Download 9.2 How to invest in corporations

9.2 HOW TO INVEST IN CORPORATIONS
9.2 HOW TO INVEST IN CORPORATIONS
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Goals:
 Describe
ways to purchase different types of stock.
 Explain differences between investing in corporate
stocks and corporate bonds.
KEY TERMS
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Corporate stock
Stockholder
Stockbroker
Brokerage firm
Stock exchange
NASDAQ
Preferred stock
Common stock
Corporate bond
Junk bond
CORPORATE STOCK
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There are two ways to invest in a corporation
 Corporate
stocks
 Corporate bonds
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First we will focus on corporate stock!
A
share of corporate stock is a unit of ownership in
a corporation.
 Stockholders are the investors who own the
corporation because they own shares of stock.
HOW CORPORATE STOCK WORK
Corporations sell shares of stock to investors to
raise money for the business.
 As an investor, you buy shares of stock in the
hope of earning a return on your investment. You
expect the corporation to make a profit.
 If the corporation makes a profit you could earn
a two part return:
 Dividend
 Increase in the price of the stock
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HOW STOCKHOLDERS EARN RETURNS
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Suppose you bought 100 shares of stock for $20 per
share.
What is the total you invested?
 $2,000
A few months later, the stock is selling for $30 per share.
If you sell the stock at $30 per share, what will be your
profit?
 $30 X 100 shares = $3,000
 $3,000 - $2,000 = $1,000 profit
The profit you earn from selling stock at a higher price
than you paid for it is called a capital gain.
If your stock decreases in value and you sell it for a lower
price than you paid for it. The amount you lose is called a
capital loss.
HOW STOCK EXCHANGES WORK
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Investors generally buy and sell stock in two ways:
 Through a stock exchange
 An electronic system called the NASDAQ
Transactions, sales or purchases of shares, are
usually conducted through a:
 Stock brokerage firm- a company that specializes in
helping people buy and sell stocks & bonds.
 Stockbroker- a person who handles the transfer of
stocks & bonds between buyer & seller.
THE STOCK EXCHANGE & NASDAQ
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A stock exchange is where orders to buy or sell
stocks are sent and carried out.
 Which
 New
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is the largest one in the world?
York Stock Exchange (NYSE)
The NASDAQ electronically links
brokerage firms. Stocks can be bought
or sold without using a central location.
TYPES OF STOCK
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Preferred stock: a nonvoting share that pays a fixed dividend.
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Preferred stockholders receive the same dividend unless the
suffers a loss.
Preferred stockholders do not have the right to vote on how the
company is run.
Common stock: a voting share that does not pay a set
dividend.
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Each corporation’s board of directors is elected by the common
stockholders to oversee the operation of the company.
Common stock holders have the right to vote on important
corporate decisions. They normally have one vote for each share
that they own.
PREFERRED STOCK VS COMMON STOCK
Preferred stock is less risky than common
stock. Preferred stockholders receive their
share of the company’s assets before common
stockholders.
 Common stock generally has a better return
than preferred stock in the same corporation.
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CORPORATE BONDS
Another way to invest in corporations is to buy
the bonds they sell.
 Corporate bonds are sold by many corporations
to finance business activities. They usually pay
a fixed rate of interest and are paid off after a
specific period of time.
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WHY OWN CORPORATE BONDS?
You are basically lending money to a corporation.
Corporations must make interest payments and
repay their bonds on time, even if they earn no
profit.
 This makes bonds issued by a firm less risky than
stock in the same firm. Unless the corporation
fails, you will be paid.
 Since bonds are less risky, they generally pay a
lower return.
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JUNK BONDS
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Some corporate bonds are high-risk investments.
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They offer high interest rates to encourage people
to buy them. These high-return, high-risk bonds
are called high-yield bonds or junk bonds.