2 Common and Preferred Stocks Learning TargetsLearn how to explain the reasons for investing in common stockLearn how to explain the reasons for investing in preferred stockWhy do you think many people are reluctant to invest in stocks?What might you need to know to make sound stock investment decisions?
3 Common and Preferred Stocks Common StockSecuritiesAll of the investments (stocks, bonds, mutual funds, options and commodities) that are bought and sold on the stock market.Why Corporations issue Common StockTo raise money to start up their business and to pay for ongoing activitiesPrivate CorporationsIssues stock to a small group of people. Not traded openly on the stock markets.9-1
4 Common and Preferred Stocks Public CorporationsSells it shares openly on stock markets, where anyone can buy themA Form of EquityCorporations do not have to repay the money a stockholder pays for stock.Use this money to fund ongoing activitiesStockholders make money by selling stock to another investorDemand for the stock sets the priceNews on expected sales revenue, earnings, expansions or mergers can make demand go up or down.
5 Common and Preferred Stocks Dividends not mandatoryIt is up to the corporate board of directors to decide whether any profits will be paid to the stockholdersCan reinvest profits into the companyWhy Investors Purchase Common StockTo make money - 3 Different ways:Income from DividendsAn equal amount per sharePaid quarterlyAppreciation of Stock ValueSelling your stock for a higher price than you bought it forIncreased Value from Stock SplitsStocks are divided into larger number of sharesWhy split? Management believes stock should be within an ideal price range. Split the stock to get back in that rangeMore appealing to new investors
6 Common and Preferred Stocks Voting Rights and Control of the CompanyStockholders get a vote for every stock they own in a company.They get to vote on Company businessUsually at the annual stockholders meetingPreferred StockShould know the amount of dividends you should receivePar Value – Assigned dollar amount that is printed on the stock certificatePar Value x Dividend Rate = Dividend
7 Common and Preferred Stock Why Corporations Issue Preferred StockWay to raise moneyMethod of financingAttract more conservative investorsWhy Investors Purchase Preferred StockConsidered a middle investmentSafer investment than common stock, but not as safe as bondsSteady source of incomeLacks the potential growth that common stock offers
8 Common and Preferred Stock Cumulative Preferred StockStock whose unpaid dividends build up and must be paid before any cash stock is paid to common stockholdersConvertible Preferred StockA stock that can be exchanged for a specific number of shares of common stockProvides safety of preferred stock but the possibility of greater returns by converting to common stockParticipation FeatureAllows preferred stockholders to share in corporate earnings with common stockholdersAny remaining earnings after all dividends have been paidVery Rare9-1
9 Evaluating Stocks Learning Targets Types of Stock Investments Identify the types of Stock investmentsIdentify Sources of information to evaluate stock investmentsDiscuss the factors that affect stock pricesTypes of Stock InvestmentsBlue-Chip StocksConsidered a safe investment that generally attracts conservative investorsIssued by the strongest and most respected companiesCompanies that show leadership in an industry, a history of stable earnings, and consistency in the payment of dividends9.2
10 Evaluating Stocks Income Stocks Pays higher than average dividends compared to other stock issuesBuyers of preferred stocks are attracted to these common stocksPharmaceutical, chemical, gas and electric companies
11 Evaluating Stocks Growth Stocks Issued by corporations whose potential earnings may be higher than the average earnings predicted for all the corporations in the countryGenerally do not pay dividendsLook for signs that the company is engaged in activities that pay higher earnings and ales revenue:Building new facilities; introducing new, high quality products; or conducting recognized research and development
12 Evaluating Stocks Cyclical Stocks Has a market value that tends to reflect the state of the economyProducts and services are directly linked to the activities of a strong economyShould buy these stocks when they are inexpensive just before the economy starts to improveEx. Ford or Real Estate Companies and Home Builders
13 Evaluating Stocks Defensive Stock Large Cap A stock that remains stable during declines in the economy.Stocks that have steady earnings and pay dividends even when the economy is downMany of the Blue Chip stocksLarge CapA stock from a corporation that has issued a large number of shares of stock and has a large amount of capitalization.Capitalization – The total amount of stocks and bonds issued by a corporation.Most companies on the Dow Jones Industrial Avg.
14 Evaluating Stocks Small-cap Stocks Penny Stocks A stock issued by a company with a capitalization of $500 million or less.Smaller, less established companiesConsidered high riskPenny StocksTypically sells for less than a dollar a share, but can sell for up to $5 a shareStocks issued by new companies or whose companies sales are very unsteadyCan go up and down wildlyShould be purchased by investors who understand the risk.
15 Evaluating Stocks Sources for Evaluating Stocks Newspaper (Wall Street Journal)InternetStock Advisory SeriesStandard and Poor’s, Moody’sCorporate News PublicationsAnnual and Quarterly Reports from companies
16 Evaluating Stocks Factors that Influence the Price of Stock Must consider the overall condition of the marketBull MarketMarket condition that occurs when investors are optimistic about the economy and buy stocks.Greater demand increases stock pricesBear MarketMarket condition that occurs when investors are pessimistic about the economy and sell stocksDemand goes down, stock prices go down
17 Evaluating Stocks Numerical Measures for a Corporation Current Yield – Used to track value of Investments= Annual dividend / Current Market ValueAn increase is a healthy sign for any investmentTotal Return –Shows increase or decrease= current return + capital gainCurrent return = Dividend x # of shares x years heldCapital gain = (Selling price – Purchase price) x # of shares
18 Evaluating StocksEarnings per share – Measures the amount corporate profit assigned to each share.= Corporate net earnings / outstanding # of sharesPrice-Earnings (PE) Ratio – Used to compare the corporate earnings to the market price of a corporations stock.= Market price per share / Earnings per share
19 Evaluating Stocks Investment Theories The Fundamental Theory Assumes that a stock’s real value is determined by looking at the company’s future earnings.The Technical TheoryBased on the idea that a stock’s value is really determined by forces in the stock market itselfLook at number of stocks bought, sold or traded over a certain amount of timeThe Efficient Market TheoryArgument that stock price movements are purely random.
20 Researching StocksFind 2 different stocks that would fit into each of the following stock categories: Explain!This will take some research!Blue Chip StockIncome StockGrowth StockCyclical StockPenny StockLarge Cap and Small Cap Stocks
21 Buying and Selling Stocks Markets for StocksPrimary MarketsMarket in which investors purchase new security issues from a corporation through an investment bank or a rep. from the company.Investors are commercial banks, insurance companies, mutual funds, and the general public.Initial Public Offering (IPO)Occurs when a company sells stock to the general public for the first time.9-3
22 Buying and Selling Stocks The Secondary MarketsOnce a companies stock is sold on the primary market, it can then be sold on the secondary market.Secondary MarketMarket for existing financial securities currently traded among investorsThere are two types of secondary marketSecurities ExchangeOver-the-Counter Market
23 Buying and Selling Stocks Securities ExchangeA marketplace where brokers who represent investors meet to buy and sell securities.New York Stock Exchange (NYSE)One of the largest in the world3000 corporations total market value of about $16 billionA corporation must have a very large capitalization and trade many sharesAMEX is now NYSE Amex EquitiesPositioned to be a premier market for listing and trading of small and micro cap companies
24 Buying and Selling Stocks Over-the-Counter MarketA network of dealers who buy and sell the stocks of corporations that are not listed on a security exchange.NASDAQ (National Association of Securities Dealers Automated Quotation System)Electronic marketplace for over 4000 different stocksHandles trades from forward thinking companies, usually smallMicrosoft and Intel are traded on it
25 Buying and Selling Stocks How to Buy and Sell StockBrokerage FirmsCompany who handles your stock transactionsFull ServiceCharge the highest commissions in exchange for personalized service and free research informationDiscount Brokerage FirmsCharge less commissions but charge for all of your research informationOnline FirmCharge less, a fee per transaction, and charge for informationDiscount and Online firms generally believe that you alone are in charge of your investment plans
26 Buying and Selling Stocks Account Executives/StockbrokersLicensed professionals who buy and sell securitiesHandle your entire portfolio: a collection of all of the securities held by an investorPaid on CommissionsBrokerage Firms: $25 - $55 per transactionDiscount/Online: As low as $10
27 Buying and Selling Stocks Types of OrdersOrders: Buying or selling a stockMarket OrdersRequest to buy or sell stock at the current market valueLimit OrdersRequest to buy and sell stock at a certain priceNot guaranteed, filled in the order they are recievedStop OrdersUsed for selling stockType of limit order to sell a particular stock at the next available time when the market price reaches a specified amount
28 Buying and Selling Stocks Investment StrategiesLong Term (10 or more years = Investor)Buy and Hold TechniqueHave the stock for a number of yearsPaid dividends and stock splitsDollar Cost AveragingYou buy an equal amount of stock at equal intervalsProtects investors from buying at high prices and selling at low prices.Price averages out over timeDirect Investment and Dividend ReinvestmentDirect – Buying stock directly from the company (No brokers and commissions)Dividend – Automatically reinvests dividends into buying more stocks
29 Buying and Selling Stocks Short Term (1 year or less, trader)Buying on MarginInvestor borrows through the brokerage firm part of the money (50%) needed ton purchase stock.As long as you have $2000 in your accountDo this to buy more sharesStock goes up = more money / Down = lose moreSelling ShortSelling a stock that has been borrowed from a brokerage firm and that must be replaced at a later dateSteps on next slide
30 Buying and Selling Stocks How to Sell ShortArrange to borrow a certain number of shares of a particular stock from a brokerage firmSell the borrowed stock, assuming that it will drop in value in a reasonably short period of timeBuy the stock at a lower price than the price it sold for in step 2Use the stock you purchased in Step 3 to replace the stock that you borrowed from the brokerage firm in Step 1