1. Finance
Chapter 9
STOCKS

2. Common and Preferred Stocks
Learning Targets
Learn how to explain the reasons for investing in common stock
Learn how to explain the reasons for investing in preferred stock
Why do you think many people are reluctant to invest in stocks?
What might you need to know to make sound stock investment decisions?

3. Common and Preferred Stocks
Common Stock
Securities
All of the investments (stocks, bonds, mutual funds, options and commodities) that are bought and sold on the stock market.
Why Corporations issue Common Stock
To raise money to start up their business and to pay for ongoing activities
Private Corporations
Issues stock to a small group of people. Not traded openly on the stock markets.
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4. Common and Preferred Stocks
Public Corporations
Sells it shares openly on stock markets, where anyone can buy them
A Form of Equity
Corporations do not have to repay the money a stockholder pays for stock.
Use this money to fund ongoing activities
Stockholders make money by selling stock to another investor
Demand for the stock sets the price
News on expected sales revenue, earnings, expansions or mergers can make demand go up or down.

5. Common and Preferred Stocks
Dividends not mandatory
It is up to the corporate board of directors to decide whether any profits will be paid to the stockholders
Can reinvest profits into the company
Why Investors Purchase Common Stock
To make money - 3 Different ways:
Income from Dividends
An equal amount per share
Paid quarterly
Appreciation of Stock Value
Selling your stock for a higher price than you bought it for
Increased Value from Stock Splits
Stocks are divided into larger number of shares
Why split? Management believes stock should be within an ideal price range. Split the stock to get back in that range
More appealing to new investors

6. Common and Preferred Stocks
Voting Rights and Control of the Company
Stockholders get a vote for every stock they own in a company.
They get to vote on Company business
Usually at the annual stockholders meeting
Preferred Stock
Should know the amount of dividends you should receive
Par Value – Assigned dollar amount that is printed on the stock certificate
Par Value x Dividend Rate = Dividend

7. Common and Preferred Stock
Why Corporations Issue Preferred Stock
Way to raise money
Method of financing
Attract more conservative investors
Why Investors Purchase Preferred Stock
Considered a middle investment
Safer investment than common stock, but not as safe as bonds
Steady source of income
Lacks the potential growth that common stock offers

8. Common and Preferred Stock
Cumulative Preferred Stock
Stock whose unpaid dividends build up and must be paid before any cash stock is paid to common stockholders
Convertible Preferred Stock
A stock that can be exchanged for a specific number of shares of common stock
Provides safety of preferred stock but the possibility of greater returns by converting to common stock
Participation Feature
Allows preferred stockholders to share in corporate earnings with common stockholders
Any remaining earnings after all dividends have been paid
Very Rare
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9. Evaluating Stocks Learning Targets Types of Stock Investments
Identify the types of Stock investments
Identify Sources of information to evaluate stock investments
Discuss the factors that affect stock prices
Types of Stock Investments
Blue-Chip Stocks
Considered a safe investment that generally attracts conservative investors
Issued by the strongest and most respected companies
Companies that show leadership in an industry, a history of stable earnings, and consistency in the payment of dividends
9.2

10. Evaluating Stocks Income Stocks
Pays higher than average dividends compared to other stock issues
Buyers of preferred stocks are attracted to these common stocks
Pharmaceutical, chemical, gas and electric companies

11. Evaluating Stocks Growth Stocks
Issued by corporations whose potential earnings may be higher than the average earnings predicted for all the corporations in the country
Generally do not pay dividends
Look for signs that the company is engaged in activities that pay higher earnings and ales revenue:
Building new facilities; introducing new, high quality products; or conducting recognized research and development

12. Evaluating Stocks Cyclical Stocks
Has a market value that tends to reflect the state of the economy
Products and services are directly linked to the activities of a strong economy
Should buy these stocks when they are inexpensive just before the economy starts to improve
Ex. Ford or Real Estate Companies and Home Builders

13. Evaluating Stocks Defensive Stock Large Cap
A stock that remains stable during declines in the economy.
Stocks that have steady earnings and pay dividends even when the economy is down
Many of the Blue Chip stocks
Large Cap
A stock from a corporation that has issued a large number of shares of stock and has a large amount of capitalization.
Capitalization – The total amount of stocks and bonds issued by a corporation.
Most companies on the Dow Jones Industrial Avg.

14. Evaluating Stocks Small-cap Stocks Penny Stocks
A stock issued by a company with a capitalization of $500 million or less.
Smaller, less established companies
Considered high risk
Penny Stocks
Typically sells for less than a dollar a share, but can sell for up to $5 a share
Stocks issued by new companies or whose companies sales are very unsteady
Can go up and down wildly
Should be purchased by investors who understand the risk.

15. Evaluating Stocks Sources for Evaluating Stocks
Newspaper (Wall Street Journal)
Internet
Stock Advisory Series
Standard and Poor’s, Moody’s
Corporate News Publications
Annual and Quarterly Reports from companies

16. Evaluating Stocks Factors that Influence the Price of Stock
Must consider the overall condition of the market
Bull Market
Market condition that occurs when investors are optimistic about the economy and buy stocks.
Greater demand increases stock prices
Bear Market
Market condition that occurs when investors are pessimistic about the economy and sell stocks
Demand goes down, stock prices go down

17. Evaluating Stocks Numerical Measures for a Corporation
Current Yield – Used to track value of Investments
= Annual dividend / Current Market Value
An increase is a healthy sign for any investment
Total Return –Shows increase or decrease
= current return + capital gain
Current return = Dividend x # of shares x years held
Capital gain = (Selling price – Purchase price) x # of shares

18. Evaluating Stocks
Earnings per share – Measures the amount corporate profit assigned to each share.
= Corporate net earnings / outstanding # of shares
Price-Earnings (PE) Ratio – Used to compare the corporate earnings to the market price of a corporations stock.
= Market price per share / Earnings per share

19. Evaluating Stocks Investment Theories The Fundamental Theory
Assumes that a stock’s real value is determined by looking at the company’s future earnings.
The Technical Theory
Based on the idea that a stock’s value is really determined by forces in the stock market itself
Look at number of stocks bought, sold or traded over a certain amount of time
The Efficient Market Theory
Argument that stock price movements are purely random.

20. Researching Stocks
Find 2 different stocks that would fit into each of the following stock categories: Explain!
This will take some research!
Blue Chip Stock
Income Stock
Growth Stock
Cyclical Stock
Penny Stock
Large Cap and Small Cap Stocks

21. Buying and Selling Stocks
Markets for Stocks
Primary Markets
Market in which investors purchase new security issues from a corporation through an investment bank or a rep. from the company.
Investors are commercial banks, insurance companies, mutual funds, and the general public.
Initial Public Offering (IPO)
Occurs when a company sells stock to the general public for the first time.
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22. Buying and Selling Stocks
The Secondary Markets
Once a companies stock is sold on the primary market, it can then be sold on the secondary market.
Secondary Market
Market for existing financial securities currently traded among investors
There are two types of secondary market
Securities Exchange
Over-the-Counter Market

23. Buying and Selling Stocks
Securities Exchange
A marketplace where brokers who represent investors meet to buy and sell securities.
New York Stock Exchange (NYSE)
One of the largest in the world
3000 corporations total market value of about $16 billion
A corporation must have a very large capitalization and trade many shares
AMEX is now NYSE Amex Equities
Positioned to be a premier market for listing and trading of small and micro cap companies

24. Buying and Selling Stocks
Over-the-Counter Market
A network of dealers who buy and sell the stocks of corporations that are not listed on a security exchange.
NASDAQ (National Association of Securities Dealers Automated Quotation System)
Electronic marketplace for over 4000 different stocks
Handles trades from forward thinking companies, usually small
Microsoft and Intel are traded on it

25. Buying and Selling Stocks
How to Buy and Sell Stock
Brokerage Firms
Company who handles your stock transactions
Full Service
Charge the highest commissions in exchange for personalized service and free research information
Discount Brokerage Firms
Charge less commissions but charge for all of your research information
Online Firm
Charge less, a fee per transaction, and charge for information
Discount and Online firms generally believe that you alone are in charge of your investment plans

26. Buying and Selling Stocks
Account Executives/Stockbrokers
Licensed professionals who buy and sell securities
Handle your entire portfolio: a collection of all of the securities held by an investor
Paid on Commissions
Brokerage Firms: $25 - $55 per transaction
Discount/Online: As low as $10

27. Buying and Selling Stocks
Types of Orders
Orders: Buying or selling a stock
Market Orders
Request to buy or sell stock at the current market value
Limit Orders
Request to buy and sell stock at a certain price
Not guaranteed, filled in the order they are recieved
Stop Orders
Used for selling stock
Type of limit order to sell a particular stock at the next available time when the market price reaches a specified amount

28. Buying and Selling Stocks
Investment Strategies
Long Term (10 or more years = Investor)
Buy and Hold Technique
Have the stock for a number of years
Paid dividends and stock splits
Dollar Cost Averaging
You buy an equal amount of stock at equal intervals
Protects investors from buying at high prices and selling at low prices.
Price averages out over time
Direct Investment and Dividend Reinvestment
Direct – Buying stock directly from the company (No brokers and commissions)
Dividend – Automatically reinvests dividends into buying more stocks

29. Buying and Selling Stocks
Short Term (1 year or less, trader)
Buying on Margin
Investor borrows through the brokerage firm part of the money (50%) needed ton purchase stock.
As long as you have $2000 in your account
Do this to buy more shares
Stock goes up = more money / Down = lose more
Selling Short
Selling a stock that has been borrowed from a brokerage firm and that must be replaced at a later date
Steps on next slide

30. Buying and Selling Stocks
How to Sell Short
Arrange to borrow a certain number of shares of a particular stock from a brokerage firm
Sell the borrowed stock, assuming that it will drop in value in a reasonably short period of time
Buy the stock at a lower price than the price it sold for in step 2
Use the stock you purchased in Step 3 to replace the stock that you borrowed from the brokerage firm in Step 1