Investing in Stocks Chapter 12

Goals for Chapter 12.1 Describe the features of common stock and compare it to preferred stock. Discuss stock investing classifications and why you would choose one over another. Explain how stock values are determined. Discuss factors that affect a stock’s price.

Characteristics of Stock Stockholders are the owners of the corporation. If the corporation does well, stockholders will profit. One way to profit is through dividends, which are part of the corporation’s profit paid to stockholders. The other way to profit is through capital gain.

Why is owning a stock risky? Part of the risk of owning stock is that the price could go down below the price initially paid for it, resulting in a loss.

Types of Stock Common stock is a type of stock that pays a variable dividend and gives the holder voting rights. Preferred stock is a type of stock that pays a fixed dividend and carries no voting rights.

Preferred Stock Who invests in preferred stock and why? – It is less risky than common stock – Generally provides a lower return – Retired people like to invest in choices that have fixed monthly payments

Income vs. Growth Stocks Stocks that have a consistent history of paying high dividends are known as income stocks. Growth stocks are stocks in corporations that reinvest their profits into the business so that it can grow.

Less-Established vs. Blue Chip Stocks Stocks in young, often small corporations have higher overall risk than stocks of companies that have been successful for many years. Blue-chip stocks are stocks of large, well- established corporations with a solid record of profitability.

Defensive vs. Cyclical Stocks A defensive stock is one that remains stable and pays dividends during an economic decline. (utilities, drugs, food) Cyclical stocks do well when the economy is stable or growing but often do poorly during recessions.

Stock Price 1. The Company – When a company is performing well, the company’s stock is attractive. 2. Interest Rates – When interest rates are low, people who would normally buy CD’s look for more profitable places to invest. 3. The Market – The marketplace determines a company’s ability to sell its product or service now and in the future.

4. Earning Per Share (EPS) – Earning per share are a corporation’s after-tax earnings, divided by the number of common stock shares outstanding

Return on Investment Current Profit on Stock ________________________ = ROI Purchase Price + Commission

Goals for Chapter 12.2 Buying and Selling Stock  Describe market channels and the process for buying and selling securities.  Describe short- and long-term investment strategies when buying and selling stocks.  Explain how to read the stock listings in financial publications and how to use stock indexes.

Securities Exchanges  A securities exchange is a marketplace where brokers who are representing investors meet to buy and sell securities. The NYSE is the largest exchange.

Over-the Counter Market  The over-the-counter-market is a network of brokers who buy and sell the securities of corporations that are not listed on a securities exchange.  Brokers operating in the OTC market use an electronic quotations system called the NASDAQ.

Bull and Bear Markets  A bull market is a prolonged period of rising stock prices and a general feeling of investor optimism.  A bear market is a prolonged period of falling stock prices and a general feeling of investor pessimism.

Short-Term Investing Techniques  Buying on margin is borrowing money from your broker to purchase more stock. This strategy is called using leverage.  Selling short is selling stock borrowed from a broker that must be replaced at a later time.

Long-Term Techniques  Buy and Hold Over time, it is likely that your stock will have a stock split, which is an increase in the number of shares you own.  Dollar Cost Averaging This technique involves the systematic purchase of an equal dollar amount of the same stock at regular intervals.

 Direct Investment You can save money using direct investment, or buying stock directly from a corporation.  Reinvesting Dividends Dividend reinvestment means using dividends previously earned on the stock to buy more shares.

Picking Stocks  When picking stocks you are likely to think of popular brand names Example: Pizza Hut  You will not be able to find Pizza Hut when you do a search Pizza Hut is owned by PepsiCo, Inc.  PepsiCo would be considered the parent company

Parent Company  A Parent Company is one that controls and owns another business.  To purchase Pizza Hut, you would have to buy shares in PepsiCo.