Download CHAPTER 5 Small Business and the Entrepreneur

16
chapter
Securities and
Investments
Better Business
1st Edition
Poatsy · Martin
Slide presentation prepared by Pam Janson
Stark State College of Technology
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without the prior written permission of the publisher. Printed in the
United States of America.
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Learning Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
What are the pros and cons of debt and equity financing?
How do companies issue bonds and stocks?
How do risk return relationships, risk tolerance, and asset allocations
relate to the fundamentals of investment?
What are the different investment categories of stocks, and how does the
stock trade process work?
What is stock performance, and what are the factors that lead to changes
in stock price?
What are the different types and characteristics of bonds, and how is the
safety of bonds evaluated?
What is the difference among bond mutual funds, money market funds,
and equity funds?
What are the advantages and disadvantages of mutual fund investment?
What is an option or a futures contract?
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Raising Capital with Securities
• For large capital-intensive projects or
general expansion, business owners can
raise funds with securities
• They decide between bonds (debt) and
stock (equity) depending on:
o Corporate earnings, cash flow, and taxes
o Existing bonds or stocks
o Environmental factors, such as the economy
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Financing with Bonds
• Project returns should be greater than the cost of
bond financing
o The rate of interest the company pays is affected by:
• Issuer risk
• The length of the bond term
• The general state of the economy
• Bond debt is paid back with interest annually and
principal at maturation
• Bond financing advantages
o Uses money from investors, not company profits
o Doesn’t give up any ownership or control
• Bond financing disadvantage
o Debt
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Financing with Stock
• Companies issue stock (equity) to finance
long-term general funding and ongoing
expansion
• Stock advantages
o Equity financing doesn’t need to be repaid
o No interest and principal payments needed
• Disadvantages
o Dilution of ownership
o Potential dividend payment
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Debt or Equity Financing
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Issuing Bonds and Stocks
• Financial advisory firm
• Securities and Exchange Commission (SEC)
o Prospectus
• Capital market
o Primary market
o Secondary market
• Stocks
o Initial public offering (IPO)
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Risks and Returns of Investing
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How to Start Investing
• Strategies
o Diversification
o Asset allocation
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Types of Stocks
• Two main types
o Common
• Vote on corporate policy and board of directors
• Have a lesser right to dividends and assets
o Preferred
• Have no voting rights
• Receive a fixed dividend before common
stockholders
• Have a greater right to assets
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Stocks by Company Type
Income
Blue chip
Cyclical
Growth
Defensive
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Choosing Stocks
• Know your goals and risk tolerance
• Many start with a managed 401(k) account
• If you are choosing stocks on your own
o Evaluate company financial and other data
o Look at past stock performance
o Understand how current events could impact the
stock
o Compare other companies’ performance to spot
trends
o View industry analysts’ opinions
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Buying and Selling Stocks
• Before Internet
trading, buyers had to
use a full-service
stockbroker
• Now individuals can
use online discount
brokers
• Either way, stock is
purchased through
the broker on a stock
exchange
Selecting a Broker
1. Know your objectives
2. Interview brokers
3. Check the firm’s history
4. Ask about fees
5. Ask about SIPC
6. Take time
to decide
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The Stock Exchanges
• New York Stock Exchange (NYSE)
o Trades made electronically or on the trading
floor
• National Association of
Securities Dealers
Automated Quotation
(NASDAQ)
o Trades made electronically
only
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A Typical Stock Trade
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Changing Stock Prices
• Stock prices change daily/changes based on
supply and demand
• Value: Stock price x number of shares =
market capitalization
• Investors look at expected future growth
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Stock Performance
• Stock performance is directly related to changes in
stock price, which is impacted by supply and demand.
• Stock prices change in reaction to company actions
and broader news based on economic forecasts,
industry or sector concerns, or global events.
• In a bull market, there is increasing investor
confidence and the market increases in value.
• In a bear market, there is decreasing investor
confidence and the market declines in value.
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Stock Indexes
• Standard and Poor’s 500 Composite Index (S&P
500)
• Dow Jones Industrial Average (DJIA)
• NASDAQ 100
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Making Money
Investing in Stocks
• Collecting dividends
• Capital gains
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Types of Bonds
• Corporate
o Secured
o Debenture
o Convertible
• Serial bonds
• Callable bonds
• Government
o Treasury bills
o Treasury notes
o Treasury
• Municipal bonds
o General obligation
o Revenue
o Serial
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Bond Ratings
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Characteristics of a Bond
• Par (face) value
• Coupon
• Maturity date
• Bond prices move in the opposite direction of
interest rates
o If a bond has a coupon of 10 percent:
• And current interest rates are 8 percent, the bond is
worth more to investors and its price will go up
• And current interest rates are 12 percent, demand for
your bond is not strong and will go down
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Mutual Funds
• Allows a group of investors to pool their
money together with a predetermined
investment objective
• There are different types of mutual funds
• Money market funds are popular
o They invest in short-term debt obligations like
Treasury Bills and certificates of deposit
o Interest rates can be double savings accounts
o Money market funds are very liquid
o But these funds are not insured by the FDIC
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Bond Mutual Funds
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Stock Mutual Funds
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Why Are Mutual Funds
So Popular?
• Good for those with little investment experience
• Features
o
o
o
o
Diversification
Professional management
Liquidity
Cost
• Financial gains through
o
o
o
o
Dividends
Interest
Capital gains
Fund appreciation
• Mutual funds measured by net asset value (NAV)
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Mutual Fund Investing Tips
• Understand costs
o Load
o No-load
• Understand fund
management
o Management team
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Options and Futures
• Option
o A contract that gives a buyer the right to buy or
sell a particular security at a specific price on or
before a certain date
• Futures contract
o An agreement between a buyer and a seller to
receive (or deliver) an asset in the future at a
specific price that is agreed upon today
• An option gives you the right to purchase the
underlying asset while you have an
obligation to purchase the asset with a
futures contract
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Exchange-Traded Funds (ETFs)
• One of newest investment options
• Pools of stocks similar to mutual funds
• Trade like stocks on the exchanges
o Prices change all day vs. at the end of the day
for mutual funds
• Fees are lower
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Chapter Summary
1.
2.
3.
4.
5.
6.
7.
8.
9.
What are the pros and cons of debt and equity financing?
How do companies issue bonds and stocks?
How do risk return relationships, risk tolerance, and asset allocations
relate to the fundamentals of investment?
What are the different investment categories of stocks, and how does the
stock trade process work?
What is stock performance, and what are the factors that lead to changes
in stock price?
What are the different types and characteristics of bonds, and how is the
safety of bonds evaluated?
What is the difference among bond mutual funds, money market funds,
and equity funds?
What are the advantages and disadvantages of mutual fund investment?
What is an option or a futures contract?
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31
Beyond the Book
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Typical Sources of
Equity Financing
Public Stock
Offer
Private
Placement of
Stock
Venture Capital Funds
Wealthy Individual (Angel
Investors)
Family and Friends
Personal Savings
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Stock Exchanges
• In addition to NYSE and NASDAQ, there
are:
o The American Stock Exchange
o Regional stock exchanges
o Global stock exchanges
o Over-the-counter market
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Mutual Fund Fees
Basic Fee Structure
• Front-end load: Fees for purchase of mutual fund
shares
• Back-end load: Fees charged when shares are sold
• No load: Fees are withheld from earnings
Other Possible Fees
• Exchange fees are charged when money transferred
from one fund to another
• Annual account fees may be charged to maintain lowbalance accounts
• Management fees are charged by the fund’s
investment advisor
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Institutional Investors are U.S.
Corporate Stockholders
• The largest investors in securities in the U.S. aren’t
individuals; rather, they are pension funds, investment
companies, insurance companies, banks and
foundations.
• Institutional investors have substantially and
consistently increased their stock ownership in U.S.
corporations
1980
1987
2000
2007
Institutional investor stock ownership
in largest 1,000 U.S. corporations
-
46.6%
61.4%
76.4%
Total assets controlled by institutional
investors
$2.7
trillion
-
-
$27.1
trillion
Market value of total institutional
equity holdings
$571.2
billion
-
-
$12.9
trillion
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Stock Options: In General
• Common form of employee incentive
• Options to purchase a set amount of stock
at a fixed price in the future
o If the stock price drops, there’s no cost to the
employee
o If the stock price rises, the employee buys the
stock at the option price and can make a profit
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Stock Options at Google
• An estimated 1,000 people each have more
than $5 million worth of Google shares from
stock grants and options
• Current and former employees have cashed
in options worth $2.1 billion
• Current employees have unvested options of
$4.1 billion
• Nooglers (new Google employees) have an
average exercise price of $500
o It takes a lot of money to exercise their options!
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