1. Investing in Stocks
Chapter 31

2. getting rich takes time”
“You can only get poor quickly;
getting rich takes time”

3. Investing is putting your money to use in order to make money on it

4. Putting money in a savings account is a form of investing.
Buying stock from a company is another form of investing.
Stock is a share of ownership in a business.

5. Types of Stocks Common stock Preferred stock
Primary form of ownership in a corporation
All corporations must issue common stock and many issue common stock only
Preferred stock
Gives certain privileges that common stockholders do not have. If the company pays dividends, dividends on preferred stocks are paid before dividends on common stock

6. Return on Stocks
The return on an investment, or yield, is the amount of money the investment earns
Dividend
Capital Gain
Capital Loss

7. Dividend Share of a company’s profits
If a company makes a lot of money over a certain period of time, it distributes the profits among its shareholders in the form of dividends.

8. Capital Gain A capital gain is recognized when the stock is sold
Purchase 100 each = $1,000
Stock goes up to $20 a share and you decide to sell all 100 shares.
Sale price is 100 shares x $20 = $2,000
Capital Gain is $2,000 - $1,000 = $1,000
You will pay tax on the $1,000 capital gain

9. Capital Loss A capital loss is recognized when the stock is sold
Purchase 100 each = $1,000
Stock goes down to $5 a share and you decide to sell all 100 shares.
Sale price is 100 shares x $5 = $500
Capital Loss is $1,000 - $500 = $500
Taxable income will be reduced by the $500 capital loss

10. Rate of Return
Measures the change in the investment expressed as a percentage
Purchase 100 each = $1,000
Stock goes up to $12 a share. Investment is worth $1,200
Rate of return is ($1,200 - $1,000)/$1,000
$200/$1,000 = 20%

11. Stockbroker
A person who acts as a go-between for buyers and sellers of stock
Brokers process the purchase and sale of stocks for a fee
Charge a transaction fee
Discount brokers charges less
Examples: Charles Schwab

12. Stock Exchange Where stocks are bought and sold
NYSE – New York Stock Exchange
NASDAQ
AMEX – American Stock Exchange

13. Stock Indexes DJIA – Dow Jones Industrial Average
The most widely used indicator of the overall condition of the stock market
a price-weighted average of 30 actively traded blue chip stocks
The 30 stocks are chosen by the editors of the Wall Street Journal, a practice that dates back to the beginning of the century.

14. S & P 500 – tracks how the top 500 companies are doing
Wilshire 5,000 – the most comprehensive measure of the stock market
The benchmark is designed to represent the performance of all U.S.-headquartered equity securities with readily available price data

15. Mutual Funds
Allows an investor to participate in the stock market without buying stocks in one specific corporation.
Mutual funds purchase from several companies

16. Diversification
A strategy designed to reduce exposure to risk by combining a variety of investments
If one stock performs poorly, the loss is limited and can be made up by other stocks
Mutual funds help an investor diversify

17. Where to Begin?
There are many ways to begin accumulating wealth. You will need to decide:
where to invest
for how long
how much risk you are willing to take

18. Putting money in a savings account is a form of investing
Interest earned is low
Little or no risk of losing money in your account if amount is less than $100,000

19. Risk Risk is something we encounter every day
With investments, understanding the relationship between risk and reward is very important.
All investors want to maximize their potential returns, while minimizing risk.

20. Risk can hold tremendous opportunities for those who know how to manage it.
Some investments are certainly less "risky" than others, but no investment is risk free. With investing, you should carefully consider your overall financial situation.

21. Risk Profile So what's the right amount of risk to take?
First, consider your risk preference. After all, what good is a profitable investment if it costs a heart attack along the way.

22. It is said:
The higher the risk, the greater the potential for a higher reward

23. Blue-Chip Stocks
Are stocks of large, well-established companies that have a good track record of profitability and success
Are said to be the safest
IBM GM

24. Speculative Stocks
Stocks of relatively new firms that do not have an established track record of success
Often small firms that are developing new types of goods and services
Riskier investments

25. Day Trading
Very big during late 1990s and early 2000 when the Internet stocks took off.
People buy and sell stock based on minute-by-minute changes in the price of a stock
Extremely risky

26. Chapter 31 Book Work Fast Review Page 505 #’s 1-4
Using Business Key Words Page 508 #’s 1-13