Chapter 12 Buying and Selling Investments

What Are Sources of Investing Information?

• 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

What Professional Advice Is Available?

• A

stockbroker

buys and sells securities on behalf of others.

o Full-service brokers: qualified stockbroker who o o 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 5

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 6

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 7

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 8

How Are Financial Markets

• •

Designed?

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 9

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 10

How Are Stocks Bought and Sold?

1. Set up an account.

• Choose your venue (full service broker, discount broker, bank, etc.) • Provide identification.

• Access your account online.

• Make minimum or regular monthly deposit.

12-2 Buying and Selling Securities Slide 11

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 12

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 13

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 14

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 High Low 1 2 Stock 3

58.75

44.00

Enger

Div 4

2.20

57.00

32.00

ExeB 2.50

Yld% 5 P/E Ratio 6

4.8

12 5.7

11

Sales 100s 7

109

High 8

46.38

Low 9 Close 10

45.50

46.00

48 46.00

43.00

44.00

Net Change 11

-.50

+1.00

12-2 Buying and Selling Securities Slide 16

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 17

What Regulatory Agencies Help

• • •

Consumers?

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 18

What Regulatory Agencies Help

• • • •

Consumers?

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 19

•

What Are Financial Reform Laws?

Sarbanes-Oxley (SOX)

sets standards for public companies and accounting firms for the reporting of finances.

o o Created in response to financial scandals at large companies.

Requires improved financial reporting, audits, and accounting services.

12-3 Regulatory Agencies and Laws Slide 20

Dodd-Frank Wall Street Reform

•

Wall Street Reform Act aims to create and maintain a stable financial system.

o New consumer agency: agency sets rules to prevent unfair practices related to consumer loans and credit cards o o 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 o 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 21

Dodd-Frank Wall Street Reform

o o o Mortgage help: allows unemployed homeowners with good credit to take out low interest loans to help them avoid foreclosure. New oversight: new ten-member oversight council consisting of financial regulators that will monitor financial firms and the financial system for problems 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 22