Stock Investing
Basics
Important Terminology Related to
Stock Investing
Stock
 Stock represents ownership in a
corporation.
 It also represents a proportional share in
the assets and profits of the issuing
corporation.
Corporations
 Corporations are legal entities owned by
individual stockholders.
 20% of all businesses in the United States are
classified as corporations.
 90% of all products sold and services provided
in the United States come from corporations.
 The two types of corporations are publicly
traded and privately held.
Why do Corporations Issue
Stock?
 To raise financial capital that the
company can use to expand its business
operations, update equipment, and
conduct research and development.
 All of these efforts are designed to
improve the corporation’s profitability.
Public Corporations
 These are also referred to as publicly
traded or publicly held corporations.
 These are companies that sell their stock
to the general public.
 McDonald’s, Wal-Mart, Home Depot, and
Coca-Cola are all examples of publicly
traded corporations.
Private Corporations
 These are also referred to as privately
held or closely held corporations.
 These are corporations that issue stock
but do not sell it to the general public.
 Chick-fil-A is an example of such a
company.
Why do People Invest in
Stocks?

To make a profit! Historically, stocks
have returned around 10%.
 Profits are made from stock in two ways
1. Dividends
2. Appreciation in value from the time of
purchase until the time of sale (capital
gains).
Common Stock
Common Stock Characteristics:
 The shareholder (person that owns the stock)
has voting privileges on company matters.
 The shareholder may receive dividends (profits
of the corporation that are distributed to
shareholders).
 There is a greater potential for growth
(appreciation in value) with common stock.
Preferred Stock
Preferred Stock Characteristics:
 The shareholder is guaranteed to be paid a dividend
before common stock shareholders.
 The shareholder has virtually no voting privileges in
company matters.
 A preferred share of stock is assigned a dollar value
that is printed on the stock certificate (par value).
 There is much less fluctuation in the price of
preferred stocks compared to common stocks.
 Preferred stock is a much more conservative
investment than common stock.
Market Capitalization
 This is the total number of stocks issued
by a corporation multiplied by the current
market price of the stock.
 We are going to discuss three types of
market capitalization:
 Large-Cap
 Mid-Cap
 Small-Cap
Large-Cap Stocks
 These are the stocks of corporations that
have market capitalizations in excess of
10 billion dollars.
 Some examples of large-cap stocks
include: Exxon-Mobil (426 Billion),
Microsoft (227 Billion), Wal-Mart (197
Billion), and General Electric (228
Billion).
Mid-Cap Stocks
 These are the stocks of corporations that
have market capitalizations of between 2
billion and 10 billion dollars.
 Some examples of mid-cap stocks
include: Family Dollar (6 billion) and
VeriSign (6 billion)
Small-Cap Stocks
 These are the stocks of corporations that
have market capitalizations of between
300 million and 2 billion dollars.
 Some examples of small-cap stocks
include: The Cheesecake Factory (1.8
billion) and Ann Taylor Stores (1.4
billion).
Stock Exchanges
A stock exchange is where shares of stock
are bought and sold.
Some examples of stock exchanges
include the New York Stock Exchange
(NYSE) and the NASDAQ.
These are also sometimes referred to as
securities exchanges.
NYSE
 The New York Stock Exchange is one of the world’s
largest and most well known exchanges.
 More than 3000 corporations are listed on the NYSE.
 The NYSE uses a combination of human floor traders
and computerized trading.
 The NYSE is open between 9:30 A.M.-4:00 P.M. (EST)
 Some of the world’s largest and most well known
companies are traded on the NYSE.
 Some examples include: Coca-Cola, Wal-Mart, ExxonMobil, General Electric, and McDonald’s.
NASDAQ
 NASDAQ stands for the National Association of
Securities Dealers Automated Quotation System.
 This is a completely computerized stock exchange.
 More than 4000 corporations are listed on the
NASDAQ.
 The NASDAQ was started in 1971.
 Many high tech companies are listed and traded on the
NASDAQ.
 Some examples include: Microsoft, Intel, Dell,
Amazon.com, Google, and Apple.
Brokerage Firms
 A brokerage firm is a company that conducts
securities trading (the buying and selling of
stocks, bonds, mutual funds, etc…), investment
research, analysis, and advisory services for its
clients.
 We are going to talk about the differences
between full-service and discount brokerage
firms.
Full-Service Brokerage Firms
 Full-service brokerage firms provide the most
personalized services (research, advice, retirement
planning, tax tips, etc…)
 They also charge the highest fees and commissions.
 Typically, full-service brokerages are best for
individuals that do not have the time, level of comfort,
or expertise to make their own investment decisions.
 Some examples of full-service brokerage firms include:
Merrill Lynch and Edward Jones.
Discount Brokerage Firms
 Discount brokerage firms carry out buy and sell orders
for their clients but provide little or no investment
advice.
 The fees and commissions charged by discount
brokerage firms are much lower than those charged by
full-service firms.
 Discount brokerage firms are best for individuals that
have the ability, level of comfort, and expertise to
conduct their own research and make their own
investment decisions.
 Some examples of discount brokerage firms include: ETrade and ShareBuilder.
Brokerage Firms (Continued)
 Charles Schwab and TD Ameritrade are
examples of brokerage firms that offer
both full and discount services to their
clients.
 Fidelity and Vanguard are two of the
largest mutual fund companies that also
provide brokerage services to their
clients.
Stock Performance
Indicators
 Some common indicators of stock market
performance include the:
 Dow Jones Industrial Average
 S&P 500
 NASDAQ
Dow Jones Industrial
Average
 The Dow Jones Industrial Average tracks the stocks of
30 of the largest and most widely held companies in
the United States.
 The DJIA is calculated by adding the sum stock values
of the 30 companies listed in the index and dividing the
sum by an established divisor.
 The current divisor is .0123051408
 Because the divisor is less than one it actually serves
as a multiplier.
S&P 500
 This is a stock index that contains 500 large
companies.
 Each of these companies trade on either the New York
Stock Exchange (NYSE) or on the National Association
of Securities Dealers Automated Quotation System
(NASDAQ)
 It is the second most watched US index after the Dow
Jones Industrial Average. However, many investors
feel that the S&P 500 is a better indicator of the overall
stock market because it contains more companies.
 Each of the 30 companies listed in the Dow Jones
Industrial Average are also listed in the S&P 500 Index.
Types of Stock
Investments
 We are going to examine the following types of
stocks:
 Blue-Chip Stocks
 Income Stocks
 Growth Stocks
 Cyclical Stocks
 Defensive Stocks
 The stocks of some companies can fit into
several of these categories.
Blue-Chip Stocks
 These are the stocks of the most well
established and financially sound
companies.
 All 30 of the stocks that make up the
DJIA are blue-chips.
Income Stocks
 These are the stocks of companies that pay
regular and steadily increasing dividends.
 These are typically conservative stock
investments that may not appreciate (or
decline) as much in value as other types of
stocks.
 Exxon-Mobil and Proctor & Gamble are
examples of income stocks.
Growth Stocks
 These are the stocks of companies whose
earnings are expected to grow at an above
average rate.
 Growth stock companies often do not pay
dividends. They instead invest the profits back
into the company in the hopes of becoming
more profitable.
 Google and Amazon.com are examples of
growth stocks.
Cyclical Stocks
 These are stocks that appreciate in value
quickly when economic growth is strong
and fall rapidly when economic growth is
declining.
 Alcoa, Caterpillar, and Ford are
examples of cyclical stocks.
Defensive Stocks
 These are stocks that remain stable
during declines in the economy.
 Blue-chip and income stocks like ExxonMobil and Proctor & Gamble are
examples of defensive stocks.