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Basics-of-Stocks-and-Investing

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Introduction to Stocks and Investing
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Introduction
Peter Looney works as an executive.
For a long time, Peter has felt that he
should invest the extra amount of money
that he makes from his job.
Introduction
He has been saving in cash form for a long
time.
However, he wants that he should use the
saved amount to invest in something that
could help him multiply his money and
help grow his finances.
Introduction
Peter has always thought of starting a
business venture to grow his money,
however, he is greatly averse to the huge
amount of risk involved in any business
venture.
So, Peter starts asking advice from his
colleagues about what possible investment
options are available in the market.
Introduction
George, one of Peter’s colleagues, advices
him to invest in stocks and mutual funds.
Stocks are the capital raised by a
corporation through the issue of shares
entitling holders to an ownership interest
also known as ‘equity’.
Introduction
Mutual funds are an investment vehicle
made of pool of funds collected through a
regulated investment company from many
investors.
This pooled money is then used for the
purpose of investing in securities such as
stocks, bonds, money market instruments
and similar assets.
Introduction
Money managers operate the mutual
funds by investing the fund's capital and
attempt to produce capital gains and
income for the fund's investors.
George tells Peter that by investing in
stocks and mutual funds, Peter can earn a
small share of the great profits that big and
successful organizations make for
themselves and their shareholders.
Introduction
George tells him that although Peter will
get to enjoy a part of the profit made by
the organization, he will be spared of the
hassles of running a business on his own,
and also will undertake a much lesser risk
than if he would have to run a business on
his own.
Therefore, although stocks and mutual
funds would help Peter to multiply and
grow his money, he would be able to do so
by taking advantage of the stability and
experience of these fast growing and
stable organizations that have been
operating and making profits for decades.
Introduction
George also adds a word of warning for
Peter.
He tells Peter that the most important
thing that he should keep in mind while
investing in stocks and mutual funds is that
he should determine the maximum risk
that he is willing to take.
Introduction
Peter should always make sure that he
never invests more than his risk taking
capacity.
George assures Peter that if he takes
calculated risks and invests wisely; then
stocks and mutual funds prove to be a very
lucrative way of growing his money.
Introduction
Therefore, you can understand that
investing in stocks and mutual funds are a
great way to multiply and grow your
money by undertaking calculated amount
of risk according to one’s own risk taking
capacity.
Let us learn about stocks and investing in
detail.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
What is a Stock?
•
Any business needs money or
capital whenever it has to start
its operations or expand its
business operations.
•
Thus, in order to raise this capital
for a business start-up or
expansion, the corporation
would offer shares of stock for
sale to the public.
What is a Stock?
•
By selling these shares or stock
to the public, the company is
able to increase its finance
reserves and also get the
necessary funds to start
operations or expand its
operations.
•
So, any individual who purchases
a ‘share’ or ‘stock’ of a company
becomes a part owner of a
portion of that company, based
upon the number of shares
purchased compared with the
number of shares that make up
the company’s total stock
offering.
What are Stock Exchanges?
What are Stock Exchanges?
Why Stocks should be in Your Portfolio?
•
It has been found over
several decades that, as an
asset class, common stocks
have outperformed all other
major asset classes.
•
Also, stocks deliver strong
long-term capital gains.
•
They prove to be one of the
best and most tax-efficient
types of return.
Why Stocks should be in Your Portfolio?
•
You should include stocks in
your diversified portfolio
because the individual
stocks in a diversified
portfolio can reduce the
overall risk of your portfolio.
•
Dividends and capital gains
are taxed at a lower
preferential federal tax rate
and so if tax planning is
done wisely, then stocks can
prove to be tax-efficient
assets.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Types of Stocks
There are two main types of stocks that are offered by any company such as
follows:
Common
Stock
Let’s look at each in detail.
Preferred
Stock
Common Stock
Common Stock is a ‘voting stock’. Hence, any individual
who has purchased the common stock of a company is
entitled to vote for appointing the officers of the
company and it’s Board of Directors. Thus, common
stock is the ownership share in publicly held company.
Common
Stock
Common stock holders have a residual claim on a
company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights
and obligations. Thus, each common stockholder has
the right to vote. Moreover, if a common stockholder is
not able to vote in person, he can give a written consent
to give permission to someone else to vote on his behalf
as a proxy.
Common Stock
Common Stock is a ‘voting stock’. Hence, any individual
who has purchased the common stock of a company is
entitled to vote for appointing the officers of the
company and it’s Board of Directors. Thus, common
stock is the ownership share in publicly held company.
Common
Stock
Common stock holders have a residual claim on a
company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights
and obligations. Thus, each common stockholder has
the right to vote. Moreover, if a common stockholder is
not able to vote in person, he can give a written consent
to give permission to someone else to vote on his behalf
as a proxy.
Preferred Stock
‘Preferred Stock’ as the names suggests has a
preferential position over common stock.
Therefore, during the payout of dividend to
share holders, it is first paid to preferred stock
owners before common stock holders.
Preferred stock is also ownership shares of a
company.
Preferred
Stock
However, it differs from common stock because
in preferred stocks, the dividend is guaranteed
and paid before dividends on common stock are
paid. On the other hand, if profits of the
company increase, the dividend for preferred
stocks isn’t increased accordingly.
Preferred Stock
‘Preferred Stock’ as the names suggests has a
preferential position over common stock.
Therefore, during the payout of dividend to
share holders, it is first paid to preferred stock
owners before common stock holders.
Preferred stock is also ownership shares of a
company.
Preferred
Stock
However, it differs from common stock because
in preferred stocks, the dividend is guaranteed
and paid before dividends on common stock are
paid. On the other hand, if profits of the
company increase, the dividend for preferred
stocks isn’t increased accordingly.
Key Asset Classes for Common Stocks
The following are some of the key asset classes for common stocks:
Large
Capitalization /
Large Cap
Stocks
Mid
Capitalization /
Mid Cap Stocks
Small
Capitalization /
Small Cap
Stocks
Key Asset Classes for Common Stocks
The following are some of the key asset classes for common stocks:
Large Cap stocks are
stocks of companies with
market capitalization
(shares outstanding
times’ price) of greater
than $10 billion.
Large
Capitalization /
Large Cap
Stocks
Mid
Capitalization /
Mid Cap Stocks
Small
Capitalization /
Small Cap
Stocks
Mid Cap stocks are stocks
of companies with market
capitalization of between
$2 billion and $10 billion.
Small Cap stocks
are stocks of
companies with
market
capitalization of
less than $2
billion.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Classification of Common Stock
Common stock can be classified as follows:
Blue-chip Stocks
Growth Stocks
Value Stocks
Income Stocks
Cyclical Stocks
Defensive Stocks
Let us look at each in detail.
Blue-chip Stocks
Blue-chip Stocks
•
Blue-chip Stocks:
o
o
‘Blue Chip Stock’ is a stock
that is issued by a large,
stable, mature company.
This is not a specific list,
but changes over time.
Growth Stocks
Growth Stocks
•
Growth Stocks:
o
o
o
‘Growth Stock’ is the stock
that compensates investors
primarily through increase
in value of the shares over
time.
These are issued by
companies which are
growing faster than
average and which
generally reinvest
dividends.
They generally have higher
PE and PB ratios than the
market as a whole.
Value Stocks
Value Stocks
•
Value Stocks:
o
o
Value Stocks are issued by
companies which are less
expensive compared to the
market.
They generally have lower
PE and PB ratios than the
market as a whole.
Income Stocks
Income Stocks
•
Income Stocks:
o
o
‘Income Stock’ is the stock
that compensates investors
primarily through the
regular payment of
dividends.
These are issued by
companies which pay
dividends regularly.
Cyclical Stocks
Cyclical Stocks
•
Cyclical Stocks:
o
o
‘Cyclical Stock’ is stock
exhibiting above-average
sensitivity to the business
cycle.
These are issue by
companies whose share
prices move up and down
with the state of the
economy.
Defensive Stocks
Defensive Stocks
•
Defensive Stocks:
o
o
‘Defensive Stock’ is a stock
that is relatively insensitive
to the business cycle.
These are issued by
companies whose share
prices move opposite to
the state of the economy.
MCQ
Q. Which of the following is a stock
issued by a large, stable and
mature company?
Click on the
radio button
to select the
correct
answer!
MCQ
Q. Which of the following is a stock
issued by a large, stable and
mature company?
MCQ
Q. Which of the following is a stock
issued by a large, stable and
mature company?
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
What is ‘Beta’?
Interpreting Beta
It is very important that you
understand how to interpret
‘Beta’ to understand how a stock
is behaving with respect to the
movements in the overall market.
Interpreting Beta
The following are some important points that you should bear in mind while
interpreting ‘Beta’:
If Beta = 1.0 = This
means that the
stock has the same
risk as the market.
Therefore, a stock
with Beta = 1 will
move with the
market.
If Beta > 1.0 = This
means that the
stock has more risk
than the market.
Therefore, a stock
with Beta > 1.0 will
move more than
the market.
If Beta < 1.0 = This
means that the
stock has less risk
than the market.
Therefore, a stock
with Beta < 1.0
will move less
than the market.
Role of Beta in Your Portfolio
•
The ‘Beta’ indicator
plays a crucial role
while selecting the
stocks that will make
up your portfolio.
•
Hence, when you build a
portfolio, you should always
track the beta of your
portfolio. The ‘Beta’ of your
portfolio is the weighted
Beta of each of your stocks
or funds in the portfolio.
So, this weighted ‘Beta’
or the ‘Beta of your
portfolio’ will indicate
and show you how
risky your portfolio is
versus the market.
Role of Beta in Your Portfolio
•
You should always keep
in mind that a
diversified portfolio
moves with the
market. So, in a
diversified portfolio,
you will feel less effect
from one company.
•
Hence, it is
crucial that you
should always be
diversified in all
your
investments.
•
So, you should
diversify by
buying a broad
array of financial
assets.
You should not only
invest in largecapitalization stocks,
but also broaden and
deepen your portfolio
by buying
international stocks,
small cap stocks, etc.
Understanding Leverage
1
2
3
•
‘Leverage’ is another important concept while
learning about stocks and investing. ‘Leverage’ is
the process of increasing your purchasing power
by borrowing money to invest in more assets.
•
Therefore, it is very natural that the ‘Leverage’
increases your risk as you invest more than your
own financial capacity by borrowing from
others.
•
Also, when you borrow money for investing the
rate of return on the loan is fixed, however,
there is no fixed or guaranteed rate of return on
your investments.
Understanding Leverage
4
5
6
•
Therefore, Leverage magnifies capital gains
and losses.
•
As a ground rule, you should always keep in
mind that you should ‘never’ use leverage to
invest. Leverage is as pure and simple as an
ordinary ‘debt’.
•
So, if you want to invest a larger amount, then
the best thing that you can do is saving for
making the larger investments but never
borrow money for it.
Costs of Investing in Stocks
It is crucial for you to understand that there are a few major costs of investing
in stocks.
Also, the costs of investing in stocks can be divided into the following three
major types:
• Explicit Costs
• Implicit Costs
• Hidden Costs
Let us look at each in detail.
Explicit Costs
• Explicit Costs
Brokerage Commission
Costs and Fees
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Custody or
Annual Fees
Let us look at each in detail.
Explicit Costs
• Explicit Costs
Brokerage Commission
Commission
Brokerage
Costs and
and Fees
Fees
Costs
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Brokerage Commission Costs and Fees:
•
Custody or
Annual Fees
•
‘Explicit Costs’ include the brokerage
commission costs and fees.
Brokerage commission costs and fees is
a service charge applied by a broker in
return for arranging the purchase or sale
of financial assets.
Let us look at each in detail.
Explicit Costs
• Explicit Costs
Brokerage Commission
Commission
Brokerage
Costs and
and Fees
Fees
Costs
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Brokerage Commission Costs and Fees:
•
Custody or
Annual Fees
•
‘Explicit Costs’ include the brokerage
commission costs and fees.
Brokerage commission costs and fees is
a service charge applied by a broker in
return for arranging the purchase or sale
of financial assets.
Let us look at each in detail.
Explicit Costs
• Explicit Costs
Brokerage Commission
Costs and Fees
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Custody or Annual Fees:
•
Custodyor
or
Custody
AnnualFees
Fees
Annual
•
‘Explicit Costs’ include custody or annual
fees.
Custody or annual fees are fees the
brokerage house charges to hold the
stocks, bonds, or mutual funds in your
account.
Let us look at each in detail.
Explicit Costs
• Explicit Costs
Brokerage Commission
Costs and Fees
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Custody or Annual Fees:
•
Custodyor
or
Custody
AnnualFees
Fees
Annual
•
‘Explicit Costs’ include custody or annual
fees.
Custody or annual fees are fees the
brokerage house charges to hold the
stocks, bonds, or mutual funds in your
account.
Let us look at each in detail.
Implicit Costs
• Implicit Costs
Capital Gains Taxes
Short-term Capital
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
The following are some of the ‘Implicit Costs’
that you may have to pay:
Long-term Capital
Dividends
Let us look at each in detail.
Implicit Costs
• Implicit Costs
CapitalGains
GainsTaxes
Taxes
Capital
Short-term Capital
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
The following are some of the ‘Implicit Costs’
that you may have to pay:
Long-term Capital
Capital Gains Taxes:
Dividends
You may have to pay taxes on the gains you
have made by selling financial assets.
Let us look at each in detail.
Implicit Costs
• Implicit Costs
Capital Gains Taxes
Short-termCapital
Capital
Short-term
Long-term Capital
Dividends
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
The following are some of the ‘Implicit Costs’
that you may have to pay:
Short-term Capital:
You may have to pay taxes on the gains that
you made in selling assets owned for a
period of less than one year.
Let us look at each in detail.
Implicit Costs
• Implicit Costs
Capital Gains Taxes
Short-term Capital
Long-termCapital
Capital
Long-term
Dividends
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
The following are some of the ‘Implicit Costs’
that you may have to pay:
Long-term Capital:
You may have to pay taxes on the gains that
you made in selling assets owned for a
period of more than one year.
Let us look at each in detail.
Implicit Costs
• Implicit Costs
Capital Gains Taxes
Short-term Capital
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
The following are some of the ‘Implicit Costs’
that you may have to pay:
Dividends:
Long-term Capital
Dividends
Dividends
You may have to pay taxes for the dividends
that you receive from the companies.
Dividends are the returns you get from the
company. Different countries have different
rules and policies for taxing stock dividends,
bonds and other dividends at federal tax
us looktax
atrate.
each in detail.
rate and your state Let
marginal
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
Let us look at each in detail.
Hidden Costs
• Hidden Costs
AccountTransfer
TransferFees
Fees
Account
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
Account Transfer Fees:
‘Account Transfer Fees’ are the charges that
you need to pay for moving assets either
into or out of an existing account.
Let us look at each in detail.
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account
Account Maintenance
Maintenance Fees
Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
Account Maintenance Fees:
‘Account Maintenance Fees’ are the charges
that you need to pay for maintaining your
account.
Let us look at each in detail.
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
InactivityFees
Fees
Inactivity
Inactivity Fees:
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
‘Inactivity Fees’ are the charges that you
need to pay because you did not trade or did
not perform any account activity during a
specified period.
Let us look at each in detail.
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees:
MinimumBalance
BalanceFees
Fees
Minimum
Interest on Margin Loans
Sales Charges or Loads
‘Minimum Balance Fees’ are the charges that
you need to pay because you failed to
maintain a minimum balance in your
account.
Let us look at each in detail.
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
Interest on Margin Loans:
‘Interest on Margin Loans’ is the amount
that you need to pay as an ‘interest’ on
money you borrowed to buy securities.
Let us look at each in detail.
Hidden Costs
• Hidden Costs
Account Transfer Fees
Account Maintenance Fees
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
should look out for while investing in stocks are
as follows:
Inactivity Fees
Sales Charges or Loads:
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads
‘Sales Charges or Loads’ are the sales charges
that you need to pay to the broker for
helping you purchase specific securities such
as mutual funds.
Let us look at each in detail.
Risks in Stocks
You should always bear in mind while investing stocks that all kinds of stocks are
susceptible to a number of risks. Moreover, the amount of risk may not be equal
in all stocks. The following are the major types of risks faced by stocks:
Interest Rate Risk
Inflation Risk
Business Risk
Financial Risk
Liquidity Risk
Political or Regulatory Risk
Exchange Rate Risk
Market Risk
Let us look at each in detail.
Interest Rate Risk
Interest Rate Risk
Interest Rate Risk:
•
‘Interest Rate Risk’ is the risk
caused by the rise or fall in
interest rates which may result
in a decline or rise in the
stock’s value.
Inflation Risk
Inflation Risk
Inflation Risk:
•
‘Inflation Risk’ is a risk caused
due to a rise or fall in inflation
which will result in a decrease
or increase in the value of the
stock.
Business Risk
Business Risk
Business Risk:
•
‘Business Risk’ is risk that the
share price will fall due to
problems with the business.
Financial Risk
Financial Risk
Financial Risk:
•
‘Financial Risk’ is a risk is
caused due to any adverse
effect caused on the financial
performance of the firm due
to ways in which the firm
raises money.
Liquidity Risk
Liquidity Risk
Liquidity Risk:
•
‘Liquidity Risk’ is a risk that
investors will be unable to find
a buyer or seller for a stock
when they need to sell or buy
that particular stock.
Political or Regulatory Risk
Political or Regulatory Risk
Political or Regulatory Risk:
•
‘Political or Regulatory Risk’ is
a risk that unanticipated
changes in the tax or legal
environment will have an
adverse impact on a business.
Exchange Rate Risk
Exchange Rate Risk
Exchange Rate Risk:
•
‘Exchange Rate Risk’ is a risk
that changes in exchange rates
will impact the profitability of
firms that operate and
function on a global or
international level.
Market Risk
Market Risk
Market Risk:
•
‘Market Risk’ is risk of the
impact on price due to the
overall market movements.
Stock Market Sectors
When deciding to buy or sell any stock, it is crucial that you should
have thorough knowledge about the sector of the particular stock
that you intend to buy or sell. The performance of the overall
sector in the economy will to a greater extent affect the stocks of
the company belonging to that particular sector.
Stock Market Sectors
The following are some considerations that you should keep in mind with
respect to the sector of any company:
You should always be aware of which sectors are doing well.
You should always be aware of which sectors are not doing well.
Keep a track of the performance history of the various sectors
to determine the high performing sectors.
You should always be aware of what are the new rules and
regulations that have come up in different sectors of the
economy in your country.
Always keep abreast of the latest news and trends with
respect to the different sectors.
Stock Market Sectors
The given image shows the various sectors in an economy of any country:
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Stock Screening Criteria
It is very important that you should
screen each and every stock that you
intend to buy or sell before deciding on
a purchase or sale.
Screening the stock carefully on certain
crucial criteria will help you make
informed and wise decision to
safeguard your money against risk as
well as losses.
Stock Screening Criteria
Sector
The following are some of the crucial criteria that you should screen the stock
upon:
Stock Split
•
‘Stock Split’ is a process through
which a company splits its own
shares to keep the price of its stock
affordable and in a buying range.
•
Generally, a stock price of $6-$100
per share is considered affordable.
A company may decide to split each
of its shares into a number of shares.
So, a company may split its stock (x)
for 1, which results in the stock price
declining by the same multiple (x).
•
•
•
You should bear in mind that a stock
split has no impact on firm value, but
it may give information on the firm’s
prospects.
Stock Split
•
For Example:
o
Assume you had 20 shares priced
at $100 each or 20 * $100 =
$2,000.
o
If the stock split 2 for 1, you
would have 40 shares (2 * 20)
and the price would adjust to $50
each, or 100 / 2.
o
Your value would be 40 * $50 =
$2,000, the same as before
Reverse Split
Real Life Example
Let us now look at a
real life example to
understand stock
splitting.
Real Life Example
Peter Smith owns 300
shares of Globus Stock
selling at $600 per share.
At a recent Board Meeting,
Globus’ management has
decided to split the stock, in
order to make the stock
more affordable for the
average investor.
Real Life Example
Look at the questions given below and try answering them in
context of the changing situations at Globus.
How much was Peter’s investment before the split?
Consider that Globus’ management decides to split the
stock three-for-one, how many shares would Peter own
after the split?
What is the new price per share after the split?
How much would Peter’s investment be worth after the
three -for-one split?
Now, let’s take a look at the answers.
Real Life Example
Look at the questions given below and try answering them in
How much was Peter’s investment before the split?
context of the changing situations at Globus.
muchinvestment
was Peter’sbefore
investment
before
split?x $600
• How
Peter’s
the split
= 300the
shares
per share = $180,000.
Consider that Globus’ management decides to split the
stock three-for-one, how many shares would Peter own
Consider that Globus’
management
after
the split? decides to split the
stock three-for-one, how many shares would Peter own
after
the split?
What is the new price per
share
after the split?
much would
Peter’s
worth
after
• How
Number
of shares
that investment
Peter wouldbe
have
after
thethe
three
-for-one
three-for-one split
= 300
x 3 = split?
900 shares.
Now, let’s take a look at the answers.
Real Life Example
What
is the
priceinvestment
per share after
thethe
split?
How
much
wasnew
Peter’s
before
split?
••
New
price
per sharebefore
after the
= $200.
Peter’s
investment
the split
split == $600/3
300 shares
x $600
per share = $180,000.
How much would Peter’s investment be worth after the
threemanagement
-for-one split?
Consider that Globus’
decides to split the
three-for-one,
many
would
Peter own
• stock
Peter’s
investmenthow
worth
aftershares
the three
-for-one
split
split?
= 900 shares x $200after
per the
share
= $180,000.
•
Number
of Peter’s
shares that
Peter would
the Therefore,
investment
worthhave
afterafter
the three
three-for-one
split = 300
3 = 900
shares.
for-one split remains
thexsame
as his
initial
investment amount.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Analysis in Stock Trading
Before trading in stocks, various kinds of analysis is carried out by investors,
financial experts, financial institutions, etc. to give an indication about the
performance of a stock, its volatility etc.
The following are a few key types of analysis performed on stocks:
• Fundamental Analysis
• Cash Flow Analysis
• Technical Analysis
Let us look at each in detail.
Fundamental Analysis
• Fundamental Analysis
The chief assumption on which ‘Fundamental Analysis’ is carried out is that the
value of the stock can be determined based on the future earnings of the
company.
Financial Analysts carry out thorough research on the background and
operations of a company, the state of the industry to which the company
belongs, the global industry and the global economy etc.
Fundamental Analysis
• Fundamental Analysis
The chief assumption on which ‘Fundamental Analysis’ is carried out is that the
value of the stock can be determined based on the future earnings of the
company.
Financial Analysts carry out thorough research on the background and
operations of a company, the state of the industry to which the company
belongs, the global industry and the global economy etc.
Cash Flow Analysis
• Cash Flow Analysis
The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the
value of a company is the discounted value of the free cash flows to all
shareholders and to equity shareholders.
Cash flow models are built by investors to predict expected cash flows to the
equity shareholders and to the total firm.
Cash Flow Analysis
• Cash Flow Analysis
The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the
value of a company is the discounted value of the free cash flows to all
shareholders and to equity shareholders.
Cash flow models are built by investors to predict expected cash flows to the
equity shareholders and to the total firm.
Technical Analysis
• Technical Analysis
The chief assumption on which ‘Technical Analysis’ is carried out is that supply
and demand are the key factors needed to understand stock prices and market
trends.
Therefore, the company’s value is determined in Technical Analysis by focusing
on psychological factors such as greed and fear and also economic factors.
Technical Analysis
• Technical Analysis
The chief assumption on which ‘Technical Analysis’ is carried out is that supply
and demand are the key factors needed to understand stock prices and market
trends.
Therefore, the company’s value is determined in Technical Analysis by focusing
on psychological factors such as greed and fear and also economic factors.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Ratios for Valuing Firms
There are a few key ratios that are used for valuing firms such as follows:
• Price-to-Earnings Ratio (PE)
• Price-to-Book Ratio (PB)
• Return on Equity (ROE)
• Dividend Payout Ratio
Let us look at each in detail.
Price-to-Earnings Ratio (PE)
• Price-to-Earnings Ratio (PE)
•
The ‘Price-to-Earnings Ratio (PE)’
is defined as the market price of
the stock divided by the Earningsper-Share (EPS). This basically
means it is what you would pay
for $1 of earnings.
•
The PE Ratios is one of the most
widely used ratios. It is chiefly
used to compare financial
performance of different
companies.
Price-to-Earnings Ratio (PE)
• Price-to-Earnings Ratio (PE)
•
The ‘Price-to-Earnings Ratio (PE)’
is defined as the market price of
the stock divided by the Earningsper-Share (EPS). This basically
means it is what you would pay
for $1 of earnings.
•
The PE Ratios is one of the most
widely used ratios. It is chiefly
used to compare financial
performance of different
companies.
Price-to-Book Ratio (PB)
• Price-to-Book Ratio (PB)
•
The ‘Price to Book Ratio (PB)’ is
defined as the price of the
company’s stock divided by the
book value per share.
•
The PB ratio basically indicates
the price you are paying for a $1
worth of assets as shown on the
balance sheet.
Price-to-Book Ratio (PB)
• Price-to-Book Ratio (PB)
•
The ‘Price to Book Ratio (PB)’ is
defined as the price of the
company’s stock divided by the
book value per share.
•
The PB ratio basically indicates
the price you are paying for a $1
worth of assets as shown on the
balance sheet.
Return on Equity (ROE)
• Return on Equity (ROE)
•
The ‘Return on Equity (ROE)’ is
defined as a ratio of the
company’s Earnings-per-Share
(EPS) divided by the company’s
book value per share.
•
Thus, ROS measures how well the
company is utilizing the assets of
the company to make money.
Return on Equity (ROE)
• Return on Equity (ROE)
•
The ‘Return on Equity (ROE)’ is
defined as a ratio of the
company’s Earnings-per-Share
(EPS) divided by the company’s
book value per share.
•
Thus, ROS measures how well the
company is utilizing the assets of
the company to make money.
Dividend Payout Ratio
• Dividend Payout Ratio
•
The ‘Dividend Payout Ratio’ is
defined as the ratio of dividends
paid divided by the earnings of
the company.
•
Also, it is also calculated as
dividends per share divided by
earnings per share.
•
So, when this ratio is high, it
shows that a firm is returning to
the shareholders a large
percentage of company profits.
Dividend Payout Ratio
• Dividend Payout Ratio
•
The ‘Dividend Payout Ratio’ is
defined as the ratio of dividends
paid divided by the earnings of
the company.
•
Also, it is also calculated as
dividends per share divided by
earnings per share.
MCQ
Q.
Click on the
radio button
to select the
correct
answer!
Which of the following ratios is
often seen as a measure of future
earnings potential?
MCQ
Q.
Which of the following ratios is
often seen as a measure of future
earnings potential?
MCQ
Q.
Which of the following ratios is
often seen as a measure of future
earnings potential?
Types of Orders
As an investor and stock trader, you can place the following three types of
orders on your stocks:
Limit
Order
Stop
Order
Market
Order
Types of Orders
As an investor and stock trader, you can place the following three types of
orders on your stocks:
‘Stop Order’ is an
order to buy or sell
stock holdings
when the market
price reaches a
certain level.
Limit
Order
Stop
Order
‘Market Order’ is an
offer to buy stock at the
market price.
Market
Order
‘Limit Order’ is a
request to buy
stock at any price
up to a specified
maximum or to
sell stock at any
price above a
specified
minimum.
MCQ
Q. You have invested in a stock. The
stock prices go up and have made a
profit for you. Which of the following
should you do to help you protect
your gains?
Click on the
radio button
to select the
correct
answer!
MCQ
Q. You have invested in a stock. The
stock prices go up and have made a
profit for you. Which of the following
should you do to help you protect
your gains?
MCQ
Q. You have invested in a stock. The
stock prices go up and have made a
profit for you. Which of the following
should you do to help you protect
your gains?
Types of Brokers
There are various types of brokers who offer various kinds of services for
buying and selling of stocks and various securities such as follows:
Let’s look at each in detail.
Full Service Brokers
Full Service Brokers
•
‘Full Service Brokers’ are the
traditional brokers who are
present since the start of stock
exchanges across the world.
•
Such full service stock brokers
develop and maintain personal
relationships with clients.
•
Such brokers recommend to
their client the purchase and
sale of securities based upon
the client’s needs.
Full Service Brokers
Full Service Brokers
•
‘Full Service Brokers’ are the
traditional brokers who are
present since the start of stock
exchanges across the world.
•
Such full service stock brokers
develop and maintain personal
relationships with clients.
•
Such brokers recommend to
their client the purchase and
sale of securities based upon
the client’s needs.
Discount Brokers
Discount Brokers
•
‘Discount Brokers’ is a relatively
new kind of brokerage service
offering that has come up in the
brokerage business.
•
The discount brokers through
the firm execute a customer’s
transaction on behalf of the
client.
•
However, a discount broke does
not give any advice to the
customer regarding the
purchase or sale of the security.
Discount Brokers
Discount Brokers
•
‘Discount Brokers’ is a relatively
new kind of brokerage service
offering that has come up in the
brokerage business.
•
The discount brokers through
the firm execute a customer’s
transaction on behalf of the
client.
•
However, a discount broke does
not give any advice to the
customer regarding the
purchase or sale of the security.
Electronic Trading Platforms
Electronic Trading Platforms
•
Another more modern and
latest form of trading can be
done electronically by
customers.
•
In such electronic trading, the
customers can through the use
of computer on-line services
initiate their own buy and sell
orders.
Electronic Trading Platforms
Electronic Trading Platforms
•
Another more modern and
latest form of trading can be
done electronically by
customers.
•
In such electronic trading, the
customers can through the use
of computer on-line services
initiate their own buy and sell
orders.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Criteria for Choosing a Broker
•
As a new investor, it is important that you should start
investing with the help of an experienced broker.
•
Hence, it is very crucial that you should choose the right
broker who can guide you to make stock trades in a wise
manner.
Criteria for Choosing a Broker
There are a few criteria that you should keep in mind before choosing a broker.
So, before you choose a broker, keep in mind the following considerations:
•
The brokerage site should have a useful and informative website and trading
platform.
•
The trading platform and interface should be able to allow you to trade during
high-traffic trading periods.
•
The account should be properly insured and valid as per local and national
regulations.
•
Check and find detailed information about the commission structure.
•
Find out detailed information about all the types of services offered by the
brokerage firm.
•
Find out if the brokerage firm offers any daily updates on the stock listings,
news, information and dedicated relationship manager as well.
•
Check and find detailed information if the broker or brokerage firm is willing to
pay you interest on any un-invested cash in your account. Also, what is the
interest rate that the broker is willing to pay?
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Common Stock Investing Strategies
You can use a number of different strategies for investing in stocks.
The following are a few of the most common strategies for investing in stocks:
• Buy and Hold Strategy
• Dollar-cost Averaging Strategy
• Dividend Reinvestment Strategy
Let us look at each in detail.
Buy and Hold Strategy
• Buy and Hold Strategy
Buy and Hold Strategy:
A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not
selling it for an extended period of time. Hence, this is a long-term strategy. It
proves to be very cost-effective.
Buy and Hold Strategy
• Buy and Hold Strategy
Buy and Hold Strategy:
A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not
selling it for an extended period of time. Hence, this is a long-term strategy. It
proves to be very cost-effective.
Dollar-cost Averaging Strategy
• Dollar-cost Averaging Strategy
Dollar-cost Averaging Strategy:
A ‘Dollar-cost Averaging Strategy’ is a strategy of purchasing a fixed dollar
amount of a security at regular intervals, such as every month.
Dollar-cost Averaging Strategy
• Dollar-cost Averaging Strategy
Dollar-cost Averaging Strategy:
A ‘Dollar-cost Averaging Strategy’ is a strategy of purchasing a fixed dollar
amount of a security at regular intervals, such as every month.
Dividend Reinvestment Strategy
• Dividend Reinvestment Strategy
Dividend Reinvestment Strategy:
A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock
are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is
also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’.
Dividend Reinvestment Strategy
• Dividend Reinvestment Strategy
Dividend Reinvestment Strategy:
A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock
are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is
also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’.
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