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  1. Stocks Chapter 9

  2. Common & Preferred StockSection 9.1 • Identify the reasons for investing in common stock • Identify the reasons for investing in preferred stock

  3. Why it’s important • Recognizing the reasons for investing in common and preferred stock will enable you to make the best investments for your financial situation

  4. Common Stock • Stockholders – owners of shares of stock in the company • (earn a return or gain on investment) • Money used to: • Make & sell products • Fund company operations • Expand

  5. Types of corporations • Private- aka, closely held corporation, is one whose shares are owned by a relatively small group of people and are not openly trades in stock markets. • Public-aka, publicly held corporation, is one that sells its shares openly in stock markets where anyone can buy them.

  6. Reasons to sell stock to fund business activities • A form of equity –corp. do not have to repay the money a stockholder pays for stocks • Dividends not Mandatory-board of directors will make the decisions about paying dividends • Voting Rights and control of company-stockholders can vote on company business. 1 vote for 1 share of stock • Proxy-transfers voting rights to someone else • Preemptive rights-gives current stock holders the right to buy new stock issues before the public.

  7. Why investors purchase common stock • Income from dividends • Dollar appreciation of stock • Possibility of increase value from stock splits

  8. Stock Split Example

  9. Preferred Stock • Gives the owner the advantage of receiving cash dividends before common stock holders receive cash dividends • You will know the dollar amount of the dividend • Par value-assigned random dollar value that is printed on a stock certificate

  10. Why corp. issue preferred stock. • Less common way to raise money • Attracts more conservative investors • Limited voting rights-when company is in financial trouble

  11. Why investors purchase preferred stock • “middle investment” • Cumulative preferred stock-unpaid dividends build up and must be paid before common stockholders • Convertible preferred stock-may be exchanged for a specificed number of common shares • Participation feature-allows preferred stockholders to share in the corp’s earnings with common stockholders.

  12. Evaluation of a stock issueSection 9.2 • How to evaluate stock investments

  13. Why it’s Important • Understanding how to evaluate stocks and learning how they are bought and sold will help you invest in stocks wisely and increase the value of your investments.

  14. Categories of stocks • Blue chip stocks-Safe investment that attracts consevattive investors. • Strongest and most respected companies • Look for leadership in industry, history of stable earning, consistency in dividend payemnts • Ex. AT&T, GE, Kellogg

  15. Income Stock • Pays higher than average dividends compared to other stock issues • Dividends are predicable • Ex: Bristol-Myers Squibb, Dow Chemical and gas and electric companies

  16. Growth Stock • Potential earnings may be higher than the average earnings predicted for all the firms in the country. • Usually do not pay dividends • Engaged in activities that produce higher earnings/sales. • i.e. Building new facilities, R &D, new high quality products • Examples for ‘90s Home Depot, SWA

  17. Cyclical Stocks • Market value tends to reflect the state of the economy • Buy while inexpensive, but before recovery • Sell before economy declines • Examples: Ford, Centex (construction)

  18. Defensive Stock • Remains stable during declines in the economy • Steady earnings, continue dividend payments in economic decline • Many blue chip and income stocks may be considered defensive stocks. • Examples: Proctor and Gamble

  19. Large Cap Stocks • Capitalization= shares outstanding x market price • Large cap $10 Billion +

  20. Mid Cap • $2 billion - $10 Billion

  21. Small cap • Less than $2 Billion • Small companies with higher investment risk

  22. Penny Stock • Sells for less than $1 a share typically, • But could sell for up to $10 • New companies • Sales very unsteady • Wild fluctuation in stock price • Risky

  23. Sources of evaluating Stock performance • Financial section of newspaper • Internet • Stock advisory services ( Moody’s, S& P, Value Line, Mergent’s) • Corporate news

  24. Factors that influence price • Bull market-increase in market, optimistic • Bear market- decline, pessimistic • Current yield • Total return • Earnings per share • Price-earnings ration ( P/E)

  25. Buying and Selling StockSection 9.3 • Describe how stocks are bought and sold • Explain the trading techniques used by long-term investors and short-term speculators

  26. Primary Markets for Stock • Primary market- investors purchase securities from a corporation through and investment bank or other representative. • Such investors are: commercial banks, insurance companies, pension funds, mutual funds

  27. Secondary Market • After stocks are sold on the primary market they are sold on the secondary market. • Secondary market-where existing financial securities are currently trades among investors on securities exchanges or through the over-the counter market

  28. Security Exchanges • Market place where brokers who represent investors meet to buy and sell securities. • NYSE (NYSE) • American Stock Exchange (AMEX) • Regional exchanges: Chicago, san Francisco, Boston • Foreign Exchanges: Tokyo, London, Paris

  29. Over-the-counter Market • Network of dealers who buy and sell stocks of corporations not listed on a securities exchange. • Electronic marketplace

  30. Account Executive • Stockbroker, Licensed individual who buys and sells securities for clients. • Portfolios-all securities held by investor • Commission- fee charged by brokerage firm for buy/selling your securities • Churning- buy/selling a lot to collect more commission

  31. Brokerage Firms • Full service • Edward Jones, Merrill Lynch, Morgan Stanley smith barney • Discount • Charles Swabb • Online • Etrade, Scottrade, Ameritrade

  32. Stock transactions • Market order-request to buy or sell stock at current market price • Limit order-request to buy or sell stock at a specified price. • Stop order-a type of limit order to sell a particular stock at the next opportunity after its market price reaches a certain amount

  33. Investment StrategiesLong-Term • Buy-and-Hold technique • Dollar Cost Averaging • Direct investment and dividend reinvestment (Drips)

  34. Short-term techniques • Buying on margin-borrow money from brokerage firm to purchase stock • Selling short- selling a stock that has been borrowed from a brokerage firm and that must be replaced at a later date.