9.2 How to invest in corporations

9.2 How to invest in corporations Goals: Describe ways to purchase different types of stock. Explain differences between investing in corporate stocks and corporate bonds.

Corporate Stock There are two ways to invest in a corporation Corporate stocks Corporate bonds First we will focus on corporate stock! A share of corporate stock is a unit of ownership in a corporation. Stockholders are the investors who own the corporation because they own shares of stock.

How stock exchanges work Investors generally buy and sell stock in two ways: A stock exchange is an actual physical, central location where orders to buy or sell stocks are sent and carried out. (NYSE) The NASDAQ electronically links brokerage firms. Stocks can be bought or sold without using a central location. Transactions, sales or purchases of shares, are usually conducted through a: Stock brokerage firm- a company that specializes in helping people buy and sell stocks & bonds. Stockbroker- a person who handles the transfer of stocks & bonds between buyer & seller.

stockholders Can earn returns 2 ways A capital gain is one way to earn a return Suppose you bought 100 shares of stock for $20 per share. A few months later, the stock is selling for $30 per share. If you sell the stock at $30 per share, what will be your profit? $30 X 100 shares = $3,000 $3,000 - $2,000 = $1,000 capital gain Capital gain is the profit you earn from selling stock at a higher price than you paid for it. Capital loss is the amount you lose if your stock decreases in value and you sell it for a lower price than you paid for it.

How Stockholders Earn Returns Dividends are the second way to earn returns Dividends are a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits. For example, you purchased 100 shares of stock in XYZ Corp. for $25 per share. XYZ Corp. decides to pay $.50 per share in dividends based upon their profits. How much money will you receive in dividend returns? 100 X $.50 = $50.00 Shareholders sometimes choose to reinvest their dividend earnings. How many more shares of XYZ Corp could you buy if you did this? 2

Types of stock Preferred stock: a nonvoting share that pays a fixed dividend. Preferred stock is less risky than common stock Common stock: a voting share that does not pay a set dividend. Common stock generally has a better return than preferred stock in the same corporation

Corporate bonds Another way to invest in corporations is to buy the bonds they sell. Corporate bonds are sold by many corporations to finance business activities. They usually pay a fixed rate of interest and are paid off after a specific period of time. You are basically lending money to a corporation. Corporations must make interest payments and repay their bonds on time, even if they earn no profit.

Junk bonds Some corporate bonds are high-risk investments. They offer high interest rates to encourage people to buy them. These high-return, high-risk bonds are called high-yield bonds or junk bonds.