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Rule of 72
 Divide the number 72 by your
investment’s expected rate of return.
 Since the crash of the stock market,
it has shown a return of 10%.
 So if you divide 72 by the 10%
return, your investment should
double every 7 years.
Illustration Using Pizza
 If you bought a slice of pizza @ $2.00
a slice every week for 50 years it
would cost you $5,200.
 If you gave up that slice and invested
money instead, earning 8% interest,
you’ll have over $64,678.87.
ROI (Return on Investment)
 ROI=

(Gain from Investment – Cost of Investment)/ Cost of Investment
 If you invest $5,000 in Coca Cola shares and the value
after 10 years is now $12,500, what is your ROI?



(12,500 – 5000)/5000
=1.5x 100%
150% ROI
 Savings account = 1% ROI
 CD = 3%
 Stock Market = 8 – 12%
What is the Stock Market
The stock market plays an enormous
role in the national and global
economy. It is a way for people to
invest in a company by purchasing
small shares that represent a small
piece of company ownership known
as stock. The success of each stock
is usually dependent upon the
success of the company.
What is a stock?
 A stock is a unit of ownership in a
corporation
 The owner of a stock is called a
stockholder or shareholder
 Stockholders receive stock certificates
which is evidence of ownership
 Stockholders share in a corporation’s profits
– paid out in dividends.
 Capital Gain - If a company does well the
value of the stock you own will increase in
value
How are Stocks Traded?
 Stocks are traded in Round Lots or
Odd Lots
 Round Lots – 100 Shares or multiples of
a 100 shares of a particular stock
 Odd Lots – fewer than 100 shares of a
particular stock
Common Stock
 Common Stock – a type of stock that
pays a variable dividend and gives
the holder voting rights
 The Board of Directors (elected by
stockholders) decides the amount of the
dividend each year.
Preferred Stock
 Preferred Stock – a type of stock that pays
a fixed dividend and carries no voting
rights.
 Preferred stockholders earn the stated
dividend, regardless of how the company is
doing, making preferred stock less risky
than common stock.
 If the company fails, preferred stockholders
are paid ahead of common stockholders
What is a Penny Stock
 Penny stocks are low-priced stocks of small
companies that have no track record
 The stock usually sells for under a dollar
per share
 These companies usually have low revenues and
few assets to assure future growth
 Typical of dot-com (Internet) companies
 Occasionally a penny stock will be successful
 Considered high-risk
Income Stocks
 Income stocks – Stocks that have a
consistent history of paying high
dividends.
 Investors choose income stocks in order
to receive current income in the form of
dividends.
 Preferred stocks pay the mast certain
and predictable dividends
Growth Stocks
 Growth Stocks – Stocks in a
corporation that reinvest their profits
into the business so that it can grow.
 These corporations pay little or no
dividends.
 Investors buy growth stocks for future
capital gain.
 Growth stocks are long-term
investments
Blue Chip Stocks
 Blue Chips Stocks – stocks of large, well
established corporations with a solid record
of profitability.
 Most people have heard of these companies
because their products and services have
been around for decades.
 Example: IBM & Coca-Cola
 Blue Chip stocks are a conservative
investment. Investors choose them for
relatively safe, stable, but moderate
returns
Defensive Stocks
 Defensive Stocks – a stock that
remains stable and pays dividends
during an economic decline.
 Companies in this category have a
history of stable earnings.
 Not effected as much by the ups and
downs of business cycles.
 Examples: utilities, drugs, food, and heath
care
Cyclical Stocks
 Cyclical Stocks – do well when the
economy is stable or growing but
often do poorly during recessions
when the economy slows down.
 Examples: travel-related companies
(airlines, resorts), manufacturing
companies, agriculture.
Determining a Stocks Worth
 When you buy stock you expect to
hold it for a period of time and then
sell it, hopefully for a profit.
 Whether or not you make a profit on
the sale of your stock depends on
how much someone else is willing to
pay for it when you are ready to sell
Stock Value
 When you purchase s tock you may
receive a stock certificate or have it
help electronically
 The certificate states the number of
shares you own, name of the
company, the type of stock (common
or preferred), and the par value
 Par value – an assigned (and often
arbitrary dollar value)
Market Value of a Stock
 Market value – the price for which the
stock is bought and sold in the
market place
 Reflects the price investors are willing
to pay for the stock
 How a company currently is doing, its
track record, and how well it is
expected to perform in the future
determine market value.
Stock Price
 Several Factors affect the price you
will pay for a share of stock
 The Company’s financial situation
 Current interest rates
 The Market for the Company’s Products
and Services
 Earnings per Share
Stock Price – The Company
 When a company performs well
(making a profit) the stock is
attractive.
 Investor’s consider the company’s
earning power as well as its debt
obligations.
 If the company seems to be in a good
financial position, the stock price will
continue rising
Stock Price – Interest Rate
 When interest rates are low, people who
would normally put money into savings
accounts and certificates of deposit look
elsewhere.
 As interest rates rise, people tend to move
their money to safer investments
 When interest rates fall below the current
rate of inflation, people buy more stock and
stock prices rise.
Stock Price – The Market
 The marketplace determines a
company’s ability to sell its product or
service now and in the future.
 If a company is in a popular industry
and its products or services are
selling well, its stock price will rise
 If the demand for a particular product
or service declines, the price of the
stock will decrease
Stock Price – Earnings per Share
 Earnings per share – a corporation’s
after-tax earning divided by the
number of common stock shares
outstanding, that is, shares in the
hands of investors.
 Stockholders use earnings per share
as a measure of a company’s
profitability.