Transcript Investing in Stocks Money Management Chapter 12 Notes

INVESTING IN STOCKS
MONEY MANAGEMENT
CHAPTER 12 NOTES
BUYING STOCKS
 According to our book, over 50,000 Americans own stock in more than 34,000 different publicly traded
companies! A public corporation is a company whose stock is traded openly on stock markets like the NYSE or
NASDAQ
Stocks are traded in round lots or odd lots.
 A ______________________________ is 100 shares or multiples of 100.
 An _____________________________ is less than a 100 shares.
 Brokerage Firms sometimes charge more for odd lot purchases. This is because the firm will have to
combine odd lot purchases to make a round lot purchase before they can submit the order!
COMMON STOCK
 ______________________________________________ is a class of stock in which the owner of the stock
shares directly in the success or failure of a business.
 As a shareholder you stand to profit when the company profits. You also have some say in policy
decisions like whether to issue more stock to outside buyers, changes on the board of directors etc…
 The more shares you own, the more say you have and the greater your power is.
 When the company does well, they will often pay ____________________: which are a portion of the
profits that are redistributed to the shareholders of a corporation. Dividends are usually declared once
a year.
 Common stockholders can lose all of their investment in a business if the stock bottoms out!
 Common stockholders are entitled to vote for the board of directors that runs the corporation.
 When you assign your right to vote to someone else that is known as a ________________.
PREFERRED STOCK
 In addition to common stock, investors can purchase ____________________________________.
 Dividends are fixed, regardless of how the company does, making it less risky than common stock.
 In the event the company fails, ____________________________________________________.
 The investor can only lose as much as they put in, no more!
 Preferred stockholders ________________________________________________________.
 How to Buy Preferred Stock: http://www.forbes.com/columnists/forbes/2003/0303/108.html
CLASSIFICATION OF STOCK INVESTMENTS
 How do you decide what type of stock to buy? To make analysis a bit more organized, analysts use a few
classifications:
INCOME VS. GROWTH STOCKS
 Stocks that have a consistent history of paying high dividends are known as ________________________..
 Preferred stocks are usually the investors choice if they are after income stocks.
 __________________________________ are companies that REINVEST their profits into the business so
that they can grow and expand.
 In the long run, ten or twenty years, these types of companies may be worth substantially more than
their purchase price today. Growth stocks usually pay little or no dividend.
PENNY VS. BLUE CHIP STOCKS
 When a stock sells for less than $5 per share it is classified as a ______________________________.
 Although inexpensive, penny stocks are considered highly speculative. In other words, they can grow
substantially or lose all their value. Frequently these stocks are issued by companies with a “hot” new
product that may be an enormous long-term success or merely a fad!
 ___________________________ are stocks of large well-established, and usually profitable businesses.
 Most people have heard of these companies because their products have been around for decades.
 Companies like McDonald’s, Coca-Cola, Microsoft, and Ford Motor Company are examples.
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INVESTING IN STOCKS
MONEY MANAGEMENT
CHAPTER 12 NOTES
DEFENSIVE VS. CYCLICAL STOCKS
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A ______________________________ is one that remains stable and pays dividends during an economic decline.
 Generally, companies in this category have a history of stable earnings.
 A defensive stock is not as subject to the ups and downs of business cycles.
 The demand for their products is consistent regardless of economic conditions.
 Examples include: Food, Utilities, and Health Care industries

_________________________ do well when the economy is table or growing, but do very poorly during recessions.
 Examples are airline companies and other industries based on traveling – people may feel like they can’t afford
an expensive vacation.
STOCK VALUES AND RETURN ON INVESTMENT

When you buy a stock you will pay its _________________________________.
 Market Value reflects ______________________________________________________________________.
 How a company is doing, its track record, and how well it is expected to do in the future will determine market
value.
 Stocks can be considered ________________________________ or ______________________________ if
they are selling for a price that is not justified by their earnings potential.
 You can use ratios such as Earnings per Share (EPS) and the Price/Earnings Ratio (P/E) to determine if a stock
is under or overvalued.
HOW DO YOU MAKE MONEY BUYING STOCK?
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There are two major ways:
 __________________________________________________________________________________.
 __________________________________________________________________________________
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The _______________________________________________ is how much money you make from the investment. It
is the difference between what you paid for the stock and what you sold it for, plus any dividends you earned!
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__________________________ is computed as follows:
SECURITIES MARKET
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A __________________________ is where you buy and sell __________________ – which are stocks and bonds.
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A _____________________________________ is a marketplace where brokers who are representing investors
meet to buy and sell securities.
 The largest organized exchange in the U.S. is the _______________________________________ (_______)
HOW THE NYSE WORKS…
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The trading floor is almost as big as a football field
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____________________________________________ buy and sell stocks on the floor. Only brokers who are
members of the exchange may trade there. _________________________________ are spread out about every 100
feet. All buying and selling is done at these trading posts. About ninety stocks are assigned to each post.
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Orders received at a brokerage firm are sent by computer’s to that firm’s booth at the exchange. A message is printed
out & given to the floor broker. When the trade is complete, the floor broker reports back to their brokerage firms. The
buyer and seller can be notified that the transaction has been concluded.
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Stock trading is done _________________________________ … meaning for every transaction, the highest bidder
meets the lowest seller. The NYSE is open from 9:30 am - 4:00 pm each day.
OVER-THE-COUNTER-MARKET
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When securities are bought and sold through brokers, but not through a stock exchange, the transaction is
_______________________________________________________________.
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The OTC market is ____________________________________________________________________________
___________________________________________________________________________________________.
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Brokers in the OTC market __________________________________. Trades are done via phone or computer only.
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______________________ is the largest OTC Market.
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To be listed with them the company must have at least 100,000 shares of stock worth at least 1 million.
INVESTING IN STOCKS
MONEY MANAGEMENT
CHAPTER 12 NOTES
INVESTMENT STRATEGIES
 Once stock has been acquired, your investment may be either short or long
term.
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Generally, if you buy and sell stock within a short period of time, you are considered a
______________________________________, or trader.
If you hold your investments for a long period of time (a year or more), you are considered an
_________________________________.
SHORT-TERM STRATEGY
 ___________________________________ – strategy used if you feel like a
stock price is going to drop!
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To sell short, you borrow a certain number of shares from a broker.
You then sell them at the current price and hold on to the cash.
Once the price has dropped, you buy back the correct number of shares at the lower price. This is called
“_____________________________________________________”.
You then return the correct number of shares to the broker and keep the extra money!
LONG-TERM TECHNIQUES
 As you may have already learned, investing in the stock market for the shortterm is highly speculative and extremely risky.
 Most advisors recommend long-term investment strategies instead. That’s
how to make the stock market work for you! 
 The most popular long-term investment strategy is the _____________
________.

Pick solid companies with great growth and earnings potential and HOLD on to the stock! Collect your
dividends and watch your portfolio grow!
STOCK SPLITS
 __________________________________ can also add to your investment.
 A stock split occurs when _______________________________________
____________________________________________________________.
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For example: Lets say Google believes that it’s stock is getting too expensive. They want the price to be
cut in half. So they execute a two to one (2:1) stock split.
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If you owned 100 shares of Google worth $400 per share for a total of $4,000 – you would
now own 200 shares worth $200 per share for a total of $4,000. Looks the same right?
This stock split lowers the cost of the stock and will hopefully encourage more people to buy
the stock! But now if the price goes back up to $400 again … you own twice as many
shares! That’s a pretty great deal!