Transcript Personal Financial Literacy

Chapter 12
Buying and Selling Investments
What Are Sources of Investing
Information?
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Magazines
Newspapers
Investor newsletters
Annual reports
• Company’s report to investors
about the financial position of
the company.
• Prospectus
• Legal document that offers
securities or mutual fund
shares for sale and includes
detailed description of the
securities.
• Internet
12-1 Researching Investments and Markets
Slide 2
Key Figures for Comparing Firms
• Stock Price: The amount investors are willing to pay for a share
of ownership in the company
• Number of Employees: Increases or decreases in number of
employees can reflect growth or downsizing
• Market Cap: Total value of a company in the stock market (total
shares outstanding times price per share). This figure, along
with revenue, indicates size of company.
• Revenue: The amount of money received from business
activities.
• Net Income: The amount of money after deducting all the
business expenses.
• Profit Margin: The net income divided by revenue for the same
period. “%”
Slide 3
Key Figures for Comparing Firms
• P/E Ratio: the price-earnings ratio compares the
selling price of a company's common stock to the
annual profits per share. Fast-growing or high risk
companies may have higher P/E ratios than slow
growing or low risk companies. This ratio is an
important measure of the stocks value.
• Current Ratio: measure of the company's ability to
pay its current debts from current assets. It indicates
a company's liquidity and financial strength. The
current ratio is calculated by dividing the total assets
by the total current liabilities.
Slide 4
Interpreting P/E Ratio
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N/A: A company with no earnings has an undefined P–E ratio. By
convention, companies with losses (negative earnings) are usually
treated as having an undefined P–E ratio, even though a negative P–E
ratio can be mathematically determined.
0–10: Either the stock is undervalued, or the company's earnings are
thought to be in decline. Alternatively, current earnings may be
substantially above historic trends or the company may have profited
from selling assets.
10–17: For many companies a P–E ratio in this range may be
considered fair value.
17–25: Either the stock is overvalued or the company's earnings have
increased since the last earnings figure was published. The stock may
also be a growth stock with earnings expected to increase
substantially in the future.
25+: A company whose shares have a very high P/E may have high
expected future growth in earnings, or this year's earnings may be
considered exceptionally low, or the stock may be the subject of
a speculative bubble.
What Professional Advice Is
Available?
• A stockbroker buys and sells securities
on behalf of others.
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Full-service brokers: qualified stockbroker who
provides advice about what securities to buy and
sell
o Edward Jones
Discount Broker: qualified stockbroker who buys
and sells securities at a reduced commission but
offers no advice.
o Fidelity and E*Trade
Online Brokers: Online services offered by
brokerage firms.
o TD Ameritrade
12-1 Researching Investments and Markets
Slide 6
What Professional Advice Is
Available?
• A financial planner helps people make
investment decisions to meet goals.
• Certified Financial Planner (CFP):
has taken coursework and has
passed an exam, indicating an
expertise in developing financial
plans for individuals.
• Banks and credit unions sell securities
that they endorse.
12-1 Researching Investments and Markets
Slide 7
How Are Financial Markets
Designed?
• Securities can be traded in the
primary or secondary markets.
• The primary market is where new
issues of securities are sold.
– IPO Offerings
– Visa holds the record for the
highest IPO after raising $18
billion in its debut in 2008.
• The secondary market is where
previously issued securities are
sold.
12-1 Researching Investments and Markets
Slide 8
How Are Financial Markets
Designed?
• Securities exchanges are places for brokers to buy and sell
securities for their clients.
– NYSE is one of the largest security exchanges in the world
– In an auction market, a stock is sold to the highest bidder.
Both buyers and sellers compete with others for the best
price.
• Over-the-counter market is a network of dealers and brokers
who buy and sell securities not listed on an exchange.
– NASDAQ is an electronic marketplace for over-the counter
stocks.
– This system allows investors to buy and sell stock through
their brokers.
12-1 Researching Investments and Markets
Slide 9
How Are Financial Markets
Designed?
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Direct investing involves buying securities directly from a corporation.
– No broker necessary
– Buying US government savings bonds is a form of direct
investing
Reinvesting involves getting stock dividends instead of cash
dividends.
– Stock dividend: dividend paid in the form of new shares of stock.
• A 10% stock dividend issues 10 new shares of stock for every
100 shares held.
– By acquiring more shares, investors can continue to grow their
wealth
– Stock split: occurs when a company issues more stock to current
shareholders in some proportion to the stock they already own.
• Helps keep share prices low for investors.
12-1 Researching Investments and Markets
Slide 10
Focus On . . .
Full Service or Discount Brokers?
• Discount brokers:
o Charge a smaller fee
o May charge extra for information
• Full service brokers:
o Give sound investment advice for a higher fee
• When making a choice, consider: services,
fees, location of nearest brokerage office,
minimum deposits, etc.
12-1 Researching Investments and Markets
Slide 11
How Are Stocks Bought and
Sold?
1. Set up an account.
• Choose your venue (fullservice broker, discount
broker, bank, etc.)
• Provide identification.
• Access your account
online.
• Make minimum or
regular monthly deposit.
12-2 Buying and Selling Securities
Slide 12
How Are Stocks Bought and
Sold?
2. Place transactions.
• A market order is a request to buy or sell a
stock at the current market price.
• A limit order is a request to buy or sell a
stock at a specific price.
• A stop order is a request to sell a stock
when it reaches a certain price.
• A discretionary order allows the broker to
buy or sell a stock to get the best price.
12-2 Buying and Selling Securities
Slide 13
How Do You Know When to Buy
or Sell?
• Set aside cash so you can buy and sell
stock when you need to.
• If you don’t have cash, you can use
credit.
o Selling short involves selling stock that
has been borrowed from a broker and
replacing it later.
o Buying on margin involves borrowing
money from your broker to buy stock.
12-2 Buying and Selling Securities
Slide 14
Buying Patterns
• Buy and hold is a plan to purchase and
keep stock for the long term.
• Stock turning is making regular and
systematic changes in stock ownership
based on trends in the economy.
• Watch-and-wait investing involves
making a comparative analysis of
securities periodically.
12-2 Buying and Selling Securities
Slide 15
Managing Costs
• Type of Transaction
– On the trading floor, stocks are traded in round
lots or odd lots
– Round lots: exactly 100 shares or multiples of 100
shares
– Odd lots: fewer than 100 shares of stock
– Thus, you can manage your costs of buying and
selling by purchasing in round lots and avoiding
the odd lot additional fee.
• Using Discount Brokers
– Using discount brokers will help reduce costs
– However, buying in odd lots or trading an amount
less than $1,000 usually increases the fees.
Success Skills
Reading the Stock Listings
To make wise investment choices, track the
progress of your investments in stock listings.
52 wks
P/E
Sales
Net
High
Low
Stock
Div
Yld%
Ratio
100s
High
Low
Close
Change
1
2
3
4
5
6
7
8
9
10
11
58.75
44.00
Enger
2.20
4.8
12
109
46.38
45.50
46.00
-.50
57.00
32.00
ExeB
2.50
5.7
11
48
46.00
43.00
44.00
+1.00
12-2 Buying and Selling Securities
Slide 17
What Regulatory Agencies Help
Consumers?
• Banks, brokerage
companies, and other
financial businesses are
controlled by agencies
created by Congress.
• Agencies provide
oversight to ensure that
investors’ rights are
protected.
12-3 Regulatory Agencies and Laws
Slide 18
What Regulatory Agencies Help
Consumers?
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Federal Deposit Insurance Corporation: created in 1933
as a response to the stock market crash of 1929.
– Promotes public confidence in the banking system
– Supervises banks and other financial institutions to
maintain stable and sound banking system
National Credit Union Administration
– Similar to FDIC but for credit unions
Commodity Futures Trading Commission: government
agency that regulates commodity, futures, and options
markets in the U.S.
– Protects investors against manipulation, abusive
trade actions, and fraud
12-3 Regulatory Agencies and Laws
Slide 19
What Regulatory Agencies Help
Consumers?
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Securities and Exchange Commission: primary overseer and regulator
of the U.S. securities markets.
– Maintains fair and orderly markets and promote business growth.
Department of the Treasury: government agency responsible for
economic growth of the United States.
– Maintains strong economy that creates growth and job opportunities
Internal Revenue Service: helps taxpayers understand and meet their
tax responsibilities.
– Seeks to ensure that those who owe taxes pay them
The Fed: central bank of the United States
– Sets monetary policy
– Provides financial services to the U.S. government, financial
institutions, and the public
– Supervising and regulating the banking system
– Keeps the country’s financial systems and markets stable
12-3 Regulatory Agencies and Laws
Slide 20
What Are Financial Reform
Laws?
• Sarbanes-Oxley (SOX)
sets standards for public
companies and
accounting firms for the
reporting of finances.
o Created in response to financial scandals
at large companies.
o Requires improved financial reporting,
audits, and accounting services.
12-3 Regulatory Agencies and Laws
Slide 21
Dodd-Frank Wall Street Reform
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Wall Street Reform Act aims to
create and maintain a stable
financial system.
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New consumer agency: agency sets
rules to prevent unfair practices
related to consumer loans and
credit cards
Credit scores: allows consumers to
get one free credit report a year.
Interchange fees: cracks down on debit card “swipe fees” that retailers
pay to banks when their customers buy products and services using
debit cards
Liar loans: lenders are now required to document borrowers income
o Part of the collapse was due to mortgages being made to those who
could not afford the payments
o Income was undocumented
12-3 Regulatory Agencies and Laws
Slide 22
Dodd-Frank Wall Street Reform
o Mortgage help: allows unemployed
homeowners with good credit to take out lowinterest loans to help them avoid foreclosure.
o New oversight: new ten-member oversight
council consisting of financial regulators that
will monitor financial firms and the financial
system for problems
o FDIC takeovers: FDIC new power to take over
and liquidate giant financial firms in the same
way it takes over banks whose failure would
jeopardize the financial system.
12-3 Regulatory Agencies and Laws
Slide 23