Back to Table of Contents pp Chapter 31 Investing in Stocks

Introduction to Business, Investing in Stocks Slide 2 of 52 Why It’s Important Making good investment decisions helps you reach your financial goals.

Introduction to Business, Investing in Stocks Slide 3 of 52 Investing in Stocks Investing is putting your money to use in order to make money on it.

Introduction to Business, Investing in Stocks Slide 4 of 52 Investing in Stocks Stock is a share of ownership in a business. One way a corporation raises money to start or to enlarge its business is by selling stock.

Introduction to Business, Investing in Stocks Slide 5 of 52 Investing in Stocks When you buy stock, you receive a stock certificate indicating that you are now part owner of the company. Sole proprietorships and partnerships don’t sell stock.

Introduction to Business, Investing in Stocks Slide 6 of 52 Return on Stocks The return on an investment, or yield, is the amount of money the investment earns.

Introduction to Business, Investing in Stocks Slide 7 of 52 Types of Return One type of return is through the payment of dividends, which is a share of profits. Dividends are usually paid quarterly.

Introduction to Business, Investing in Stocks Slide 8 of 52 Types of Return Stockholders can also earn income on their stocks by selling their stock shares for more than they paid for them.

Introduction to Business, Investing in Stocks Slide 9 of 52 Types of Return Selling stock for more than you paid for it is called a capital gain. Selling stock for less than you paid for it is called a capital loss.

Introduction to Business, Investing in Stocks Slide 10 of 52 Types of Return The government taxes the amount you make in dividends or in capital gains.

Introduction to Business, Investing in Stocks Slide 11 of 52 Rate of Return The rate of return on stocks is always expressed as a percent of the original investment and figured on an annual basis.

Introduction to Business, Investing in Stocks Slide 12 of 52 Rate of Return A single share of stock whose value increases from $50 to $55 in a year and pays a $5 dividend during the year has a 20 percent rate of return.

Introduction to Business, Investing in Stocks Slide 13 of 52 Types of Stocks Common stock is the primary form of ownership in a corporation. For each share of common stock that you own, you get a vote in how to run the corporation.

Introduction to Business, Investing in Stocks Slide 14 of 52 Types of Stocks The Board of Directors is responsible for representing the interests of the stockholders in the running of the corporation.

Introduction to Business, Investing in Stocks Slide 15 of 52 Types of Stocks Preferred stock gives its holders certain privileges that common stockholders don’t have.

Introduction to Business, Investing in Stocks Slide 16 of 52 Types of Stocks If the company pays dividends, dividends on preferred stocks are paid before dividends on common stocks.

Introduction to Business, Investing in Stocks Slide 17 of 52 Types of Stocks If a company fails, preferred stockholders get a share of whatever assets are left after the company’s debts are paid before the common stockholders do.

Introduction to Business, Investing in Stocks Slide 18 of 52 Types of Stocks Preferred stockholders have limited voting privileges and so they play a smaller role in the company’s affairs.

Introduction to Business, Investing in Stocks Slide 19 of 52 Graphic Organizer Types of Stock Graphic Organizer Dividend rate not fixed Common Stock Preferred Stock Both Voting rights Fixed dividend rate Dividends and claims paid first Limited voting rights Represent ownership No maturity date

Introduction to Business, Investing in Stocks Slide 20 of 52 Stockbrokers A broker is a person who acts as a go-between for buyers and sellers. Brokers charge either a percent of the value of the stock or a set amount for each transaction as a fee for their services.

Introduction to Business, Investing in Stocks Slide 21 of 52 Stock Exchanges Most stocks are bought and sold through a trading market known as a stock exchange.

Introduction to Business, Investing in Stocks Slide 22 of 52 Stock Exchanges When people sell stocks through their stockbrokers, their wishes are sent to the broker’s representative on the stock exchange floor.

Introduction to Business, Investing in Stocks Slide 23 of 52 Stock Exchanges Only the stocks listed on an exchange can be traded. To be listed on an exchange, a corporation must prove to the exchange that it meets the rules.

Introduction to Business, Investing in Stocks Slide 24 of 52 Over-the-Counter Markets Many stocks not listed on a major exchange can be bought and sold through the National Association of Securities Dealers Automated Quotations (NASDAQ) market.

Introduction to Business, Investing in Stocks Slide 25 of 52 Over-the-Counter Markets The NASDAQ is a system that quotes over-the-counter securities—that is, all investments bought and sold.

Introduction to Business, Investing in Stocks Slide 26 of 52 Mutual Funds A mutual fund is a fund created by an investment company that raises money from many shareholders and invests it in a variety of stocks.

Introduction to Business, Investing in Stocks Slide 27 of 52 Mutual Funds A mutual fund has much greater buying power because it has a greater amount of money available to invest.

Introduction to Business, Investing in Stocks Slide 28 of 52 Mutual Funds Mutual funds are a way to limit your risk of investing in the stock market. The risk is spread out because a mutual fund consists of stocks in many companies.

Introduction to Business, Investing in Stocks Slide 29 of 52 Mutual Funds Many people prefer mutual funds because the professional managers of the mutual funds have more experience in selecting stocks than they do.

Introduction to Business, Investing in Stocks Slide 30 of 52 Stock Indexes An index is a measuring system that tracks stock prices over the long run.

Introduction to Business, Investing in Stocks Slide 31 of 52 Stock Indexes The two most common indexes are: The Dow Jones Industrial Average (DJIA) Standard & Poor’s (S&P)

Introduction to Business, Investing in Stocks Slide 32 of 52 Levels of Risk The two basic categories of stocks that offer different levels of risk are: Blue-chip Speculative

Introduction to Business, Investing in Stocks Slide 33 of 52 Blue-Chip Stocks Blue-chip stocks are stocks in large, well-established companies that have a good track record of profitability and success.

Introduction to Business, Investing in Stocks Slide 34 of 52 Speculative Stocks Speculative stocks are stocks in relatively new firms that don’t have an established track record of success.

Introduction to Business, Investing in Stocks Slide 35 of 52 Day Trading Day trading means buying and selling stock, usually on the Internet, based on minute-by-minute changes in the price of the stock.

Introduction to Business, Investing in Stocks Slide 36 of 52 Day Trading Because online trading is so easy, it’s easy to buy too much stock and go quickly into debt.

Introduction to Business, Investing in Stocks Slide 37 of 52 Liquidity Liquidity refers to how easily an investment can be turned into cash. Stocks are very liquid because they can be turned into cash quickly by selling them.

Introduction to Business, Investing in Stocks Slide 38 of 52 Inflation Risk Inflation risk is whether the rate of return on an investment keeps up with the rate of inflation. Your stock needs to go up in value to earn a return on your investment.