Bài giảng Personal Financial - Chapter 12: Investing in Stocks

12 Investing in StocksStocks – shares of ownership in the assets and earnings of a business corporation.Common Stock – the most basic form of ownership of a corporation.Shareholder – the owner of a stock.Voting Rights – proportionate authority to express a choice in matters affecting the company.Proxy – written authorization given by shareholder to someone else to represent him or her and vote his or her shares at a stockholder’s meeting.12-*Objective 1 Identify the Most Important Features of Common and Preferred StocksTwo types of stockCommon Stock- provides investors with an ownership interest in a corporation or (growth oriented)Preferred Stock- a cross between a stock and a bond (income oriented)On average, common stocks have outperformed all other assets over timeNeed to be patient and do research12-*Common Stock = most basic form of corporate ownership Stock = equity financingReasons why corporations issue stockRaise money to start or expand businessPay ongoing business expensesNeed not repay the money (like bonds)Dividends (distributions to shareholders) not mandatoryBoard of Directors votes each dividend paymentBut: Shareholders have voting rights; control of companyManagement must often make concessions Why Corporations Issue Common Stock12-* Investors can make money in three waysIncome from dividends Dollar appreciation of stock valuePrice appreciation = capital gainPossible increased value from stock splitsNo guarantee price will go up after a splitStock Split – when the shares of stock owned by existing shareholders are divided into a larger number of shares; done to change (lower) price Example: 2:1- twice as many shares worth half as muchA reverse stock split results in smaller number of shares.Example: 1:2- half as many shares worth twice as muchWhy Investors PurchaseCommon Stock12-*Dividend DatesDeclaration Date = Board of Directors votes to pay a dividend (usually quarterly)Record Date = A stockholder must be registered on the firm’s books to receive the dividendEx-Dividend Date = 2nd day before the record date; stock begins to trade without the dividendInvestors buying after the ex-dividend date do not receive a dividend for that quarterPayment Date = Dividend is paid to investors12-*Preferred StockHybrid SecurityKnown cash dividend is about equal to bond interestEquity position is about equal to common stock but usually non-voting; low % of all stock issuedDividends paid before common stockDividend may be omittedCumulative Preferred StockUnpaid cash dividends accumulateMust be paid before any cash dividends are paid to common stockholders (versus noncumulative preferred stock)Convertible Preferred StockCan be traded for shares of common stockProvides investor with added safety of preferred stock and greater speculative gain through conversion to common stock12-*Classifications of StocksIncome Stock – may not grow too quickly, but pays a cash dividend higher than that offered by most companies year after year. Example: utility companiesGrowth Stock – a company that offers the promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings in all economic conditions.Example: technology companiesMore Classifications of StocksSpeculative Stock – a company that has a potential for substantial earnings in the future. Blue-Chip Stocks – a company that has been around for a long time, has a well-regarded reputation, dominates its industry, and is known for being a solid, relatively safe investment.Value Stock – a company with stock that is selling for less than the true worth of its assets. Other Characterizations for Common Stocks (continued)Cyclical Stocks – stock from a company whose profits are greatly influenced by changes in the economic business cycle.Examples?Countercyclical (or Defensive) Stocks – stock from a company that performs well even in an environment characterized by weak economic activity.Examples?Objective 2Explain How You Can Evaluate Stock InvestmentsThe InternetFirm’s home page more current than printed materials Stock Advisory ServicesMost charge a feeThree most popular: Standard and Poor’s reports, Value Line and Mergent’s Handbook of Common StockProspectus- Lists all necessary information as dictated by the Federal governmentAnnual Report- All publicly traded corporations send to their stockholdersSecurities and Exchange Commission Web site ( Periodicals:Business Week, Fortune, Forbes, Money, Smart Money, Kiplinger’s Personal Finance Magazine12-*Objective 3Analyze the Numerical Measures that Cause a Stock to Increase or Decrease in ValueCorporate Earnings One of the most significant factors in changes in the value of a stockEarnings per share (EPS)Formula: Corporation’s after-tax income divided by number of outstanding shares of common stock Example: $5,000,000/10,000.000 = $0.50EPS Increase = generally a healthy sign12-*Numeric Measures That Influence InvestmentPrice-Earnings Ratio (PE) Price per share of stock divided by the firm’s earnings per share Example: $10 price/0.50 EPS = a PE ratio of 20Tells how much an investor is paying for a company’s earning powerP/E > 20  investor optimismP/E book value12-*Objective 4Describe How Stocks are Bought and SoldPrimary MarketInvestor buys securities from issuer of those securities via an investment bankInvestment bank = financial firm that assists corporations in raising funds, usually by helping sell new security issues (underwriting)IPO = when a corporation sells stock to general public for first timeCash from security sales goes to issuing companyGenerally considered a high-risk investmentSecondary MarketMarket for existing financial securities Traded among investors via brokers and dealersMarketsStock exchanges (NYSE, foreign securities exchanges)Over-the-counter markets12-*Secondary Markets for StocksSecurities Exchanges (NYSE)Marketplace where members, representing investors, meet to buy and sell securities (almost 4,000 companies)Securities sold on an exchange must be listed, or accepted for trading, on that exchange“The Listed Market” = NYSE“Specialist” buys or sells a particular stockThe Over-the-Counter (OTC) Market (NASDAQ)Network of dealers who buy and sell the stocks of companies from inventory (several thousand companies)Dealer = “Market Maker”NASDAQ = electronic marketplace for over 3,200 companies12-*Brokerage Firms and Account ExecutivesAccount Executive (Stockbroker) Licensed individual who buys and sells securities for his or her clientsChurningExcessive buying and selling of securities to generate commissionsIllegal under SEC regulationsCan be difficult to prove; clients subject to arbitration12-*Discount vs. Full Service BrokersService vs. CostHow much advice do you want?Can you buy and sell stocks over the phone?Can you trade stocks online?Where is the nearest office located?Toll-free number for customer use?How often are statements issued?Is there a charge for statements, research reports, and other financial reports?Are there any fees in addition to commissions to buy and sell?12-*Computerized TransactionsReasons that justify trading online:Size of investment portfolioAbility and desire to manage own portfolioAbility to monitor investments closelyCapability of computer and software12-*Stock Transaction OrdersMarket Order Request to buy or sell stock at the current market valueLimit Order Request to buy or sell a stock at a specified priceStop Order (Stop-loss order)Request to sell a stock at the next available opportunity after its market price reaches a specified amountCan lose a lot of money in a “flash crash”Brokerage minimum commissions Range = $7 to $35Depends on the number of shares traded and stock value Full service vs. discount brokers Full service fees > 1% to 2% of transaction amountOnline broker little advice or service 12-*Objective 5Explain the Trading Techniques Used by Long-term Investors and Short-term SpeculatorsLong-Term Investment StrategiesBuy and holdDollar cost averagingDirect investment and dividend reinvestment plans (DRIPS) Cost AveragingLong-term techniqueInvest equal dollar amount in the same stock at equal intervalsGoals:Minimize average cost per shareAvoid “Buy High – Sell Low”12-*Short-Term Investment StrategiesBuying Stock on Margin Borrowing money from brokerMargin requirement set by the Fed“Bullish” (expect stock price increase)Selling short Borrowing stock to sell“Sell high, buy low”“Bearish” (expect stock market decrease)12-*Wrap UpChapter QuizConcept Check 12-1- Common Stock and Preferred StockConcept Check 12-2-Prospectus and Annual ReportFigure It Out- Earnings per Share, PE Ratio, Dividend YieldConcept Check 12-4- How Would You Buy Stock?