Transcript Investing in Stocks Chapter Sixteen

Chapter 14:
Investing in Stocks and Bonds
Objectives
 Describe stocks and bonds 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.
Objectives
 Describe the major characteristics of
bonds.
 Differentiate among the four general types
of bonds.
Objectives
 Describe what the investor should
consider before investing in bonds,
particularly the current yield and yield to
maturity.
 List the advantages and disadvantages of
investing in bonds.
Stocks and Bonds and How They are
Used
 Common stock
 Preferred stock
 Bonds
Investing in Stocks
 Why do corporations issue common
stock?
 Equity financing
 To raise money to start, expand or
help pay for ongoing business
expenses
 They don’t have to repay the money
 Dividends are not mandatory
 Stockholders have voting rights-proxy
Why Do Investors Purchase Stock?
Income from dividends
Dollar appreciation
of stock value (averaged
10% since 1926).
Increased value from
stock splits
Percentage of People in Different
Age Groups That Own Stocks
Income from Dividends
 Dividends can be paid in:
 Cash
 Additional stock
 Company products
 Who is entitled to the dividends?
 Record Date
 Ex-dividend Date
Dollar Appreciation of Stock Value
100 shares of common stock purchases January 5,
2007 and were sold January 5,2010; total dividends of
$4.97 per share for the four years.
Cost when purchased
Return when sold
100 shares @$57 = $5,700 100 shares @$71 = $7,100
Plus commission + 35 Minus commission
-35
Total investment $5,735 Total return
$7,065
Transaction summary
Total return
Minus total investment
Profit from stock sale
Plus dividends
Total return from the transaction
$7,065
- 5,735
$1,330
+497
$1,827
Stock Split
• 2:1
• 3:1
• 3:2
• Firm’s management usually has a theoretical stock price
range for the firm’s stock.
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
 Conversion feature
 can be traded for shares of common stock
Characteristics of Common Stock
Blue Chip
Cyclical
Defensive
Growth
Income
Large Cap
Mid Cap
Small Cap
Micro Cap
Penny Stock
Language of Stock Investing
 Earnings per share (EPS)
 After tax earnings divided by the number of
outstanding shares of common stock.
 Price/earnings ratio (P/E ratio)
 Price of a share of stock divided by the
corporation’s EPS.
 Dividend payout ratio
 Annual dividend amount divided by EPS
Historical
information
Language of Stock Investing
 Price/Earnings to Growth Ratio: A Look to
the Future
 Step 1: Determine the projected change
 Step 2: Use the PEG formula
 PEG = Price earnings ratio divided by annual
EPS growth.
Language of Stock Investing
 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
Buying and Selling Stocks
 Primary market
 Initial Public Offering (IPO)
 Secondary market
 Security Exchange
 New York Stock Exchange
 Regional Exchange
 Over the Counter Market
 Nasdaq
Brokerage Firms
 Full Service
 Discount
 Online
Completing Stock Transactions
 Market Order
 Limit Order
 Stop Order
 Day Order, Week Order, Month Order or
Good Until Canceled (GTC) Order
Long-Term Investment Strategies
 But-and-Hold
 Dollar Cost Averaging
 Direct Investment
 Dividend Reinvestment Plan (DRIP)
Short-Term Techniques
 Day Trading
 Buying on Margin
 Selling Short
 Trading in Options
Make a Decision to
Sell Stocks
 1. Stock reaches target price.
 2. Favorable development temporarily push up
price.
 3. Good profits unlikely to continue.
 4. Stock lags behind others in industry group.
 5. Company profits begin to fall short of
projections.
 6. Industry/company prospects are deteriorating.
 7. Losses are moderate.
 8. Stock’s price/earnings ratio appears too high.
Language of Bond Investing
 Registered and bearer
 Callable
 Warrants
 Convertibility
Language of Bond Investing
 Indenture
 Face value, coupon rate, maturity date
 Secured and unsecured
 Senior and subordinated
Types of Bonds
 Corporate bonds
 U.S. government securities
 Treasury bills, notes, and bonds
 Federal agency issues
 Municipal Bonds
Considerations Before Investing in
Bonds
 Susceptibility to certain risks
 Credit
 Callability
 Inflation
 Interest rate
Considerations Before Investing in
Bonds
 Premiums and discounts
 Current yield
 Yield to maturity
 Tax-equivalent yields
 When to sell
Formula 14.2
Formula 14.3
Advantages of Investing in Bonds
 Pay higher interest rates than savings
 Offer safe return of principle
 Have less volatility than stocks
 Offer regular income
 Require smaller initial investment
Disadvantages of Investing in Bonds
 No hedge against inflation
 Can be quite volatile
 Compounding is almost impossible
 Subject to investors tax rate
 Poor marketability