Download Week10.2 Stocks - B-K

Personal Finance
Stocks (Equities)
Bill Klinger
Personal Finance
• Review
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Asset classes
Types of risk
Measuring risk
Calculating returns
Taxes on returns
Equities
• Common Stock
– Share of ownership in a company.
– Common stock owners can vote on major company
decisions
– They expect to receive cash dividends and to benefit from
capital gains. (Often no dividends are issued.)
• Preferred Stock
– Stock whose holders receive preference in the payment of
dividends
– Seldom confers voting rights
– Dividends are fixed
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Equities
• Convertible Securities
– Bonds or stock that contains a conversion feature
– Gives the holder the right to exchange their securities for a fixed
number of shares of common stock
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Buying Stock
• Stock exchanges
– NYSE, AMEX
– Over-the-counter, e.g. NASDAQ
• Brokers
• Bid-ask spread
• Commissions
Stock Quotations
Source: finance/yahoo.com 1/12/17
Stock Quotes
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Bid – what a person is willing to pay
Ask – what a person wants for the stock
Market Cap – Value of the company = price x (# shares)
P/E – Price/earnings ratio = price / EPS
– The higher the P/E, the more the market thinks the company’s
profits will grow
• EPS – earnings per share,
– the profit on one share of stock = net income / # shares
• Dividend – dividend paid per share of stock
– ( N/A means no dividends are paid )
• Yield – dividend / price. ( N/A means no dividends are
paid )
Buying and Selling Securities
• Brokerage Firm—financial intermediary that buys
and sells securities for individual and institutional
investors.
• E*trade: An Online Brokerage Firm
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Costs of Trading
• When investors buy or sell securities through a
brokerage firm, they pay a fee
• These costs vary widely among brokerage firms
• A full-service firm charges higher fees, but provides a
large number of services and offers investment
advice
• A discount firm charges lower fees, but offers less
advice and fewer services
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Buying and Selling Securities
• Placing an Order
– A market order instructs a brokerage firm to obtain the highest
price possible – if the investor is selling – or the lowest price
possible – if the investor is buying
– A limit order instructs the brokerage firm not to pay more than a
specified price for stock if the investor is buying, or accept less
than a specified price if the investor is selling
• Buying on margin
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Borrow a portion of funds to purchase
Fed limits margin to 50%
Subject to margin call if value drops
Using leverage
• Short selling
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– Sell stock you don’t own now
– Purchase at a later date
Equity Returns
• Dividends
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Optional
Usually quarterly
Sometimes one-time event
Not guaranteed for common stock
• Change in price
– Based on investors’ view of a firm’s future
– Will cause a capital gain or loss
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Not All Risk is the Same
Firm Risk =
Business
Cycles
Systemic risk
Financial
Markets
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Global
Conditions
Idiosyncratic Risk
Risk Unique to the
Firm
Source of Correlation
Idiosyncratic risk can be diversified away!
Stock Indexes
• Reflect the general activity of the stock market
• Most common indices
– Dow Jones Industrial Average (the Dow or DJIA),
– Standard & Poor’s 500 (S&P 500),
– NASDAQ composite
• Foreign indices
– DAX (Germany)
– FTSE, FT-100 or “Footsie” (London),
– Nikkei (Tokyo)
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How’s the Market Doing?
• Bull market
• Bear market
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In Class
• In groups of two
– Chapter 15 Financial Planning Exercises