1. Stocks Chapter 9

2. Section 9.1 – Common and Preferred Stocks Explain reasons for investing in common stock Explain reasons for investing in common stock Explain reasons for investing in preferred stock Explain reasons for investing in preferred stock

3. Common Stock Why do companies sell stock? Why do companies sell stock? –Make new products –Sell products –Fund its operations –Expand Why do people buy stocks? Why do people buy stocks? –To make money –More money than conservative investments

4. Why Corporations Issue Common Stock Private corporations Private corporations –Issue to small amount of people –Are not traded openly in stock markets Public corporations Public corporations –Anyone can buy/sell openly in stock markets Form of equity – money that doesn’t have to be repaid Form of equity – money that doesn’t have to be repaid –Demand for stock affected by Expected sales revenue Expected sales revenue Earnings Earnings Expansions or mergers Expansions or mergers Dividends not mandatory, may be reinvested back into business Dividends not mandatory, may be reinvested back into business

5. Why Investors Purchase Common Stock Income from dividends Income from dividends –Board of directors often votes to pay dividends to keep stockholders happy Appreciation of stock value Appreciation of stock value –Can sell at a higher price for profit Increased value from stock splits Increased value from stock splitsstock splitsstock splits –Decreased price attracts more investors, then price starts to rise again Voting rights and control of the company Voting rights and control of the company

6. BeforeAfter Shares Issued 10,00020,000 Value5025 Your shares 200400 Your value $10,000$10,000

7. Preferred Stock What is preferred stock? What is preferred stock? –Mix between regular common stock and a bond –Each share of preferred stock is normally paid a relatively high dividend and has first dibs over common stock at the company's assets in the event of bankruptcy –Stockholders know exactly what they will receive from par value on stick certificate –In exchange for the higher income and safety, preferred shareholders miss out on large potential capital gains [or losses] –Owners of preferred stock generally do not have voting privileges Why do corporations issue preferred stock? Why do corporations issue preferred stock? –Attract those conservative investors who do not want to purchase common stock Why do investors purchase preferred stock? Why do investors purchase preferred stock? –Safe and steady source of income, lower return than corporate bonds but better than common stock

8. Types of Preferred Stock Cumulative Preferred Stock Cumulative Preferred Stock –Pays dividends “saved” up, even if company omits some payments to other preferred stock holders Convertible Preferred Stock Convertible Preferred Stock –Can be exchanged for a specific number of common stock – spreads risk and return Participation Feature Participation Feature –Rare feature that allows retained earnings to go back to these stockholders after dividends are paid to be

9. Tracking Your Stock Investments Monitor Monitor –Graph $ value on daily or weekly basis Watch the financials Watch the financials –Evaluate current sales, profits, and projected Track the products Track the products –Poor-quality or lack of new up-to-date can affect value of stock Watch the economy Watch the economy –Inflation rate, overall economy Be patient Be patient –Wait it out if the company is good

10. Section 9.2 – Evaluating Stocks Types of stock investments Types of stock investments Sources of information to evaluate stock investments Sources of information to evaluate stock investments Factors that affect stock prices Factors that affect stock prices

11. How are stocks classified? Blue-chip stocks Blue-chip stocks Income stocks Income stocks Growth stocks Growth stocks Cyclical stocks Cyclical stocks Defensive stocks Defensive stocks Large and small cap stocks Large and small cap stocks Penny Stocks Penny Stocks

12. Blue Chip Stocks Safe investment, attracts conservative investors Safe investment, attracts conservative investors Issued by strongest, most respected companies Issued by strongest, most respected companies At & T, General Electric, Kellogg At & T, General Electric, Kellogg

13. Income Stocks Pays higher-than-average dividends Pays higher-than-average dividends Dividends are predictable, often choice of retired people Dividends are predictable, often choice of retired people Bristol-Myers Squibb, Dow Chemical Bristol-Myers Squibb, Dow Chemical

14. Growth Stocks Issued by a corporation whose potential earnings may be higher than average earnings predicted for all the corporations in the country Issued by a corporation whose potential earnings may be higher than average earnings predicted for all the corporations in the country Do not pay dividends, but buy for potential increase in value (long-term investment) Do not pay dividends, but buy for potential increase in value (long-term investment) Indicators: building new facilities, introducing new, high-quality products, or conducting recognized research and development Indicators: building new facilities, introducing new, high-quality products, or conducting recognized research and development Home Depot, Southwest Airlines Home Depot, Southwest Airlines

15. Cyclical Stocks Do well when economy is good, but poorly during recessions Do well when economy is good, but poorly during recessions Ford and Centrex Ford and Centrex Airlines, manufacturing, industries based on travel Airlines, manufacturing, industries based on travel

16. Defensive Stocks Not subject to ups and downs of business cycle Not subject to ups and downs of business cycle Many blue-chip stocks, income stocks, and Procter & Gamble Many blue-chip stocks, income stocks, and Procter & Gamble Utilities, drug companies, food and health care Utilities, drug companies, food and health care

17. Large-Cap and Small-Cap Stocks Large-cap comes from company that issued a large number of shares of stock Large-cap comes from company that issued a large number of shares of stock Small-cap comes from company with less than $500,000 capitalization Small-cap comes from company with less than $500,000 capitalization Capitalization – total amount of stocks and bonds issued by company Capitalization – total amount of stocks and bonds issued by company Large-cap is conservative and secure and small-cap is a higher risk Large-cap is conservative and secure and small-cap is a higher risk

18. Penny Stocks Cheap (less than $1 per share typically), but highly speculative Cheap (less than $1 per share typically), but highly speculative Those of “hot” new product Those of “hot” new product –Beanie Babies, Rubic’s Cube, Cabbage Patch Kids, Furby’s

19. What's the Problem with These Stocks? What makes penny stocks risky? Four major issues arise when you decide to buy these securities: What makes penny stocks risky? Four major issues arise when you decide to buy these securities: –Lack of Information Available to the Public –No Minimum Standards –Lack of History –Liquidity

20. What company is this? After just a few years in the public markets, it began paying a dividend and never stopped -- amazing for such a tiny company. After just a few years in the public markets, it began paying a dividend and never stopped -- amazing for such a tiny company. Related to that point, its dividend started in the teeth of a bear market in the early 1970s -- a telling sign of the strength of its financials, given the trying times. Related to that point, its dividend started in the teeth of a bear market in the early 1970s -- a telling sign of the strength of its financials, given the trying times. Wall Street treated the company like it was a bunch of hillbillies in Arkansas. For years, no analysts followed it. Wall Street treated the company like it was a bunch of hillbillies in Arkansas. For years, no analysts followed it. Institutional ownership was well below 50% for years and years. As we said, hardly anyone cared. Institutional ownership was well below 50% for years and years. As we said, hardly anyone cared. Sam Walton owned the majority of the stock. Here was a founder with a stake in the organization's enduring success. Sam Walton owned the majority of the stock. Here was a founder with a stake in the organization's enduring success. Its concept was new and innovative, yet proven. This store had been in business for eight years before going public, with more than 30 stores and more than $32 million in sales on the day of its IPO. Its concept was new and innovative, yet proven. This store had been in business for eight years before going public, with more than 30 stores and more than $32 million in sales on the day of its IPO.

21. What is Pump and Dump? Ever received one of those emails that pretends to be TO someone else, passing on some hot stock tip they've learned? Referred to as 'pump and dump' scams, the intent of the email is to get lots of people to take advantage of this unexpected windfall of information and buy the stock. This inflates the price, at which time the scammers sell their shares for a hefty profit. It works like this: Ever received one of those emails that pretends to be TO someone else, passing on some hot stock tip they've learned? Referred to as 'pump and dump' scams, the intent of the email is to get lots of people to take advantage of this unexpected windfall of information and buy the stock. This inflates the price, at which time the scammers sell their shares for a hefty profit. It works like this: Scammers buy worthless stock at a very low price Scammers buy worthless stock at a very low price Fake email is sent to millions of people, claiming the stock is projected to move Fake email is sent to millions of people, claiming the stock is projected to move People buy into the scam, and thus buy the stock, thereby raising the price People buy into the scam, and thus buy the stock, thereby raising the price The scammers sell off their holdings for a hefty profit The scammers sell off their holdings for a hefty profit The victims are left holding worthless stock The victims are left holding worthless stock

22. Poop and Scoop Here the manipulators spread highly negative false rumors about a company in order to drive the price down Here the manipulators spread highly negative false rumors about a company in order to drive the price down They buy as the stock plummets, counting on a rebound in price once the rumor is dispelled. In a related fraud, manipulators first short sell stock before releasing the rumors. On the subsequent decline, they cover their positions at a profit. They buy as the stock plummets, counting on a rebound in price once the rumor is dispelled. In a related fraud, manipulators first short sell stock before releasing the rumors. On the subsequent decline, they cover their positions at a profit.

23. Front Running In this case, the news is actually true; insiders or brokers, knowing what is coming, take large positions ahead of the news becoming public. In this case, the news is actually true; insiders or brokers, knowing what is coming, take large positions ahead of the news becoming public. If insiders are involved, this is also referred to as insider trading If insiders are involved, this is also referred to as insider tradinginsider tradinginsider trading

24. Circular Trading Happens when a stock has been laying dormant for a long time Happens when a stock has been laying dormant for a long time Using multiple accounts, often established overseas, they will trade the same shares back and forth between their own accounts to create the appearance of activity Using multiple accounts, often established overseas, they will trade the same shares back and forth between their own accounts to create the appearance of activity Once third party interest is generated, one of the schemes described above may be executed. Once third party interest is generated, one of the schemes described above may be executed.third partythird party

25. How Do You Assess a Stock Investment? Newspapers Newspapers The Internet The Internet Stock Advisory Sources Stock Advisory Sources Corporate New Publications Corporate New Publications

26. Newspapers Most major newspapers have financial sections Most major newspapers have financial sections May cover stocks of local interest May cover stocks of local interest Detailed stock information Detailed stock informationinformation Internet Most corporations have their own Web sites Most corporations have their own Web sites More up-to-date and detailed than printed publications More up-to-date and detailed than printed publications

27. Stock Advisory Services Charge fees Charge fees Information varies from simple alphabetic listings to detailed financial reports Information varies from simple alphabetic listings to detailed financial reports Corporate News Publications Annual and quarterly reports have activities and detailed financial info. Annual and quarterly reports have activities and detailed financial info. Call, write, or email Call, write, or email

28. Factors that Influence the Price of Stock Bull Market – Occurs when investors are optimistic about economy and buy stocks Bull Market – Occurs when investors are optimistic about economy and buy stocks Bear Market – Occurs when investors are pessimistic about the economy and sell stocks Bear Market – Occurs when investors are pessimistic about the economy and sell stocks Company’s profits, losses, and numerical measures of its financial situation Company’s profits, losses, and numerical measures of its financial situation

29. Numerical Measures for a Corporation Current Yield Current Yield Total Return Total Return Earnings Per Share Earnings Per Share Price-Earnings Ratio Price-Earnings Ratio

30. Current Yield Synopsis: Computing the current yield of your stocks will help you to determine the value of your investment Synopsis: Computing the current yield of your stocks will help you to determine the value of your investment Example: Suppose that Tanika purchases stock in EatGrapes.com. Assume that EatGrapes.com pays an annual dividend of $1.20 and is currently selling for $24 a share. What is Tanika’s current yield? Example: Suppose that Tanika purchases stock in EatGrapes.com. Assume that EatGrapes.com pays an annual dividend of $1.20 and is currently selling for $24 a share. What is Tanika’s current yield? Formula: Annual Dividend = Current Yield Formula: Annual Dividend = Current Yield Current Market Value Solution: $1.20 = 0.05 = 5% or.05 Solution: $1.20 = 0.05 = 5% or.05 $24.00 $24.00

31. Total Return Synopsis: Calculating the total return of your investment will let you know whether your investment is increasing or decreasing in value Synopsis: Calculating the total return of your investment will let you know whether your investment is increasing or decreasing in value Example: Two years ago Mark bought 40 shares of Ferguson’s Motor Company for $70 a share. The stock pays an annual dividend of $1.50. Mark is going to sell his stock at the current price of $120 a share. What would be the total return on his investment? Example: Two years ago Mark bought 40 shares of Ferguson’s Motor Company for $70 a share. The stock pays an annual dividend of $1.50. Mark is going to sell his stock at the current price of $120 a share. What would be the total return on his investment? Formula: Current Return + Capital Gain = Total Return Formula: Current Return + Capital Gain = Total Return Current Return = Dividend * Number of Shares * Years Held Capital Gain = (Selling Price per Share - Purchase Price per share) * Number of Shares Held share) * Number of Shares Held

32. Current Return + Capital Gain = Total Return Current Return = Dividend * Number of Shares * Years Held Capital Gain = (Selling Price per Share - Purchase Price per share) * Number of Shares Held share) * Number of Shares Held Current Return $1.50 * 40 * 2 + $120 Capital Gain ($120 - $70) * 40 = $2000 Total Return $120 + $2000 = $2,120

33. Earnings Per Share Synopsis: Figuring out the earnings per share can help you find out a company's profits. This information can help you determine the general health of the company in which you are investing. Synopsis: Figuring out the earnings per share can help you find out a company's profits. This information can help you determine the general health of the company in which you are investing. Example: EFG Corporation had net earnings of $800,000 last year. EFG had 100,000 outstanding shares of common stock. What were EFG’s earnings per share? Example: EFG Corporation had net earnings of $800,000 last year. EFG had 100,000 outstanding shares of common stock. What were EFG’s earnings per share? Formula: Net Earnings = Earnings Per Share Formula: Net Earnings = Earnings Per Share Common Stock Outstanding Common Stock Outstanding Solution: $800,000 = $8 Solution: $800,000 = $8 100,000 100,000

34. Price-Earnings Ratio Synopsis: The price-earnings ratio is the most common measure of how expensive a stock is. Determining the price- earnings ratio can help you decide whether a stock is worth purchasing. Synopsis: The price-earnings ratio is the most common measure of how expensive a stock is. Determining the price- earnings ratio can help you decide whether a stock is worth purchasing. Example: EFG’s stock is selling for $96 a share. EFG’s earnings per share are $8. What is EFG’s price-earnings ratio? Example: EFG’s stock is selling for $96 a share. EFG’s earnings per share are $8. What is EFG’s price-earnings ratio? Formula: Market Price Per Share = Price-Earnings Ratio Formula: Market Price Per Share = Price-Earnings Ratio Earnings Per Share Earnings Per Share Solution: $96 = 12 Solution: $96 = 12 $8 $8

35. Investment Theories Theories on how to evaluate possible investments Theories on how to evaluate possible investments –Fundamental Theory –Technical Theory –Efficient Market Theory

36. Fundamental Theory Assumes a stock’s real value is determined by looking at company's future earnings Assumes a stock’s real value is determined by looking at company's future earnings Look at financial strength, type of industry, new products, state of economy Look at financial strength, type of industry, new products, state of economy

37. Technical Theory Based on idea that a stock’s value is determined by stock market forces Based on idea that a stock’s value is determined by stock market forces Look at # of stocks bought or sold over time Look at # of stocks bought or sold over time Look at total number of shared traded Look at total number of shared traded

38. Efficient Market Theory Believe stock price movements are purely random Believe stock price movements are purely random All investors have considered all available information on a stock, therefore it is impossible to outperform the market over a long period of time All investors have considered all available information on a stock, therefore it is impossible to outperform the market over a long period of time Any time you buy and sell securities, you're engaging in a game of chance, not skill. If markets are efficient and current, it means that prices always reflect all information, so there's no way you'll ever be able to buy a stock at a bargain price. Any time you buy and sell securities, you're engaging in a game of chance, not skill. If markets are efficient and current, it means that prices always reflect all information, so there's no way you'll ever be able to buy a stock at a bargain price.securities The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insider information, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn’t already reflected in the stock's price. The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insider information, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn’t already reflected in the stock's price.investmentstrategystock marketstockinsider tradingpriceinvestmentstrategystock marketstockinsider tradingprice

39. Stock Advisory Services Charge fees Charge fees Information varies from simple alphabetic listings to detailed financial reports Information varies from simple alphabetic listings to detailed financial reports

40. Section 9.3 – Buying and Selling Stocks How to describe how stock are bought and sold How to describe how stock are bought and sold How to explain how the trading strategies used by long-term investors and short-term investors How to explain how the trading strategies used by long-term investors and short-term investors

41. Markets for Stocks The Primary Markets The Primary Markets The Secondary Markets The Secondary Markets

42. Primary Markets Investors purchase new securities from a corporation Investors purchase new securities from a corporation –May buy through investment bank –May buy from representative of corporation Initial Public Offering Initial Public Offering –When corporations sell to public for very first time –Use for new business start ups or business growth and expansion –Considered high-risk investment

43. Secondary Markets Market for existing securities being currently traded Market for existing securities being currently traded Securities exchange Securities exchange –Marketplace where brokers who represent investors meet to buy and sell securities –NYSE is one of largest in world Over-the-counter market – network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange Over-the-counter market – network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange Most traded through NASDAQ Most traded through NASDAQ

44. McDonalds Video Video Video

45. How to Buy and Sell Stock Brokerage Firms Brokerage Firms Account Executives Account Executives Types of Orders Types of Orders Computerized Transactions Computerized Transactions

46. Brokerage Firms Full service, discount, online Full service, discount, online Difference is in commission cost and service done Difference is in commission cost and service done Full service charge highest for personalized service and free research Full service charge highest for personalized service and free research Discount and online have printed material or info on website to help you Discount and online have printed material or info on website to help you

47. Account Executives/Brokers Licensed, buy and sell securities for clients Licensed, buy and sell securities for clients Handle your portfolio, but be sure to describe your short, long-term goals Handle your portfolio, but be sure to describe your short, long-term goals Stay involved, firms not responsible for financial losses Stay involved, firms not responsible for financial losses Be careful of churning, a lot of buying/selling to make more commissions for broker Be careful of churning, a lot of buying/selling to make more commissions for broker $25 to $55 for buying and selling stocks, additional based on # of shares and value $25 to $55 for buying and selling stocks, additional based on # of shares and value

48. Types of Orders Order to buy/sell – done over phone, Internet, or in person Order to buy/sell – done over phone, Internet, or in person Market Orders Market Orders Limit Orders Limit Orders Stop Orders Stop Orders

49. Market Orders Request to buy/sell at current market value Request to buy/sell at current market value Brokers/rep tries to get best price possible, like an auction Brokers/rep tries to get best price possible, like an auction Payment for stocks required with 3 weeks Payment for stocks required with 3 weeks Stock certificate arrive in 4 to 6 weeks Stock certificate arrive in 4 to 6 weekscertificate

51. Limit Orders Request to buy/sell at a specific price Request to buy/sell at a specific price No guarantee of purchase or sale No guarantee of purchase or sale Limit orders filled in order received, so your turn may come after price has risen Limit orders filled in order received, so your turn may come after price has risen

52. Stop Orders Used for selling a stock at next avail. opportunity when price reaches a specified amount Used for selling a stock at next avail. opportunity when price reaches a specified amount You enter a stop loss order at a point below the current market price. If the stock falls to this price point, the stop loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop loss order does nothing. You enter a stop loss order at a point below the current market price. If the stock falls to this price point, the stop loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop loss order does nothing. Stop loss orders are cheap insurance that protects you from a loss. Stop loss orders are cheap insurance that protects you from a loss.

53. Computerized Transactions Full and discount brokerage firms allow investors to trade online Full and discount brokerage firms allow investors to trade online Software packages or broker's sites can be used to evaluate stock, track and monitor portfolio, buy and sell securities Software packages or broker's sites can be used to evaluate stock, track and monitor portfolio, buy and sell securities

54. Short Skirts and Stocks Video Video Video

55. Investment Strategies Long-term techniques Long-term techniques –Buy and Hold –Dollar Cost Averaging –Direct investment and dividend reinvestment Short-term techniques Short-term techniques –Buying on margin –Selling short

56. Buy and Hold Buy and hold for ten years or more Buy and hold for ten years or more You may get: You may get: –Dividends –Price per stock may go up –Stock may split

57. Dollar Cost Averaging Systematic purchase at regular intervals Systematic purchase at regular intervals Avoid having to buy high and sell low Avoid having to buy high and sell low Simple and practical for those with steady incomes Simple and practical for those with steady incomes

58. Direct Investment and Dividend Reinvestment Direct investment Direct investment –Investors buy stock directly from company –Save brokerage fees and commission Dividend reinvestment Dividend reinvestment –Automatically reinvests any dividends you earn back into more stock

59. Buying on Margin Borrow money from broker to buy stock by opening a margin account and sign a contract Borrow money from broker to buy stock by opening a margin account and sign a contract Must deposit a minimum of $2000 in cash or eligible securities with broker (collateral) Must deposit a minimum of $2000 in cash or eligible securities with broker (collateral) Buy stock using money from margin acct. and borrowing money from broker Buy stock using money from margin acct. and borrowing money from broker –Result – you get more stocks with less of your own cash –Stock price goes up, you sell, pay back broker

60. Selling Short Arrange to borrow # of shares of stock from brokerage firm Arrange to borrow # of shares of stock from brokerage firm Sell borrowed stock, assuming value will drop within a short period of time Sell borrowed stock, assuming value will drop within a short period of time Buy stock at a lower price than the price you sold it for Buy stock at a lower price than the price you sold it for Use new stock to replace original stock that you borrowed Use new stock to replace original stock that you borrowed