Transcript Investing in Stocks Chapter Sixteen

Chapter 14:
Investing in Stocks
Objectives
 Describe stocks and how they are used
by corporations and investors.
 Define everyday terms in the language of
stock investing.
 Classify stock according to their basic
descriptive categories.
Stocks and Bonds and How They are
Used
 Common stock
 Voting rights
 Proxy Vote
 Preferred stock
 Cumulative
 Convertible
Investing in Stocks
 Why do corporations issue common
stock?
 To raise money to start or expand a
business
 To help pay for ongoing business
expenses
 They don’t have to repay the money
 Dividends are not mandatory
 Stockholders have voting rights
Why Do Investors Purchase Stock?
Income from dividends
 Record Date
 Ex-dividends
Dollar appreciation
of stock value
Increased value from
stock splits
Return on Investment
Assumptions:
100 shares of common stock purchased April 18, 2014,
sole April 18, 2015; total dividends of $2.21 per share for
the investment period.
Cost when Purchased
Return when Sold
100 shares @ $42.75 = $4,275
100 shares @ $56.25 = $5,625
Plus commission
+ 29
Minus commission
Total investment
$4,304
Total return
Transaction Summary
Total return
$5,591
Minus total investment
- 4,304
Profit from stock sale
$1,287
Plus dividends
+ 221
Total return for the transaction
$1,508
- 34
$5,591
Common vs. Preferred Stock
 Common stock
 get dividends depending on profit the
company makes
 Preferred stock
 receive cash dividends before common
stock holders
 pre-determined dividend rate
 most preferred stock is callable
Features of Preferred Stock
 Cumulative preferred stock
 unpaid cash dividends accumulate and are
paid before cash dividends to common stock
holders
 Participation feature
 rare form of investment
 can share in earnings beyond stated dividend
amount
 Conversion feature
 can be traded for shares of common stock
Classifications of Common Stock





Income stocks
Growth stocks
Cyclical stocks
Defensive stocks
Large cap stocks
 Capital > $5 billion
 Mid cap stocks
 Capital between $1 billion and $5 billion
 Small cap stocks
 Penny stocks
Types of Stock Investments
 Blue chip stock
 low risk
 consistent dividends
 ex. AT&T, Kellogg's, General Electric
 Income stock
 higher than average dividends
 ex. utility stock
Types of Stock Investments
(continued)
 Growth stock  earns above average profits
 low or no dividends
 Profits reinvested in
company, so...
 Stock price
should go up
 ex. Microsoft or Intel
Types of Stock Investments
(continued)
 Cyclical stock
 follows business cycles of advance
and declines in the economy
 ex. new construction, cars, timber
 Defensive stock
 remains stable even if the economy is
declining
 ex. food and utility stocks
Stock Advisory Services
 A good supplement to information in
newspapers
 Charge a fee
 Hundreds to choose from
 Standard and Poor’s reports
 Value Line
 Moody’s Handbook of Common Stock
 On-line services allow access to web sites
such as quote.yahoo.com and
smartmoney.com
Numeric Measures to Consider
When Evaluating a Stock
 Look at book value of one share
 net worth of company divided by the
number of outstanding shares
 if a share costs more than the book value
the company may be overextended or it
may have a lot of money in research and
development
Numeric Measures to Consider
When Evaluating a Stock (continued)
 Look at the price earnings ratio
 also called the P-E
 price of one share of stock divided by the
earnings per share of stock over the last 12
months
 a low number means could be a good time to
buy it, however many technology stocks have
high P-Es
 Look at the beta for the stock
 stock with a beta >1.0 means more volatility
Earnings Per Share
Earnings Per Share are a corporation’s after-tax income
divided by the number of outstanding shares:
Assume XYZ Corporation has after-tax earnings of
$2,500,000. Also assume that XYZ has 1,000,000 shares of
common stock. This means their Earnings per share would
be $2.50:
After-tax income
Earnings per share = Number of shares outstanding
$2,500,000
1,000,000 = $2.50
Price-Earnings Ratio
The price of a share of stock divided by the corporation’s
earnings per share of stock.
Using the example in the last slide, the Earnings Per Share
were $2.50. Assume that XYZ’s stock is selling for $50 per
share. Their P/E Ratio would be 20:
Price per share
Price-earnings (P/E) ratio = Earnings per share
=
$50.00
$2.50
= 20
Dividend Payout
Dividend payout is the percentage of a firm’s earnings paid
to stockholders in cash. Assume Ford Motor Company paid
out an annual dividend of $0.40 per share. Also assume
Ford Motor Company earned $1.44 share. The Dividend
Payout would be 28%:
Dividend payout =
=
Dividend amount
Earnings per share
$0.40
$1.44 = 0.28 = 28%
Current Yield
Current yield is the yearly dollar amount of income
generated by an investment divided by the investment’s
current market value. Assume Ford is currently selling for
$10 per share. The current dividend yield is 4%:
Annual income amount
Current yield =
Market value
$0.40
Current yield = $10.00 = 0.04 or 4%
Buying and Selling Stocks
Primary Market
Initial Public Offering (IPO)
Secondary Market
Security Exchange
New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
Regional Stock Exchanges (Chicago, San
Francisco, Philadelphia, Boston, etc.)
Over-the-Counter Exchange
NASDAQ
A Sample Stock Transaction
Market Order
Day Order
Week Order (Good This Week, GTW)
Month Order (Good This Month, GTM)
Limit Order
Stop Order
Long-Term Investment Strategies
Buy-and-Hold Technique
Dollar Cost Averaging
Value Cost Averaging
Direct Investment and Dividend
Reinvestment Plans
Direct Investment Plan allows you to purchase stock directly
from a corporation without having to use an account
executive or a brokerage firm.
Dividend Reinvestment Plans (DRIP) allows you the option
to reinvest your cash dividends back into your portfolio to
purchase additional shares of stock.