1. Chapter 14: Investing in Stocks and Bonds

2. Stocks and Bonds and How They are Used
Common stock
Preferred stock
Bonds

3. Investing in Stocks Why do corporations issue common stock?
Equity financing
To raise money to start, expand or help pay for ongoing business expenses
They don’t have to repay the money
Dividends are not mandatory
Stockholders have voting rights-proxy

4. Why Do Investors Purchase Stock?
Income from dividends
Dollar appreciation of stock value (averaged 10% since 1926).
Increased value from stock splits

5. Percentage of People in Different Age Groups That Own Stocks

6. Income from Dividends Dividends can be paid in:
Cash
Additional stock
Company products
Who is entitled to the dividends?
Record Date
Ex-dividend Date

7. Dollar Appreciation of Stock Value
100 shares of common stock purchases January 5, 2007 and were sold January 5,2010; total dividends of $4.97 per share for the four years.
Cost when purchased
Total investment $5,735 Return when sold
100 = $5,700
100 = $7,100
Plus commission
Minus commission
Total return $7,065
Transaction summary
Total return $7,065
Minus total investment ,735
Profit from stock sale $1,330
Plus dividends
Total return from the transaction $1,827

8. Stock Split
2:1
3:1
3:2
Firm’s management usually has a theoretical stock price range for the firm’s stock.

9. Common vs. Preferred Stock
Common stock
get dividends depending on profit the company makes
Preferred stock
receive cash dividends before common stock holders
pre-determined dividend rate
most preferred stock is callable

10. Features of Preferred Stock
Cumulative preferred stock
unpaid cash dividends accumulate and are paid before cash dividends to common stock holders
Conversion feature
can be traded for shares of common stock

11. Characteristics of Common Stock
Blue Chip
Small Cap
Cyclical
Micro Cap
Defensive
Penny Stock
Growth
Income
Large Cap
Mid Cap

12. Language of Stock Investing
Earnings per share (EPS)
After tax earnings divided by the number of outstanding shares of common stock.
Price/earnings ratio (P/E ratio)
Price of a share of stock divided by the corporation’s EPS.
Dividend payout ratio
Annual dividend amount divided by EPS
Historical information

13. Language of Stock Investing
Price/Earnings to Growth Ratio: A Look to the Future
Step 1: Determine the projected change
Step 2: Use the PEG formula
PEG = Price earnings ratio divided by annual EPS growth.

14. Language of Stock Investing
Look at book value of one share
net worth of company divided by the number of outstanding shares
if a share costs more than the book value the company may be overextended or it may have a lot of money in research and development

15. Buying and Selling Stocks
Primary market
Initial Public Offering (IPO)
Secondary market
Security Exchange
New York Stock Exchange
Regional Exchange
Over the Counter Market
Nasdaq

16. Brokerage Firms
Full Service
Discount
Online

17. Completing Stock Transactions
Market Order
Limit Order
Stop Order
Day Order, Week Order, Month Order or Good Until Canceled (GTC) Order

18. Long-Term Investment Strategies
But-and-Hold
Dollar Cost Averaging
Direct Investment
Dividend Reinvestment Plan (DRIP)

19. Short-Term Techniques
Day Trading
Buying on Margin
Selling Short
Trading in Options

20. Make a Decision to Sell Stocks
1. Stock reaches target price.
2. Favorable development temporarily push up price.
3. Good profits unlikely to continue.
4. Stock lags behind others in industry group.
5. Company profits begin to fall short of projections.
6. Industry/company prospects are deteriorating.
7. Losses are moderate.
8. Stock’s price/earnings ratio appears too high.

21. Language of Bond Investing
Registered and bearer
Callable
Warrants
Convertibility

22. Language of Bond Investing
Indenture
Face value, coupon rate, maturity date
Secured and unsecured
Senior and subordinated

23. Types of Bonds Corporate bonds U.S. government securities
Treasury bills, notes, and bonds
Federal agency issues
Municipal Bonds

24. Considerations Before Investing in Bonds
Susceptibility to certain risks
Credit
Callability
Inflation
Interest rate

25. Considerations Before Investing in Bonds
Premiums and discounts
Current yield
Yield to maturity
Tax-equivalent yields
When to sell

26. Formula 14.2

27. Formula 14.3

28. Advantages of Investing in Bonds
Pay higher interest rates than savings
Offer safe return of principle
Have less volatility than stocks
Offer regular income
Require smaller initial investment

29. Disadvantages of Investing in Bonds
No hedge against inflation
Can be quite volatile
Compounding is almost impossible
Subject to investors tax rate
Poor marketability