Transcript Stocks - Bellevue College

Module 5
Stocks
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Module 5 Learning Objectives
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Define what a stock is and explain why companies issue stock.
Explain how an investor makes a return on stocks.
Categorize stocks as small, medium or large cap; as growth or income; and by industry.
Define the common stocks, preferred stocks, tracking stocks, spin-offs, stock splits, and
IPO.
Explain how stocks are traded.
Find and interpret a stock quote using a financial website.
Differentiate market, limit, and stop loss orders.
Explain the role of the Securities and Exchange Commission in financial markets.
Explain how a stock exchange works.
Differentiate between the New York, American and NASDAQ exchanges.
List stock ownership rights.
Differentiate between institutional, insiders and individual investors.
Use a stock index to measure stock performance.
Differentiate between the Dow Jones Industrial Average, the Standard and Poor’s 500, the
Russell 2000, the Wilshire 5000, the Standard and Poor’s 400, and the NASDAQ
Composite.
Create and track a stock portfolio.
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When you buy stock in a company, you are
mainly investing in:
• What the company has done.
• Real estate.
• Future cash or earnings.
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What Is Stock?
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Companies issue stock to:
• Make a killing.
• Pay for buildings, systems, or other things
that will help grow the earnings of the
company.
• So they don’t have to borrow.
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Why Companies Issue Stock
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How Do You Make Money With Stocks?
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Calculate Capital Gain and Dividend Yield
• You bought General Motors at $50 per share in 1998 and
sold it at $74 in 2000. For each share, you received $2 in
dividends in 1998 and 1999.
• You bought Ford at $25 per share in 1998 and sold it at
$29 in 2000. For each share, you received $1.07 in 1998
and $1.17 in1999 in dividends.
• You bought Daimler-Chrysler at $70 per share in 1998
and sold it at $54 in 2000. For each share, you received
$2.13 in 1998 and $2.13 in 1999 in dividends.
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How Stocks Have Performed
Annual Total Returns 1971-2000
50%
40%
30%
20%
10%
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
-10%
T-Bill Total Return
Government Bonds Total Return
-20%
Stocks Total Return
-30%
Source: Global Financial Data www.globalfindata.com
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Here’s another way of looking at how
stocks performed
Cash
(90 day T-Bill)
Average for 19702000
Maximum
Minimum
Standard
Deviation
6.7%
15.2%
3.1%
2.7%
Annual Return
Bonds
(Treasury
Bond)
9.9%
44%
-7.3%
9.3%
Stocks
(S&P 500)
14.5%
37.7%
-27%
16.5%
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Choices
• Industry
• Size (Market Cap)
• Growth or Income (Capital Gain or
Dividend)
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Small caps are better performers over the
long run
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Classify this stock by market cap, industry,
and price earnings.
• Tootsie Roll sells—tootsie rolls and all kinds of candy.
The company has 49.5 M shares outstanding and is
currently selling at $46. Earnings per share for the year
was $1.53, and the company gives dividends of 28¢ per
share.
• Market cap is calculated by taking shares outstanding
and multiplying by price.
• Price earnings is price divided by earnings per share. It
tells you what you’re paying for every dollar of earnings.
• Growth stocks have higher PEs than the market. Value
stocks have lower PEs than the market.
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True or False?
If you own common shares in a company
you-• Choose the colors for the company logo
• Vote for the board of directors
• Are not allowed to look at the financial
statements for the company. These are private
and not disclosed to anyone outside.
• Are entitled to any extra cash the company has.
• Can sell your stock anytime you want.
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Preferred Stock
• About 500 listed on the NYSE and 200
listed on the AMEX and NASDAQ
• Preferred shareholders have rights to
assets over common shareholders
• Usually no voting rights
• Dividend based on fixed rate when issued
• Moves very much like a bond
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May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
40
Nov-00
Oct-00
Sep-00
Aug-00
Jul-00
Jun-00
May-00
Apr-00
Mar-00
80
Feb-00
Jan-00
Dec-99
Nov-99
Oct-99
Sep-99
Aug-99
Jul-99
Jun-99
May-99
Stock Price ($)
IBM Common versus IBM Preferred
140
120
100
IBM Common
$120 per share
$0.62 dividend
0.5% yield
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IBM Preferred
$25 per share
$1.88 dividend
7.5% yield
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Stock Splits
• Average stock price $30 to $45
• When a stock price gets too high, some
companies believe that small investors
won’t buy
• Splitting the stock does nothing to the
fundamentals of the company
• But does tend to give a psychological lift
to the stock price
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IPOs
Number of IPOs
900
800
AMEX
NYSE
NASDAQ
700
600
500
400
300
200
100
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
• More IPOs in up
markets.
• Overall do good the
first year and then
it’s anyone’s guess.
• Only about 20% of
the company is
offered the first
time around.
• Many risks.
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Where are they now?
Best performing IPOs in 1999.
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Internet Capital Group ICGE
Commerce One CMRC
VerticalNet VERT
Brocade Communications BRCD
PurchasePro PPRO
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How Do You Buy Stocks?
• You need to understand what you’re doing
• Check the following before you sign on the
dotted line:
– Are you protected if the firm goes under?
– Have there been any complaints filed against the
firm?
– What about margin accounts?
– Have you read the account agreement carefully?
• What is binding arbitration?
• What is discretionary authority?
• Check out online brokerage agreements.
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The Auction Process
• Stock trades are
executed through an
auction process.
• Stocks are worth
whatever someone will
pay for them.
• Bid: What the buyer
wants to pay.
• Ask: What the seller
want to sell for.
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Finding the stock quote
• Using finance.yahoo.com, find the stock
quote for Coca Cola
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Placing the Order
• How many shares? (Remember prices
fluctuate)
• Right ticker symbol (Especially if you’re trading
online)
• Type of Order (Market, limit, stop limit, stop
loss)
• How long is the order good for? (Immediate or
cancel, Good Til Canceled)
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What type of order?
• Case 1: You have decided to buy a stock that is very
volatile. Daily prices can go up and down $5. The
current price is $50. You only have $5000 to invest in
this stock. What kind of order should you place?
• Case 2: The market took a big fall yesterday, and all
indications are that it will fall again today. You want to
sell your stock if it hits $40 and prevent any further
losses. It started out yesterday at $55 and is hovering
around $48 today. What do you do?
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Securities and Exchange Commission (SEC)
• Ensures financials are “real” or disclosure
• That people who know more don’t benefit
at the expense of small investors
• That brokers and firms don’t engage in
shenanigans
• Funds behave properly as well
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Stock Exchanges
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New York Stock Exchange (NYSE)
New York Stock Exchange
2003
2000
Number of shares traded a year
204 B
262.5 B
Market value of companies
$14 T
$12.4 T
Average price per share
$27.50
$37.61
2759
2862
Number of companies
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National Association of Securities Dealers Automated
Quote System NASDAQ
NASDAQ
Number of shares traded per year
2006
273 B
2000
443 B
Market value of companies
$5.2 T
$3.6 T
Average price per share
Number of listed companies
$31.64
3200
4734
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American Stock Exchange (AMEX)
American Stock Exchange
2006
Number of shares traded
20 B
Market value of companies
$570 B
Average price per share
Number of listed companies
2000
13 B
$125 B
$55.85
1433
765
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Types of Shares and Dilution
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Types of Investors
Who Owns Stock
Funds
19.1%
Brokers and Dealers
0.4%
Households
38.3%
Public Pension Funds
11.3%
Private Pension Funds
11.6%
Insurance Companies
6.5%
Source: Federal Reserve Flow of Funds
Banks
2.0%
Government
0.7%
Foreign Investors
10.0%
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Evaluating Stocks
• Over the long term (over 10 years) stocks
perform the best
• Passive strategy
– Buy index funds and hold (you still need to
watch your investments)
• Active strategy - Select stocks
– Fundamental analysis
– Technical analysis
– Speculation
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Monitoring Your Stocks
• Whether you use
an active or
passive strategy,
you still need to
monitor your
stocks
• Measure stock
performance
against stock
index
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Dow Jones Industrial Average (DJIA)
Large Cap Index - Dow Jones Industrial Average
Annual Return
40%
Oldest and most wellknown stock index.
S&P 500
DJIA
30%
Covers 30 very large
companies.
20%
10%
0%
1988
-10%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Price-weighted index so
the stock with the highest
price (IBM) has the most
influence.
-20%
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Standard and Poor’s 500 - Large Cap
500 largest stocks
Large Cap Index - S&P 500
Annual Return
100%
80%
S&P 500
Russell 2000
NASDAQ Composite
S&P 400
60%
DJIA
Wilshire 5000
40%
20%
0%
1988
-20%
-40%
-60%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Market valueweighted index.
GE, Exxon Mobil,
Microsoft,
Citigroup, and
Pfizer are the
largest companies
Used as an index
for large
companies
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Russell 2000 - Small Cap
Also S&P 600
Small Cap Index - Russell 2000
Annual Return
50%
Take the top 3000
companies and
select the bottom
2000
S&P 500
Russell 2000
40%
30%
20%
10%
0%
1988
-10%
-20%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Russell 2000 is the
index for small cap
companies
-30%
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Wilshire 5000 - Total Market
All U.S. (7000)
companies listed
on the exchanges
Total Market Index - Wilshire 5000
Annual Return
40%
S&P 500
Wilshire 5000
30%
True index for
total stock market
20%
10%
0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-10%
-20%
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Standard and Poor’s 400 - Mid Cap
Mid Cap Index - S&P 400
Annual Return
Next 400 stocks
after the S&P 500
40%
S&P 500
S&P 400
30%
Measure of
medium cap
stocks
20%
10%
0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-10%
-20%
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Other Indices
Philadelphia
GoldSilver
Annual Returns of Selected Asset Classes
S&P Midcap
50%
Russell 2000 Small
Cap
40%
S&P 500
30%
EAFE International
Developed
20%
NAREIT Real
Estate
10%
0%
2002
2003
2004
2005
2006
-10%
-20%
-30%
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Summary
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For US large cap stocks – S&P 500
For US mid cap stocks – S&P 400
For US small cap stocks – S&P 600
International – MSCI EAFE
Emerging – MSCI Emerging
Bond – Lehman Brothers Aggregate
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Measure Your Performance
• Measure your portfolio against the appropriate
index
• If your portfolio is not performing well, might
consider index
• Don’t make snap judgments - even the best
advisors have bad years
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