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Stocks Chapter 9
Common & Preferred StockSection 9.1 • Identify the reasons for investing in common stock • Identify the reasons for investing in preferred stock
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
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
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.
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.
Why investors purchase common stock • Income from dividends • Dollar appreciation of stock • Possibility of increase value from stock splits
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
Why corp. issue preferred stock. • Less common way to raise money • Attracts more conservative investors • Limited voting rights-when company is in financial trouble
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.
Evaluation of a stock issueSection 9.2 • How to evaluate stock investments
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.
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
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
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
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)
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
Large Cap Stocks • Capitalization= shares outstanding x market price • Large cap $10 Billion +
Mid Cap • $2 billion - $10 Billion
Small cap • Less than $2 Billion • Small companies with higher investment risk
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
Sources of evaluating Stock performance • Financial section of newspaper • Internet • Stock advisory services ( Moody’s, S& P, Value Line, Mergent’s) • Corporate news
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)
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
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
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
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
Over-the-counter Market • Network of dealers who buy and sell stocks of corporations not listed on a securities exchange. • Electronic marketplace
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
Brokerage Firms • Full service • Edward Jones, Merrill Lynch, Morgan Stanley smith barney • Discount • Charles Swabb • Online • Etrade, Scottrade, Ameritrade
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
Investment StrategiesLong-Term • Buy-and-Hold technique • Dollar Cost Averaging • Direct investment and dividend reinvestment (Drips)
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.