Transcript STOCKS - Seattle University

FINANCE 340
BUSINESS FINANCE
MY BACKGROUND
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NAME: Ken Shah
BORN: Bombay, India
PhD:
University of Oregon
INDUSTRY EXPERIENCE:
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4 yrs trader/broker on Bombay Stock Exchange
3 yrs quantitative portfolio management research
in Portland, Oregon
RECENT RESEARCH
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I investigate the choice of mix of debt and
equity in a firm (called capital structure)
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I investigate why and how companies go
public (IPOs) and how they do afterwards
SO THAT I CAN GET TO
KNOW YOU BETTER...
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Avoid changing seats
Please bring name cards and display EVERY
class
Drop by my office and introduce yourself!
Sign and return Honor Code sheet by next
class
Attach your photo and tell me a bit about
yourself on the Honor Code sheet
COURSE OBJECTIVES
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Learn about markets and securites and
evaluate their risk and return characteristics
Learn how to make sensible personal
financial decisions
Learn how investment opportunities are
evaluated in corporations
Learn to exploit computers and Internet to
your advantage in finance
COURSE PREREQUISITES
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ECO 271, ACCT 231; Junior standing
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I will assume you have an understanding of:
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Basic Algebra
Basic Statistics
Basic computers and Internet
Excel spreadsheet
General Nature of Course
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I am not kidding, this class is not going to
be easy. It’s working with LOTS of
numbers
Practice! Practice! Practice! That’s the only
way you will stay ahead
To stay ahead, you will need to spend about
2 - 3 hours per week outside of class
OPTIONAL TEXTBOOK
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Ross, Westerfield & Jordan (RWJ),
Essentials of Corporate Finance
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My class notes are based on above text
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Course packet (slides) at Copymart or
downloaded from course website
REQUIRED CALCULATOR
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Financial Calculator - HP-10B or HP-17B
preferred
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Other calculators will not be supported
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Other calculators can be used but you will be
responsible for knowing how to use them
Self-Study from WWW
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You will be required to obtain and understand
information from WWW
Details placed on webpage handout related to
class topic of the week
You will be tested and responsible for knowing
this material for the exam
Come prepared in class with answers to selfstudy questions. Maybe asked to hand-in
COURSE GRADE
Homework Assignments (4)
150
Class presentation
50
Stock Market Game
100
Attendance and Self-study WWW
50
Midterm Exams (2)
400
Final Exam (comprehensive)
250
Total
1000
Class Presentations
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In groups of 3 students
Maximum of 10 minutes
Any finance-related WSJ article
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20% choice of article
40% communication of important points,
40% new information not in article
Stock Market Game
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Invest in stocks and index mutual fund
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Follow performance using Internet and
spreadsheet
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Evaluate how you did at the end of quarter
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Learn about risk and return!
“House” Rules
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Rules outlined in the syllabus
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Attendance is required
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No makeups, no late submissions, no
exceptions
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No cheating! You and I have our mutual
honor code which you signed and handed in
Class Participation
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Participation is strongly urged
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Speak up! No question is stupid
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Chances are, others are wondering about the
same thing - don’t be shy!!
Course Outline
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Intro to securities, markets, and calculating
returns
Time Value of Money
Bond & Stock Valuation
Capital Budgeting
Diversification and Capital Asset Pricing
Model (CAPM), WACC
Class Web Page
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Announcements, handouts, lecture slides all
available at:
http://fac-staff.seattleu.edu/kshah
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Feel free to use e-mail: [email protected]
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You must include ‘FINC 340 F06’ in subject
heading of emails addressed to me
Intro to Markets &
Securites
COMMON STOCK
PREFERRED STOCK
MUTUAL FUNDS
Common Stock
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Residual Claim
Limited Liability
Right to Vote
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Elect Directors, Important Issues
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Right to Dividends
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Stock Dividends, Splits, Reverse Splits
Preferred Stock
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Fixed Dividends
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Cumulative Dividends
No Votes
Limited Appreciation
Combines Features of Common Stock and
Bonds
Stock Value
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Capital Gains
Dividends
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Factors
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Earnings Growth
Products & Services
Management
Competition & Economic Environment
Evaluating Stocks
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Book Value
Earnings per Share
Return on Equity
Payout Ratio
Annual Reports: Bal. Sheet, Inc. Stmts
Quarterly Reports
Trading Stocks
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Primary Market
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IPOs - Selling stock for the first time
Investment banks, underwriters
Prospectus
Secondary Market
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Organized exchanges and dealer networks
Trading of previously issued stock
Trading Stock...
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NYSE, Amex, OTC (Nasdaq)
Brokers
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Dealers
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Full Service, Discount, Deep Discount, On-line
Bid - Ask Spread
Liquidity
Types of Transaction
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Buying with Cash
Buying on Margin
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Borrowing part of purchase amount from broker
Short Selling
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Borrowing stock, selling, buying back later,
returning borrowed stock
Types of Orders
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Market Order
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Limit Order
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whatever is the current price in the market
specify the highest price for buying
specify the lowest price for selling
Stop Loss/Gain
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order triggered only at a certain price
Stock Quotation
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%chg YTD
52 Weeks Hi Lo
Symbol
Div
Yld %
PE
Vol
Daily Hi, Lo, Close, Net Chg
Market Indicators
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Dow Jones Industrial
S & P 500
Wilshire 5000
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International Trading
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Tokyo - Nikkei
London - FTSE ‘Footsie’
Frankfurt - DAX
International Investing
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Today’s markest are global. But it exposes you
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Currency Risk
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risk of converting currency back and forth
Political Risk
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appropriation, nationalizations, confiscation by foreign
governments
Mutual Funds
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Professional money managers investing on
behalf of other investors
Investors buy shares of mutual funds
Shares represent a claim on the investment
portfolio of mutual funds
Mutual funds can invest in stocks, bonds, real
estate, gold, etc. etc.
Types of Mutual Funds
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Closed-end Fund
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Open-end Fund
Closed-End Funds
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Shares are sold, and money raised only once
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i.e., fixed number of shares outstanding
Investors may buy/sell closed-end fund shares
on exchanges like any other company shares
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Subsequent buying/selling among investors does
not bring in/take out money from fund
Closed-end Funds...
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Shares can sell at a premium or a discount
from the per share net asset value (NAV) of the
portfolio (after accounting for expenses for
operating the fund)
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Reasons for premium/discount is not well
understood
Open-End Funds
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Continuously issue/redeem shares to/from
shareholders
Potentially unlimited # of shares
Investors buy/sell shares from the mutual fund
company
Never sells at a premium or a discount
Load v/s No-Load Funds
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No-Load Funds: no sales commission
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typically bought directly from fund mgmt
company at NAV
can be bought from brokers e.g. Schwab
Load Funds: charge sales commission
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sold through brokers or directly from fund
loads range around 3 to 5% - split between broker
& fund
Fund Expenses
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Separate from sales loads
Compensation for managing the fund
Range from .2 to 2.5%
12b-1 charges: SEC permitted use of fund
assets for sales promotion, advertising,
brokerage commission
Fund Styles
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Stock Funds
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Bond Funds
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Money Market Funds
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Index Funds
Stock Funds
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Growth vs. Income
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Sector Funds
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e.g. Hi-Tech, Health Care, Gold etc.
International Funds
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World, Europe, Asia, Latin America etc.
Bond Funds
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L. T. Gov’t Securities
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Municipal Securities
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very low risk
Tax exempt
Corporate
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High-grade, Junk Bond etc.
Index Funds
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Passive Management
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try to track performance of popular indexes
Very low expenses
Good vehicle for diversification
Available for most popular stock and bond
indexes
Fund Facts
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Most fund managers have have a hard time
beating a passive indexing strategy
No systematic difference in performance
between Load & No-load funds
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why pay load???
Index funds have very low operating
expenses
e.g. Vanguard Index 500: .19%
PREVIEW
Returns
Returns
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Returns are earned in 2 forms:
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Dividends
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Capital Gains or Losses
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Cash distribution
Rise or fall in stock value
Total $ Return = Div. Inc. + Cap. Gain
(loss)
Measuring Returns
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Dollar Returns
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Percentage Returns
Dollar Returns
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Example:
Buy 100 shares of Caterpillar at $55.
Dividends over the year are $1.40. Sell the
shares at 60.
Dollar Return?
% Return?
ANOTHER EXAMPLE
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Buy 100 shares of Microsoft at $140. No
dividends are paid. Sell Shares at $131.
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Dollar Returns?
% Returns?
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