Business and Personal Finance

1. Business and Personal Finance Chapter 9.1 Stocks & Stock Evaluation

2. Quiz True or False?? • All stocks pay dividends. • Growth stocks are generally a safe investment that attracts conservative investors. • A bull market occurs when investors are optimistic about the economy. • A defensive stock stays stable during downturns in the economy. • Capitalization is the amount of stocks issued by a corporation. • The appeal of investing in blue-chip stock is the possibility of large returns. • Corporations issue stock as a form of equity or money for the company. • The larger the Price/Earnings ratio, the better the company is doing.

3. Common Stock Stock that provides the most basic form of corporate ownership. Why Corporations Issue Common Stock: • Don’t repay the money to stockholder • A form of equity (money) for the corporation • Dividends are not mandatory.

4. Preferred Stock Why Corporations Issue Preferred Stock: • It is another method of financing • Attractsconservative investors who do not want to buy common stock. • Why do investors buy preferred stock?

5. Evaluation of a Stock Issue Types of Stock Investments (1 of 3) • Blue-chip stocks—a safe investment that generally attracts conservative investors. • Income stocks—pay higher dividends compared to other stock issues. Safer! • Growth stocks—stocks that have the potential to bring higher than average earnings. Risky!

6. Evaluation of a Stock Issue Types of Stock Investments (2 of 3) • Cyclical stocks—have a market value that tends to reflect the state of the economy. • Defensive stocks—remain stable during declines in the economy. • Large cap stocks—issued by a company with a large amount of capitalization.

7. Evaluation of a Stock Issue Types of Stock Investments (3 of 3) • Small cap stocks—issued by a company with a capitalization of $150 million or less. • Penny stocks—sell from less than $1 to $10 a share.

8. Evaluation of a Stock Issue Sources for Evaluating Stock Investments • The newspaper • The Internet • Corporate news – CNN • Statistical Averages or Stock Indices

9. Determine the value of your investments by following a statistical averages or index:1. Dow Jones IndustrialAverage (DOW) • 30 companies • 2. Standard & Poor’s 500 StockIndex • The average indicates whether the category it measures is increasing or decreasing in value. Statistical Averages

11. Evaluation of a Stock Issue Factors That Influence the Price of Stock A bull marketoccurs when investors are optimistic about the economy and buy stocks. A bear marketoccurs when investors are pessimistic about the economy and sell stocks.

12. Factors that Influence the Price of Stock • Current Yield of a Stock • (Annual Dividend ÷ Market Price of the stock) X 100 = Current Yield (%) • Total Return of a Stock • Current Return + Capital Gain = Total Return • Current Return = Dividend X the number of shares of stock • Capital Gain = (Selling price/share – Purchase price/share) X the number of shares a stockholder has • Earnings Per Share of a Company (Corporate profit) • Net Earnings ÷ Common Stock Shares Outstanding • Price-Earnings Ratio of a Company (Goal is 5-35; the lower the better) • (Market Price Per Share ÷Earnings Per Share) = Price Earnings Ratio

13. Current Yield Paul purchased jellybean.com stock. The company pays an annual dividend of $1.25/share and the stock is selling for $15.00 per share. What is the current yield? Annual Dividend/Current Market Value of the stock = Current Yield (%) $1.25/$15.00 = .0834 .0834 X 100 = 8.34%

14. Total Return Susie bought 20 shares of Verizon stock for $25.00/share. The stock pays an annual dividend of $1.45/share. Susie is going to sell her stock at the current price of $40 per share. What is the total return on her investment? • Current Return = Dividend X the number of shares of stock $1.45 X 20 shares = $29.00 • Capital Gain = (Selling price – Purchase price) X the number of shares a stockholder has ($40-$25) X 20 shares = $300.00 • Current Return + Capital Gain = Total Return $29.00 + $300.00= $329.00

15. Earnings Per Share of a Company(Corporate profit)Net Earnings/Common Stock Outstanding • Purple Hat Company had net earnings of $250,000. Their outstanding common stock was 150,000 shares. What are their earnings per share? $250,000/150,000 shares = $1.67 per share

16. Price-Earnings Ratio of a Company (Goal is 5-35; the lower the better)Market Price Per Share/Earnings Per Share = Price Earnings Ratio Goats Incorporated is selling their stock for $103 per share. Their earnings per share are $15. What is their P-E Ratio? $103/$15 = 6.86

17. Quiz True or False?? • All stocks pay dividends. • Growth stocks are generally a safe investment that attracts conservative investors. • A bull market occurs when investors are optimistic about the economy. • A defensive stock stays stable during downturns in the economy. • Capitalization is the amount of stocks issued by a corporation. • The appeal of investing in blue-chip stock is the possibility of large returns. • Corporations issue stock as a form of equity or money for the company. • The larger the Price/Earnings ratio, the better the company is doing.