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What is Stock Spin Off - PowerPoint PPT Presentation

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Stock Spin Off is a conversion of one of a firm's subsidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders

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Dhanashri academy

Dhanashri Academy

Common Stock Investments

Key topics
Key Topics

  • Key topics include:

    • long-term perspective;

    • advantages and disadvantages;

    • characteristics, new issues, stock quotations and transaction costs;

    • measures of common stock value;

    • dividends;

    • different kinds of common stock; and

    • uses and strategies of common stock investing.

Common stock
Common Stock

  • Represents ownership in a corporation and allows investors to participate in the profits

  • Stocks offer investors the opportunity to shape an investment program to their individual needs

Stock returns
Stock Returns

  • Stock returns come mainly from capital appreciation

  • Stock market returns have averaged about 12% per year over the past 50 years, but over 18% during the past decade

Advantages common stock
Advantages: Common Stock

  • Potential for high returns; no upper limits.

  • May provide current income return from dividends.

  • Shares are highly liquid and easily transferred.

  • Transaction costs are relatively low; on-line trades can be very cheap.

  • Low unit prices relative to other securities.

Disadvantages common stock
Disadvantages: Common Stock

  • Earnings and performance are subject to wide swings.

  • Selection of common stocks is complex.

  • Current income is relatively low, compared to bonds.

Publicly traded stocks
Publicly Traded Stocks

  • Public offering

    • an offering to sell to the investing public a set number of shares of a firm's stock at a specified price

  • Rights offering

    • an offering of a new issue of stock to existing shareholders, who may purchase new shares in proportion to their current ownership position

Publicly traded stocks1
Publicly Traded Stocks

  • Stock spin-off

    • a conversion of one of a firm's subsidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders

  • Stock splits

    • a maneuver in which a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share

Publicly traded stocks2
Publicly Traded Stocks

  • Treasury stock

    • stock that has been sold and subsequently repurchased by the issuing firm

  • Classified common stock

    • Stock issued by a company in different classes, each of which offers different privileges and benefits to its holders

Buying and selling stocks
Buying and Selling Stocks

  • The investor must be familiar with stock quotes

  • The investor must also consider transaction costs

Stock quotes
Stock Quotes

  • NYSE – New York Stock Exchange

  • AMEX – American Stock Exchange


  • Published in a twelve-column format

Column titles
Column Titles

  • 52 weeks Hi

    • highest price within past year, adjusted for stock splits if any

  • 52 weeks Lo

    • lowest price w/n past year

  • Stock

    • name of company

Column titles 2 of 5
Column Titles (2 of 5)

  • Sym

    • ticker symbol; 1-3 characters on NYSE and AMEX; 4-5 on NASDAQ.

  • Div

    • annual dividend

Column titles1
Column Titles

  • Yld %

    • dividend yield based on current annual dividend divided by market price PE - price-earnings ratio based on most recent four quarters of earnings

  • Vol 100s

    • number of shares traded yesterday (in 100s)

Column titles2
Column Titles

  • Hi

    • highest price at which stock traded yesterday

  • Lo

    • lowest price yesterday Close - closing price yesterday

Column titles3
Column Titles

  • Close

    • closing price yesterday

  • Net Chg

    • change in price from close of previous day

Transaction costs
Transaction Costs

  • average 1-5% of value of transaction when using a full-service broker

  • Odd-lot trades (less than 100 shares) carry an added cost called odd-lot differential

Transaction costs continued
Transaction Costs (continued)

  • Discount brokers can save an investor up to 70% on commission

  • On-line trades can now cost less than $ 10 per trade

Measures of value
Measures of Value

  • Par value

    • the stated or face value (meaningless for investment purposes)

  • Book value

    • the amount of shareholder equity in a company; equals the amount of the firm's assets minus liabilities and preferred stock

Measures of value continued
Measures of Value (continued)

  • Market value

    • the prevailing price of a security.

  • Investment value

    • the amount that investors believe a security should be trading for, or what they think it's worth.

Dividends and earnings per share eps
Dividends and Earnings per Share (EPS)

  • The directors make the dividend decisions based on several factors.

  • Earnings per share (EPS) represents the amount that is earned per share

    EPS = (net profit after taxes - pfd dividends)

    # shares outstanding

Dividends and earnings per share eps1
Dividends and Earnings per Share (EPS)

  • Dividends are paid out of earnings, but do not have to be paid even when the firm is profitable

  • Generally, however, higher EPS lead to higher dividends

Dividends important dates
Dividends (Important dates)

  • Record date

    • date on which an investor must be a registered shareholder to be entitled to receive a dividend

  • Ex-dividend date

    • 3 business days prior to the date of record; determines if one is an official shareholder and thus eligible to receive a declared dividend

  • Payment date

    • the actual date on which the company pays the dividend

Cash dividends and the dividend yield
Cash Dividends and the Dividend Yield

  • Dividends are normally paid in cash, although stock dividends are also common.

  • Cash dividends are current income, which can be expressed as the dividend yield.

  • Dividend yield = annual dividend per share market price per share

Dividend payout ratio dpr
Dividend Payout Ratio (DPR)

  • One measure of stability of the cash dividend is the dividend payout ratio (DPR).

  • DPR = dividend per share / current market price per share.

  • A high DPR could suggest difficulty in paying future dividends.

Dividend reinvestment plans and stock dividends
Dividend Reinvestment Plans and Stock Dividends

  • Dividend reinvestment plans (DRIPs)

    • plans in which shareholders have cash dividends automatically reinvested into additional shares.

  • Stock dividend

    • A dividend payment in the form of additional shares of stock.

Market classifications of common stock
Market Classifications of Common Stock

  • Blue chip stocks

    • financially strong, high quality stocks with long and stable records of earnings and dividends.

  • Income stocks

    • Have long and sustained records of paying higher-than-average dividends.

  • Growth stocks

    • experience high rates of growth in operations and earnings.

Market classifications of common stock1
Market Classifications of Common Stock

  • Speculative stocks

    • offer the potential for substantial price appreciation, usually because of some special situation, such as new management or the introduction of a promising new product.

  • Cyclical stocks

    • Stocks whose earnings and overall market performance are closely linked to the general state of the economy.

Market classifications of common stock2
Market Classifications of Common Stock

  • Defensive stocks

    • tend to hold their own, and even do well, when the economy starts to falter.

  • Mid-cap stocks

    • medium-sized stocks, generally with market value of less than $3-4 billion, but more than $750 million.

  • Small-cap stocks

    • have market value of less than $750 million, and may offer above-average returns.

Foreign stocks
Foreign Stocks

  • Foreign equity markets

    • outperform US markets in most years

  • Investors can buy foreign stocks directly

    • Has many logistical problems

  • American Depository Receipts (ADRs)

    • Backed by foreign securities held by US banks

Foreign stocks1
Foreign Stocks

  • Both direct purchase and ADRs

    • have usual risks associated with common stocks, plus the currency exchange rate risk that drastically can affect total return.

  • Total return in US$ = dividends + cap gains (losses) + (or) - changes in FOREX rates.

Investment strategies
Investment Strategies

  • Investment strategies can be employed to satisfy one of three basic investment needs:

    • warehouse of value

    • accumulation of capital

    • and/or as a source of income

Buy and hold strategy and the high income approach
Buy-and-Hold Strategy and The High-Income Approach

  • The most basic strategy is the buy-and-hold.

    • High-quality stocks are selected and held for extended periods; a strategy popular with value-oriented investors.

  • The high-income approach

    • uses common stocks for current income. Since dividends mostly increase through time, the level of current income increases as well.

Quality long term growth and aggressive stock management
Quality Long-Term Growth and Aggressive Stock Management

  • Quality long-term growth

    • a less conservative strategy. This strategy relies on capital gains as the primary source of return.

  • Aggressive stock management

    • uses quality issues to seek attractive rates of return in a fully managed portfolio.

    • has substantial risk and requires a substantial amount of investor time.

Speculation and short term trading
Speculation and Short-Term Trading

  • Speculation and short-term trading

    • the highest risk strategy.

    • investor seeks returns from capital gains while holding the stock only a short period of time.

Using investment strategies
Using Investment Strategies

  • The first three strategies go well with the objective to use stocks as a warehouse of value

  • All five could be used to accumulate capital

  • The high-income strategy fits best with the objective of using stocks as a source of income

Popular investment strategies
Popular Investment Strategies

  • Some Popular Investment Strategies Include:

    • Growth Investing, which is investing in stocks with above average forecasts of earnings growth and high price/earnings ratios in expectation of higher returns.

    • Value Investing, which is investing in stock of companies that are out of favor with the market for some reason, as reflected by low price/earnings ratios and low prices compared to their fundamentals.

    • Sector Investing, which is an investing style based on the premise that certain industry sectors perform better during specific stages of the economic cycle.

    • Momentum Investing, which is an investing style that focuses on using relative stock price movement to determine when to buy and sell.

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