INVESTING IN STOCKS
Money Management
Chapter 12 Notes
NEWS IMPACTING STOCK PRICES
BUYING STOCKS
• According to our book, over 50,000
Americans own stock in more than
34,000 different publicly traded
companies!
– A public corporation is a company whose
stock is traded openly on stock markets
like the NYSE or NASDAQ
• Stocks are traded in round lots or
odd lots.
– A round lot is 100 shares or multiples of
100.
– An odd lot is less than a 100 shares.
– Brokerage Firms sometimes charge more
for odd lot purchases. This is because
the firm will have to combine odd lot
purchases to make a round lot purchase
before they can submit the order!
COMMON STOCK
• Common stock is a class of stock in which the
owner of the stock shares directly in the success or
failure of a business.
– As a shareholder you stand to profit when the company
profits. You also have some say in policy decisions like
whether to issue more stock to outside buyers, changes on
the board of directors etc…
– The more shares you own, the more say you have and the
greater your power is.
– When the company does well, they will often pay
Dividends: which are a portion of the profits that are
redistributed to the shareholders of a corporation. Dividends
are usually declared once a year.
– Common stockholders can lose all of their investment in a
business if the stock bottoms out!
– Common stockholders are entitled to vote for the board of
directors that runs the corporation.
• When you assign your right to vote to someone else that is
known as a proxy.
PREFERRED STOCK
• In addition to common stock, investors can
purchase preferred stock.
– Dividends are fixed, regardless of how the
company does, making it less risky than common
stock.
– In the event the company fails, preferred
stockholders are paid first.
– The investor can only lose as much as they put in,
no more!
– Preferred stockholders do not have voting
privileges.
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How to Buy Preferred Stock: http://www.forbes.com/columnists/forbes/2003/0303/108.html
CLASSIFICATION OF STOCK INVESTMENTS
• How do you decide
what type of stock
to buy?
• To make analysis a
bit more organized,
analysts use a few
classifications:
INCOME VS. GROWTH STOCKS
• Stocks that have a consistent history of
paying high dividends are known as income
stocks.
– Preferred stocks are usually the investors choice if
they are after income stocks.
• Growth stocks are companies that
REINVEST their profits into the business so
that they can grow and expand.
– In the long run, ten or twenty years, these types
of companies may be worth substantially more
than their purchase price today.
– Growth stocks usually pay little or no dividend.
PENNY VS. BLUE CHIP STOCKS
• When a stock sells for less than $5 per share it is
classified as a penny stock.
– Although inexpensive, penny stocks are considered highly
speculative.
– In other words, they can grow substantially or lose all their
value.
– Frequently these stocks are issued by companies with a
“hot” new product that may be an enormous long-term
success or merely a fad!
• Blue Chip Stocks are stocks of large wellestablished, and usually profitable businesses.
– Most people have heard of these companies because their
products have been around for decades.
– Companies like McDonald’s, Coca-Cola, Microsoft, and Ford
Motor Company are examples.
Defensive vs. Cyclical Stocks
• A defensive stock is one that remains stable and
pays dividends during an economic decline.
– Generally, companies in this category have a history of
stable earnings.
– A defensive stock is not as subject to the ups and downs of
business cycles.
– The demand for their products is consistent regardless of
economic conditions.
– Examples include: Food, Utilities, and Health Care industries
• Cyclical stocks do well when the economy is stable
or growing, but do very poorly during recessions.
– Examples are airline companies and other industries based
on traveling – people may feel like they can’t afford an
expensive vacation.
Stock Values and Return on Investment
• When you buy a stock you will pay its
market value.
– Market Value reflects the price investors are
willing to pay for a share at that moment.
– How a company is doing, its track record, and how
well it is expected to do in the future will
determine market value.
– Stocks can be considered “overvalued” or
“undervalued” if they are selling for a price that
is not justified by their earnings potential.
– You can use ratios such as Earnings per Share
(EPS) and the Price/Earnings Ratio (P/E) to
determine if a stock is under or overvalued.
How do you make money buying stock?
• There are two major ways:
– Stock can increase in value through market
activity.
– Dividends can be paid – usually in the form of
cash or extra shares.
• The return on investment is how much
money you make from the investment. It is
the difference between what you paid for the
stock and what you sold it for, plus any
dividends you earned!
• ROI is computed as follows:
Current Price + Dividends
Purchase Price + Commission
- 1 * 100
Securities Market
• A securities market is
where you buy and sell
securities – which are
stocks and bonds.
• A securities exchange is
a marketplace where
brokers who are
representing investors meet
to buy and sell securities.
– The largest organized
exchange in the U.S. is the
New York Stock Exchange
(NYSE)
– Watching it at work is truly an
experience!
HOW THE NYSE WORKS…
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The trading floor is almost as big as a football field
Floor brokers buy and sell stocks on the floor. Only
brokers who are members of the exchange may
trade there.
Trading posts are spread out about every 100 feet.
All buying and selling is done at these trading posts.
About ninety stocks are assigned to each post.
Orders received at a brokerage firm are sent by
computer’s to that firm’s booth at the exchange.
A message is printed out & given to the floor broker
When the trade is complete, the floor broker reports
back to their brokerage firms.
The buyer and seller can be notified that the
transaction has been concluded.
Stock trading is done auction style … meaning for
every transaction, the highest bidder meets the
lowest seller.
The NYSE is open from 9:30 am - 4:00 pm each day.
Over-the-Counter-Market
• When securities are bought and sold
through brokers, but not through a
stock exchange, the transaction is
over-the-counter (OTC).
• The OTC market is a network of
brokers who buy and sell
securities of corporations who
are not listed on the exchanges.
• Brokers in the OTC market DO NOT
deal face-to-face. Trades are done
via phone or computer only.
• NASDAQ is the largest OTC Market.
• To be listed with them the company
must have at least 100,000 shares
of stock worth at least 1 million.
INVESTMENT STRATEGIES
• Once stock has been
acquired, your investment
may be either short or
long term.
– Generally, if you buy and
sell stock within a short
period of time, you are
considered a speculator,
or trader.
– If you hold your
investments for a long
period of time (a year or
more), you are considered
an investor.
Short-Term Strategy
• Selling short – strategy used if you feel like
a stock price is going to drop!
– To sell short, you borrow a certain number of
shares from a broker.
– You then sell them at the current price and hold
on to the cash.
– Once the price has dropped, you buy back the
correct number of shares at the lower price. This
is called “covering your short position”.
– You then return the correct number of shares to
the broker and keep the extra money!
Long-Term Techniques
• As you may have already learned, investing in
the stock market for the short-term is highly
speculative and extremely risky.
• Most advisors recommend long-term
investment strategies instead. That’s how to
make the stock market work for you! 
• The most popular long-term investment
strategy is the Buy and Hold.
– Pick solid companies with great growth and
earnings potential and HOLD on to the stock!
Collect your dividends and watch your portfolio
grow!
Stock Splits
• Stock splits can also add to your investment.
• A stock split occurs when a company increases
the number of shares it has outstanding, but
lowers the selling price in direct proportion.
– For example: Lets say Google believes that it’s
stock is getting too expensive. They want the
price to be cut in half. So they execute a two to
one (2:1) stock split.
• If you owned 100 shares of Google worth $400 per share
for a total of $40,000 – you would now own 200 shares
worth $200 per share for a total of $40,000. Looks the
same right?
• This stock split lowers the cost of the stock and will
hopefully encourage more people to buy the stock! But
now if the price goes back up to $400 again … you own
twice as many shares! That’s a pretty great deal!