CHAPTER 12

1. CHAPTER 12 Investing in Stocks

2. Types of Stock • Nearly 50 million people in the United States own stocks. • There are more than 34,000 publicly held corporations for you to choose from if you decide to become a stockholder. • A public corporation is a company whose stock is traded openly on the stock markets.

3. Common Stock • Class of stock in which the owner of the stock shares directly in the success or failure of a business. • Stockholders profit when the company profits. • Have a say in policy decisions. • The more shares you own, the more voting power. • Dividends are the part of the profits of a corporation that each shareholder receives. • Stockholders can lose all their investment should the company fail. • Common stock owners can only lose what they have invested in the stock. • Stockholders may vote in person or in proxy. Transfer your voting rights to another person. • Board of Directors are the people elected by the stockholders to guide a corporation.

4. Preferred Stock • Dividends are fixed. • Less risky than Common Stock. • If the company would fail, the stockholder would be paid first. The stockholder can never lose more than he or she has invested in the stock. • No voting privileges. • Participating Preferred Stock • The required dividend is paid to preferred stockholders. • A stated dividend is paid to common stockholders. • The remainder of the earnings available for distribution is shared by both the preferred and common stockholders. • Cumulative Preferred Stock • A stock issue whose unpaid dividends accumulate and must be paid before any cash dividends are paid to common stockholders. • Owners of cumulative preferred stock would receive their dividends first, including previous year, before common stockholders receive any dividends.

5. Income Stocks Stocks that have a history of paying high dividends. Investors receive current income in dividends. Retired people and others investing for income. Growth Stocks Shares of stock that reinvest their profits into the business so that it can grow and expand. Long term Pay little or no dividends. Classification of Stock Investments

6. Penny Stock Less than $5 a share. Highly speculative-they grow or lose substantially in value. Blue Chip Stocks Well established and profitable companies. Been around for decades. Automobile production Computer manufact. Gasoline refining Banking service Classification of Stock Investments

7. Defensive Stock Stays stable and pays dividends during decline. History of stable earnings. Not subject to ups and downs of business cycle. (utilities,drugs, food, healthcare) Cyclical Stock Depends on the economy. Airlines Manufacturing Co. Travel Classification of Stock Investments

8. ENRICHMENT ACTIVITY • Divide class into 4 groups. • Health care stocks • Entertainment stocks • Automobile stocks • Fast food stocks • Explain the trend of stock prices in the last 10 years.

9. Stock values and the return on an Investment • Stock certificate is the evidence of a stock purchase. • Company name • Number of shares • Type of stock (Common/Preferred) • Par value • Market value (what you pay for the stock) reflects the price investors are willing to pay for a share of stock. • How a company is currently doing. • Track record. • Expectations for the future. • Par value is the dollar value printed on a stock certificate.

10. Factors that affect the price of a share of stock!!!! • The company • If company is doing well, profit, prices will rise. • Profit makes the stock attractive. • Interest Rates • Low=more profitable places to invest • High=safer, less risky • The market • Products and services selling well, stock prices go up. • Products and services not doing well, prices drop. • Earnings per share • A corporations after tax earnings divided by the number of common stock shares outstanding. • Most stockholders consider the amount of earnings per share important because the computation is a measure of a company’s profitability.

11. Computing a Stock’s ReturnFiguring a stock’s one-year return:Current Price+Dividends - 1 X 100 = Return on InvestmentPurchase Price+CommissionExample: Current stock price: $40/share Dividends received during the year: $1/share Purchase price: $38/share Stockbroker’s commission: $125 Number of shares owned: 100Computations:(100 X $40) + (100 X 1) - 1 X 100(100 X $38) + 1254,000 + 100 = 4,100 = 1.04458 - 1 = .04458 X 100 = 4.46%3,800 + 125 3,925

12. Bear Market • Develops when investors are pessimistic about the overall economy and start selling stocks. • A period of falling stock prices of perhaps 15 percent or more. • Usually short and savage.

13. Bull Market • Rising stock prices and general feeling of investor optimism. • Optimism about how the country is doing also serves to drive up stock prices. • Last three or four times as long as a bear market.

14. SECURITIES EXCHANGE • Marketplace where brokers who are representing investors meet to buy and sell securities. • Largest in the US-New York Stock Exchange (NYSE). Located in New York City at Wall and Broad St. Trading floor is about 2/3 size of a football field. • A company must have at least 1.1 million publicly owned shares with a market value of at least $9 million. • NYSE securities are traded only during official trading hours -9:30am to 4pm New York time, Monday through Friday. (Except holidays) • American Stock Exchange is also in New York City. • Company must have at least 250,000 shares worth $2.5 million.

15. (OTC) Over-the-Counter Market When securities are bought and sold through brokers, but not through a stock exchange. A network of brokers who buy and sell the securities of corporations that not listed on the securities exchange. Do not deal with the broker face-to-face. Trades are completed by telephone and computers. Brokers operating in the OTC market use an electronic quotation system called NASDAQ. National Association of Securities Dealers Automated Quotation System. To be listed with the NASDAQ, companies must have issued at least 100,000 shares worth $1 million.

16. INVESTMENT STRATEGIESShort-Term Techniques • Buying On Margin • Margin Agreement is a contract when you can borrow money from your broker to buy stock if you open a margin account • Must deposit a minimum of $2,000 in cash or securities. • Selling Short • Selling stock borrowed from a broker that must be replaced at a later time. • You borrow a stock certificate for a certain number of shares from a broker. You sell borrowed stock knowing that you must cover you short position at a later date. You cover your position by buying the stock at a lower price than the price it sold for. Then use the stock purchased to replace the stock borrowed from the broker.

17. INVESTMENT STRATEGIESLong-Term Techniques • Buy and Hold • After a number of years the stock will gain value. • Long term thinking. • Paying of dividends-steady, predictable source of income • Dollar-Cost Averaging • Involves the systematic purchase of an equal dollar amount of the same stock at regular intervals. • Avoid buying high and selling low. • Direct Investment and Dividend Reinvestment • Investors can buy stock directly from a corporation. (Direct Investment) • Broker fee is reduced or absorbed. • Dividends can be used to purchase new shares of stock. (Dividend Reinvestment) • Avoids broker fee.

18. STOCK LISTINGS • Columns 1 and 2- Highest and lowest price this stock sold for during the year. • Column 3- Lists the stocks in alphabetical order. • Column 4- Shows the cash dividend per share that is estimated for the year. • Column 5- Percent yield- percentage of the current price the dividends represent. • Column 6- P/E ratio (Price/Earnings Ratio)- the price of a share of stock dividend by the corporation’s earnings per share over the last twelve months. • Column 7- Sales in hundreds shares from the previous day-how many were bought and sold. • Column 8,9, and 10- Show the highest, lowest, and closing price from the previous day. • Column 11- “Net Change”- Compares the closing price today with the closing price of the day before.