Investing In Stocks & Bonds
Chapter 14
Personal Finance
FIN 235
Stocks (Common & Preferred)
A. Common Stock
Basic form of corporate ownership
2. Common stockholders have voting power
1.
a.
b.
c.
d.
3.
Amend the corporate charter
Approve mergers and acquisitions
Elect directors
Raise ne capital (debt and equity)
Residual claim on income and assets
B. Motives for Purchasing Common Stock
Receive dividends (if paid)
2. Participate in capital growth
1.
Stocks (Common & Preferred)
B. Preferred Stock
Preferred claim on dividends
2. May have one of several features;
1.
a.
b.
c.
3.
Cumulative
Participating
Convertible
Typically non-voting except if several dividend payments
in a row are unpaid.
Evaluating Stock Investments
What makes a particular stock an attractive investment?
A.
1.
2.
3.
4.
Good growth opportunities
Good dividend yields
Market leader
Good management
How do we find out about these stocks?
B.
1.
2.
3.
4.
5.
6.
Research reports: Barron’s, Investor’s Business Daily
Brokerage recommendations (in-house research)
Investment websites: Zack’s, Motley Fool, The Street.Com
Individual Company websites
Stock Advisory Services: Value Line, Standard & Poor’s,
Mergent
Magazines: Forbes, Business Week, Fortune, Money, Inc.
Important Decision Factors
A. Earnings and Earnings Growth
1.
2.
3.
Earnings Per Share: trailing vs. forecast
P/E ratio
PEG ratio
B. Dividends
1.
2.
Dividend growth rates
Coverage
C. Industry Characteristics
1.
2.
3.
Growth
Mature
Declining
Stock Markets
A. Primary
Where new issues are sold: e.g. IPO
2. Investment Bankers dominate this market
1.
B. Secondary Markets
Where “seasoned” issues are traded.
2. Examples; New York Stock Exchange, Nasdaq (OTC)
1.
C. Securities Exchanges
Specialists (provide liquidity)
2. Floor Traders (execute public trades)
1.
Brokerage Services
Full Service (Retail)
A.
1.
2.
3.
Best place to start for individual new to investing
More expensive to trade
Research reports available
Discount Brokers
B.
1.
2.
3.
Best for experienced traders
Do your own research
Less expensive
Online
C.
1.
2.
3.
Same as above, but typically higher incidence of trades
Investors totally comfortable with online training
Least expensive way to trade.
Details of Stock Transactions
A. Types of Orders
Market: willing to buy at ASK, sell at BID
1.
a.
Limit: will trade at specified price
2.
a.
Deferred execution
Stop: order becomes active when stop price is “hit”
3.
a.
b.
4.
5.
6.
7.
Immediate execution
Stop [Sell] Loss: sell position when price gets too low.
Stop Buy: add to position if prices start to move up.
Day Order: if no execution, automatically cancelled
Good till Cancel (GTC): stays active until executed
Fill or Kill: get it now or cancel order
All or Nothing: for large orders
Commission Schedules
A. Retail Brokers
1.
By the size of the order
B. Online / Discount
Flat fee for trades up to 1000 shares.
2. More expensive if broker assisted.
1.
C. Bid-Ask Spread
Cost of liquidity
2. Bid = highest price of unexecuted orders to buy
3. Ask = lowest price of unexecuted orders to sell
1.
Investment Strategies
A. Short-Term
Attempting to time the market
2. Expensive and risky
1.
B. Long-Term
Buy and Hold
2. Occasional trading to rebalance portfolio or take profits
1.
C. Dollar Cost Average
Buying [small] dollar amounts of an issue over time.
2. Most popular technique with mutual funds and
retirement plans
1.
Investment Strategies
Long versus Short Positions
A.
1.
2.
Long: expect prices to go up
Short: expect Prices to go down
Buying on Margin
B.
1.
2.
3.
Borrow money from broker to finance purchase
Maximum margin = 50%
Margin requirement controlled by Federal Reserve
Selling Short
C.
1.
2.
3.
4.
5.
Margin Account
Borrow stock and sell it
Buy stock back and return: trick is to buy back at a lower price.
Example: Sell ABC short at $50, then buy back later at $40
Short sellers always expect stock price to decline.
Options and Futures
A. Options
Right but not obligation to buy (call) or sell (put) a stock
2. Contracts are for round lots (100 shares)
3. Price of an option is called a premium.
4. Options have relatively short lives (6 – 7 months)
1.
a.
Exception: LEAPS – run up to two years.
Options can be used to Speculate or to Hedge
5.
a.
b.
Speculate: bet on market move in one direction
Hedge: protect an underlying stock position
Options and Futures
B. Futures
Used to speculate or hedge commodity positions
2. Commodities:
1.
a.
b.
c.
d.
Financial (bills and bonds)
Industrial (lumber, copper, gold)
Agricultural (wheat, corn, cocoa)
Exchange (Euro, Swiss Franc, UK Pounds)
Require greater net worth than stocks
4. Many hazards associated with futures trading
3.
HOMEWORK
A. Do the Math: 1, 2, 4
B. Be Your Own Personal Financial Planner
2 – Compare different stocks as Investment (w/s 54)
2. 5 – Current Yield (w/s 58)
1.