
“Sell high, buy low”
“Bearish” (expect stock market decrease)
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24. Wrap Up
Chapter Quiz
Concept Check Common Stock and Preferred Stock
Concept Check 12-2-Prospectus and Annual Report
Figure It Out- Earnings per Share, PE Ratio, Dividend Yield
Concept Check How Would You Buy Stock?