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Investing In Stocks & Bonds Chapter 14

Investing In Stocks & Bonds Chapter 14. Personal Finance FIN 235. Stocks (Common & Preferred). Common Stock Basic form of corporate ownership Common stockholders have voting power Amend the corporate charter Approve mergers and acquisitions Elect directors

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Investing In Stocks & Bonds Chapter 14

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  1. Investing In Stocks & BondsChapter 14 Personal Finance FIN 235

  2. Stocks (Common & Preferred) • Common Stock • Basic form of corporate ownership • Common stockholders have voting power • Amend the corporate charter • Approve mergers and acquisitions • Elect directors • Raise ne capital (debt and equity) • Residual claim on income and assets • Motives for Purchasing Common Stock • Receive dividends (if paid) • Participate in capital growth

  3. Stocks (Common & Preferred) • Preferred Stock • Preferred claim on dividends • May have one of several features; • Cumulative • Participating • Convertible • Typically non-voting except if several dividend payments in a row are unpaid.

  4. Evaluating Stock Investments • What makes a particular stock an attractive investment? • Good growth opportunities • Good dividend yields • Market leader • Good management • How do we find out about these stocks? • Research reports: Barron’s, Investor’s Business Daily • Brokerage recommendations (in-house research) • Investment websites: Zack’s, Motley Fool, The Street.Com • Individual Company websites • Stock Advisory Services: Value Line, Standard & Poor’s, Mergent • Magazines: Forbes, Business Week, Fortune, Money, Inc.

  5. Important Decision Factors • Earnings and Earnings Growth • Earnings Per Share: trailing vs. forecast • P/E ratio • PEG ratio • Dividends • Dividend growth rates • Coverage • Industry Characteristics • Growth • Mature • Declining

  6. Stock Markets • Primary • Where new issues are sold: e.g. IPO • Investment Bankers dominate this market • Secondary Markets • Where “seasoned” issues are traded. • Examples; New York Stock Exchange, Nasdaq (OTC) • Securities Exchanges • Specialists (provide liquidity) • Floor Traders (execute public trades)

  7. Brokerage Services • Full Service (Retail) • Best place to start for individual new to investing • More expensive to trade • Research reports available • Discount Brokers • Best for experienced traders • Do your own research • Less expensive • Online • Same as above, but typically higher incidence of trades • Investors totally comfortable with online training • Least expensive way to trade.

  8. Details of Stock Transactions • Types of Orders • Market: willing to buy at ASK, sell at BID • Immediate execution • Limit: will trade at specified price • Deferred execution • Stop: order becomes active when stop price is “hit” • Stop [Sell] Loss: sell position when price gets too low. • Stop Buy: add to position if prices start to move up. • Day Order: if no execution, automatically cancelled • Good till Cancel (GTC): stays active until executed • Fill or Kill: get it now or cancel order • All or Nothing: for large orders

  9. Commission Schedules • Retail Brokers • By the size of the order • Online / Discount • Flat fee for trades up to 1000 shares. • More expensive if broker assisted. • Bid-Ask Spread • Cost of liquidity • Bid = highest price of unexecuted orders to buy • Ask = lowest price of unexecuted orders to sell

  10. Investment Strategies • Short-Term • Attempting to time the market • Expensive and risky • Long-Term • Buy and Hold • Occasional trading to rebalance portfolio or take profits • Dollar Cost Average • Buying [small] dollar amounts of an issue over time. • Most popular technique with mutual funds and retirement plans

  11. Investment Strategies • Long versus Short Positions • Long: expect prices to go up • Short: expect Prices to go down • Buying on Margin • Borrow money from broker to finance purchase • Maximum margin = 50% • Margin requirement controlled by Federal Reserve • Selling Short • Margin Account • Borrow stock and sell it • Buy stock back and return: trick is to buy back at a lower price. • Example: Sell ABC short at $50, then buy back later at $40 • Short sellers always expect stock price to decline.

  12. Options and Futures • Options • Right but not obligation to buy (call) or sell (put) a stock • Contracts are for round lots (100 shares) • Price of an option is called a premium. • Options have relatively short lives (6 – 7 months) • Exception: LEAPS – run up to two years. • Options can be used to Speculate or to Hedge • Speculate: bet on market move in one direction • Hedge: protect an underlying stock position

  13. Options and Futures B. Futures • Used to speculate or hedge commodity positions • Commodities: • Financial (bills and bonds) • Industrial (lumber, copper, gold) • Agricultural (wheat, corn, cocoa) • Exchange (Euro, Swiss Franc, UK Pounds) • Require greater net worth than stocks • Many hazards associated with futures trading

  14. HOMEWORK • Do the Math: 1, 2, 4 • Be Your Own Personal Financial Planner • 2 – Compare different stocks as Investment (w/s 54) • 5 – Current Yield (w/s 58)

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