Securities and Investments
Gateway to Business
Fall 2007
Topics
• Securities
• Common Stock, Bonds, Mutual Funds
• Securities Markets
• Primary, Secondary
• Investment Banking
• Mutual Funds
• Risk and Return
What is a Security?
• An instrument for personal protection
• Legal claim on corporate assets and
profits
Corporate Securities
• Issued (sold) by corporations to
investors
• Represent legal claims against the
corporation’s assets and profits
• Most common examples:
• Common Stocks
• Bonds
Corporate Securities
Assets
Corporate Assets
are financed by
Debt and Equity
Corporate Bonds
Debt
(Borrowed Money)
Common Stock
Equity
(Owners’ Money)
Common Stocks and Corp Bonds
• Corporate Bonds are Debt Securities
• money borrowed by the corporation
• money invested by lenders to the corporation
• provide fixed income to bondholders
• Common Stocks are Equity Securities
• money invested by owners of the corporation
• provide variable (residual) income to stockholders
Common Stocks and Corp Bonds
• Corporations pay Interest to
Bondholders
• Failure to pay interest results in default
• Corporations pay Dividends to
Stockholders
• Firms have no obligation to pay dividends
• When would they pay dividends?
• When wouldn’t they pay dividends?
How do Corps Issue (Sell) Stock?
• Initial Public Offering (IPO)
• Initial sale of a corporation’s stock to the “public”
• Known as “Going Public”
• Google IPO August 19, 2004
• Issued 22.5 million shares of stock at $85 per
share
• GOOG raised $1.9 Billion from Equity Investors in
the Primary Market.
GOOG Stock Price in the Secondary Market
Price-Earnings (P/E) Ratio
• P/E ratio is Stock Price divided by EPS
• It is what investors are willing to pay for $1
of current Earnings
• i.e., it is the Market Value of $1 of current
earnings
• How does Google’s stock price and P/E ratio
compare to a more mature company like
Proctor and Gamble?
Google valuation data
Proctor and Gamble valuation data
Wal-Mart or Dicks Sporting Goods?
Wal-Mart (WMT) vs. Dick’s (DKS)
November 9, 2007
Stock Price
Shares Out (million)
Market Cap ($billion)
WMT DKS
$42.90 $27.50
4,068
110
174.5
3.1
Sales ($billion)
Assets ($billion)
Net Income ($million)
EPS
P/E Ratio
348.6
151.2
11,280
$2.99
14.5x
3.1
1.5
112
$1.28
22x
WMT or DKS?
Growth
Jan-07 Jan-06 Jan-05 Jan-04
Revenue
10.5
9.6
11.3
4.9
Net income
0.5
9.4
13.4
12.6
EPS
1.1
11.2
16.4
14.4
Avg
9.1%
9.0%
10.8%
Growth
Feb-07 Jan-06 Jan-05 Jan-04
Revenue
18.6
24.4
43.4
15.6
Net income
54.3
5.9
30.5
38.0
EPS
50.4
3.8
23.8
12.2
Avg
25.5%
32.2%
22.6%
Wal-Mart & Dick’s
Since January, 2003
A recent check-in on Dick’s vs. Wal-Mart
October 2008 – October 2010
Wal-Mart & Dick’s
Each had their growth phase
Mutual Fund
• An investment company (corporation) that invests
in common stocks and bonds issued by other
corporations
• Allows diversification for individual investors
• Professional investment management
• A mutual fund can make money from its securities
in two ways: a security can pay dividends or
interest to the fund, or a security can rise in value.
A fund can also lose money and drop in value.
Risk and Return
Return
Small company Common Stocks
Large company Common Stocks
Corporate Bonds
Long-term US Treasury securities
Short-term US Treasury securities
Risk
Terms
• Market capitalization (market cap)
• Price-earnings ratio
• Common stock—ownership, residual income,
dividends
• Corporate bond--debt security, fixed income,
interest
• Investment bank
• IPO, going public
• Primary and secondary markets
• Mutual Fund
Web References
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Wall Street Journal (www.wsj.com)
New York Stock Exchange (www.nyse.com)
NASDAQ Market (www.nasdaq.com)
Investment Company Institute (www.ici.org)
The Motley Fool (www.fool.com)
Investor Words (www.investorwords.com)