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SECTION 9-1
Investors have a choice of
, which are all of the
investments– stocks, bonds,
mutual funds, options, and
commodities that are bought
and sold on the stock market.
When investors buy shares of stock in a company.
The company uses the money to:
1. make and sell its products
2. fund its operations
3. Expand
If the company earns a profit, the stockholders earn a
return, or a gain, on their investment.
People buy and sell stock for one main reason:
They want a larger return than
they can get from more
conservative investments, such as
savings accounts or government
bonds.
company that issues
stock to a small amount of people. These stocks are NOT traded on
the stock market.
:
company that sells its
shares openly in stock market, where anyone can buy them
HOW DO INVESTORS MAKE MONEY ON STOCKS?
Investors will purchase shares of stock from a company and if a
company’s stock price will increase, the investor can sell and then make
a profit.
Some things that can affect stock prices (positively or negatively)
include:
1. Supply and demand (the more people that want the stock
“demand” the higher the price)
2. Expected sales revenues
3. Earnings
4. Company expansions
5. Merger announcements
MOST INVESTORS PURCHASE COMMON STOCK TO
MAKE MONEY 3 WAYS
1.Income from dividends
2.Appreciation of Stock Value
3.Increased Value from Stock Splits
a sum of money paid
regularly (typically quarterly) by a company to
its shareholders out of its profits (or reserves).
A company does not have to pay dividends, but
they like to keep their shareholders happy.
Each shareholder would receive an equal amount
per share.
STOCK SPLITS
Your profits can increase through a stock
split. A stock split occurs when the shares
of stock owned by existing stockholders
are divided into a larger number of
shares.
2 FOR 1 SPLIT
In a 2 for 1 split, you would NOW have 2 shares for every 1
share you own. You would double the amount of shares you
own.
If you own 20 shares of $50 per share stock and the company
issues a 2 for one split—you would now own 40 shares of $25
per share stock.
Companies split stock because they believe there is an ideal
price for their stock, if it starts getting too expensive, people
may not want to buy it and it would not attract as many
investors. The lower price may attract more investors.
MORE BENEFITS
All stockholders may vote on company business at a yearly
meeting. Stockholders usually get 1 vote per share.
Current stockholders may get first chance to buy more shares of
stock if the company decides to issue more stock. That way they
can keep their same % of ownership. This is called a preemptive
right.
TRACKING YOUR STOCK INVESTMENTS
1. Monitor
2. Watch the financials
3. Track the products
4. Watch the economy
5. Be patient
PREFERRED STOCK
You have the option to buy common or
preferred stock. Preferred stock gives
the stockholder the advantage of
receiving cash dividends first.
PAR VALUE
The par value of stock is the assigned
dollar value that is printed on a stock
certificate. The par value does not change.
WHY CORPORATIONS ISSUE PREFERRED STOCK
Few corporations use preferred stock as a way of
raising money.
It is a way to attract more conservative investors.
Preferred stockholders have limited voting rights
and only vote if the corporation is in financial
trouble.
Preferred stock is called a “middle investment.’
Preferred stock is considered “safer” than
common stock, but not as safe as bonds.
Preferred stock lacks potential growth that
common stock offers.
Preferred stock is not considered a good
investment for most people.
TO MAKE PREFERRED STOCK MORE ATTRACTIVE….
stock whose unpaid dividends
build up and must be paid before any cash dividend to common stock holders
for a specific number of shares of common stock
: allows
: stock
that can be exchanged
preferred stockholders to share in
the corporation’s earnings with the common stockholders. After a required dividend is
paid to preferred stockholders and a stated dividend is paid to common stockholders,
the remainder of the earnings is then shared by both preferred and common stock
holders
REVIEW
1.
2.
3.
4.
Why do corporations issue common stock?
Why do investors purchase common stock?
Why do investors purchase preferred stock?
Justify a corporations decision to split is stock when the
stock price has risen significantly.
5. Joe’s grandmother recently gave him 25 shares of
preferred stock. Joe would like to figure our the actual
dollar amount of the dividend, which is a percentage of the
par value of the stock. The par value of each share is $45
and the dividend rate is 6 %. What is the total dollar
amount that Joe would receive each year?
8 CLASSIFICATIONS OF STOCK INVESTMENTS
1. Blue-chip stocks
2. Income stocks
3. Growth stocks
4. Cyclical stocks
5. Defensive stocks
6. Large-cap stocks
7. Small-cap stocks
8. Penny stocks
BLUE-CHIP STOCKS
A blue-chip stock is considered a safe investment
that generally attracts conservative investors.
These stocks are issued by the strongest companies.
INCOME STOCKS
Income stocks pay higher than average dividends.
Dividends are predictable.
GROWTH STOCK
A growth stock is issued by a corporation whose potential earnings
may be higher than the average earnings predicted for all the
corporations in the country.
Do not pay dividends.
CYCLICAL STOCKS
Has a market value that reflects the state of the
economy.
When economy is improving, market value goes up.
During economic decline, market value goes down.
These companies sell products and services that
people would not buy during an economic decline.
DEFENSIVE STOCKS
A defensive stock is a stock that remains stable
during declines in the economy.
Many blue-chip and income stocks are defensive
stocks.
LARGE-CAP AND SMALL CAP STOCKS
A
is a stock from a corporation that has
issued a large number of shares of stock and has large
capitalization. Lower risk.
A
is a stock issued by a company with a
capitalization of $500 million or less. Higher risk.
- total amount of stocks and bonds issued
by a corporation.
PENNY STOCKS
Penny stocks typically sell for less than a dollar a share.
Issued by new companies whose earnings are unsteady.
Prices can go up and down wildly.
Risky but can have huge payoff.
WHERE CAN YOU EVALUATE STOCKS
Newspapers
The internet
Stock advisory services
Corporate news publications
BULL VS. BEAR MARKET
A
is a market condition that occurs when investors
are optimistic about the economy and buy stocks. Because of the
demand for stocks, the value of many stocks will increase, which will
then increase the value of the stock market as a whole.
A
is a market condition that occurs when investors
are pessimistic about the economy and sell stocks. As a result, the
value of the stock market will go down.
CURRENT YIELD
Current yield is the annual dividend of an investment
divided by the current market value. It is expressed as a
percent. An increase in current yield is a sign of a healthy
investment.
Annual Dividend = Current yield
Current Market value
CURRENT YIELD
Suppose that Tyler purchases stock in
EatGrapes.com. Assume that EatGrapes.com pays
an annual dividend of $1.20 and is currently selling
for $24 a share. What is Tyler’s current yield?
WHEN YOU INVEST IN STOCKS
WHAT IS YOUR MAIN GOAL?
HOW DO YOU MAKE MONEY BY
INVESTING IN THE STOCK
MARKET?
THE MONEY YOU
MAKE IS ALSO CALLED
YOUR “RETURN”.
TOTAL RETURN
Total return is the calculation that includes the annual
dividend as well as any increase or decrease in the
original purchase price of the investment.
Current return + Capital gain = Total return
Current return = Dividend amt. x number of shares x years held
By looking at what numbers belong in this side of the equation,
what will the current return calculate for you? (in your own words)
TOTAL RETURN
Total return is the calculation that includes the annual
dividend as well as any increase or decrease in the
original purchase price of the investment.
Current return + Capital gain = Total return
(Selling price per share – Purchase price per share) x # of shares held
By looking at what numbers belong in this side of the equation,
what will the Capital gain calculate for you? (in your own words)
HOW DO YOU MAKE MONEY BY
INVESTING IN THE STOCK
MARKET?
CURRENT
RETURN
CAPITAL
GAIN
CURRENT RETURN + CAPITAL GAIN = TOTAL RETURN
TOTAL RETURN (EXAMPLE PROBLEM ON HANDOUT)
Two years ago Mark bought 40 shares of
Ferguson’s Motor Company for $70 a share.
The stock pays an annual dividend of $1.50.
Mark is going to sell his stock at the current
price of $120 a share. What would be the
total return on his investment?
Two years ago Mark bought 40 shares of Ferguson’s Motor Company for
$70 a share. The stock pays an annual dividend of $1.50. Mark is going to
sell his stock at the current price of $120 a share. What would be the total
return on his investment?
Current return
+
(Dividend x number of shares x years held)
( 1.50 x 40 x
120
120
+
Capital gain
= Total return
(selling price per share – purchase price per share) x number of shares held
2 ) + ( $120 - $70 ) x
40 =
x
40 =
2000
=
+
+
$2120
50
3 years ago, Mary bought 40 shares of Facebook (FB) for $126.00 a share. The
stock pays an annual dividend of $1.27 a share. Mary is going to sell her stock
at the current price of $72.50 a share. What would be the total return of her
investment?
Current Return
Dividend amt. x # of shares x years held
Capital Gain
(Selling price per share – purchase price per share) x # of shares held
CURRENT RETURN + CAPITAL GAIN = TOTAL RETURN
AMY HAS IN INVESTED IN BARNES GROUP INC. (B), THE
HOME DEPOT (HD), AND THE COCA-COLA COMPANY (KO).
All information you need to calculate Total Return for each of these
investments is included on your handout.
1. Calculate the total return for each investment.
2. On the last page, explain the best investment. Support your decision
with mathematical facts!
WHICH STOCK WAS THE BEST INVESTMENT FOR AMY? WHY?
Home Depot was the best investment. Amy made the most amount of
money investing in Home Depot. Home Depot had the highest current
return and highest capital gain.
What if Home Depot did not issue dividends for the period of time
that Amy invested?
How much would the total return be?
$570.60
Would it still be the best investment?
Yes because she still earned the highest capital gain with Home
Depot.
If you chose an investment based on current
yield, which one would have been the best
choice?
Coca-Cola (3.13%)
EARNINGS PER SHARE
Earnings per share (EPS) measures the amount of
corporate profit assigned to each share of common stock.
An increase in this number is a good sign.
Net earnings
= EPS
Common stock outstanding
EARNINGS PER SHARE
EFG corporation had net earnings of $800,000 last year.
EFG had 100,000 outstanding shares of common stock. What
were EFG’s earnings per share?
PRICE-EARNINGS RATIO (PE) RATIO
Price to earnings (PE) ratio is commonly used to compare
the corporate earnings to the market price of a
corporation’s stock.
Market return per share = PE Ratio
Earnings per share
PE RATIO
EFG’s stock is selling for $96 a share.
EFG’s earnings per share are $8.
What is EFG’s price-earnings ratio?
INVESTMENT THEORIES
assumes that a
stock’s real value is determined by looking at the company’s future
earnings. If earning’s are expected to increase, then the company’s stock
price should also increase.
the idea that a stock’s
value is really determined by forces in the stock market itself.
Technical theorists look at factors such as the number of stocks
bought or sold over a certain period or the total # of shares
traded.
movements are purely random.
stock price
REVIEW
1. What are the different types of stock investments?
2. What are the sources that you might use to evaluate stock
investments?
3. What numerical measures of corporations can be used to evaluate
stock investments?
4. Two years ago, Andre bought 100 shares of Snowland, a ski
apparel company. The price of the stock is up $10 from the $20 a
share purchase price, and the stock even paid a dividend of $0.50
per share each year. Andre wants to determine his total return on
the stock.
STOCK BASICS 101: STOCK EXCHANGES
Most stocks are traded on exchanges, which are places where
buyers and sellers meet and decide on a price.
1. Some exchanges are physical locations where transactions
are carried out on a trading floor.
2. The other type of exchange is virtual, composed of a
network of computers where trades are made electronically.
STOCK BASICS 101: PRIMARY VS. SECONDARY MARKET
The primary market is where securities are created (by means of an IPO)
while, in the secondary market, investors trade previously-issued securities
without the involvement of the issuing-companies.
 Simply put, an initial public offering (IPO) occurs when a private company sells
stocks to the public for the first time.
The secondary market is what people are referring to when they talk
about the stock market. It is important to understand that the trading of
a company's stock does not directly involve that company.
STOCK BASICS 101: NYSE
The most prestigious exchange in the world is the New
York Stock Exchange (NYSE). The "Big Board" was founded
over 200 years ago in 1792 with the signing of the
Buttonwood Agreement by 24 New York City stockbrokers
and merchants. Currently the NYSE, with stocks like
General Electric, McDonald's, Citigroup, Coca-Cola,
Gillette and Wal-mart, is the market of choice for the
largest companies in America.
STOCK BASICS 101: THE NYSE
The NYSE is the type of exchange where much of the trading is done face-to-face on
a trading floor.
Orders come in through brokerage firms that are members of the exchange and flow
down to floor brokers who go to a specific spot on the floor where the stock trades.
 At this location, known as the trading post, there is a specific person known as
the specialist whose job is to match buyers and sellers. Prices are determined using
an auction method: the current price is the highest amount any buyer is willing to pay
and the lowest price at which someone is willing to sell.
Once a trade has been made, the details are sent back to the brokerage firm, who
then notifies the investor who placed the order. Although there is human contact in this
process, don't think that the NYSE is still in the stone age: computers play a huge role in
the process.
STOCK BASICS 101: THE NASDAQ
The second type of exchange is the virtual sort called an over-the-counter (OTC)
market, of which the Nasdaq is the most popular.
These markets have no central location or floor brokers whatsoever. Trading is done
through a computer and telecommunications network of dealers.
It used to be that the largest companies were listed only on the NYSE while all
other second tier stocks traded on the other exchanges.
The tech boom of the late '90s changed all this; now the Nasdaq is home to several
big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has
resulted in the Nasdaq becoming a serious competitor to the NYSE.
STOCK BASICS 101: OTHER EXCHANGES
The third largest exchange in the U.S. is the American Stock Exchange (AMEX).
Almost all trading now on the AMEX is in small-cap stocks.
There are many stock exchanges located in just about every country around the world.
American markets are undoubtedly the largest, but they still represent only a fraction
of total investment around the globe.
The two other main financial hubs are London, home of the London Stock Exchange,
and Hong Kong, home of the Hong Kong Stock Exchange.
STOCK BASICS 101: BUYING STOCK
1. Using a Brokerage
Brokerages come in two different flavors. Full-service brokerages
offer you (supposedly) expert advice and can manage your
account; they also charge a lot. Discount brokerages offer little in
the way of personal attention but are much cheaper.
2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans
(DIPs) are plans by which individual companies, for a minimal cost,
allow shareholders to purchase stock directly from the company.
STOCK BASICS 101: HOW TO READ A STOCK QUOTE /TABLE
Columns 1 & 2: 52-Week High and Low
Column 6: Dividend Yield
Column 11: Close
Column 3: Company Name & Type of Stock
Column 7: Price/Earnings Ratio
Column 12: Net Change
Column 4: Ticker Symbol
Column 8: Trading Volume
Column 5: Dividend Per Share
Column 9 & 10: Day High and Low