Investing in Stocks

 Describe stocks and how they are used by corporations and investors.
 Define everyday terms in the language of stock investing.
 Classify stock according to their basic descriptive categories.

Stocks and Bonds and How They are
Used
 Common stock
 Voting rights
 Proxy Vote
 Preferred stock
 Cumulative
 Convertible

 Why do corporations issue common stock?
 To raise money to start or expand a business
 To help pay for ongoing business expenses
 They don’t have to repay the money
 Dividends are not mandatory
 Stockholders have voting rights

 Income from dividends
 Record Date
 Ex-dividends
 Dollar appreciation of stock value
 Increased value from stock splits

Assumptions:
100 shares of common stock purchased April 18, 2014, sole April 18, 2015; total dividends of $2.21 per share for the investment period.
Cost when Purchased
100 shares @ $42.75 = $4,275
Return when Sold
100 shares @ $56.25 = $5,625
Plus commission + 29 Minus commission - 34
Total investment $4,304 Total return $5,591
Transaction Summary
Total return
Minus total investment
Profit from stock sale
Plus dividends
Total return for the transaction
$5,591
- 4,304
$1,287
+ 221
$1,508

 Common stock
 get dividends depending on profit the company makes
 Preferred stock
 receive cash dividends before common stock holders
 pre-determined dividend rate
 most preferred stock is callable

 Cumulative preferred stock
 unpaid cash dividends accumulate and are paid before cash dividends to common stock holders
 Participation feature
 rare form of investment
 can share in earnings beyond stated dividend amount
 Conversion feature
 can be traded for shares of common stock

 Income stocks
 Growth stocks
 Cyclical stocks
 Defensive stocks
 Large cap stocks
 Capital > $5 billion
 Mid cap stocks
 Capital between $1 billion and $5 billion
 Small cap stocks
 Penny stocks

 Blue chip stock
 low risk
 consistent dividends
 ex. AT&T, Kellogg's, General Electric
 Income stock
 higher than average dividends
 ex. utility stock

(continued)
 Growth stock -
 earns above average profits
 low or no dividends
 Profits reinvested in company, so...
 Stock price should go up
 ex. Microsoft or Intel

(continued)
 Cyclical stock
 follows business cycles of advance and declines in the economy
 ex. new construction, cars, timber
 Defensive stock
 remains stable even if the economy is declining
 ex. food and utility stocks

 A good supplement to information in newspapers
 Charge a fee
 Hundreds to choose from
 Standard and Poor’s reports
 Value Line
 Moody’s Handbook of Common Stock
 On-line services allow access to web sites such as quote.yahoo.com and smartmoney.com

Numeric Measures to Consider
When Evaluating a Stock
 Look at book value of one share
 net worth of company divided by the number of outstanding shares
 if a share costs more than the book value the company may be overextended or it may have a lot of money in research and development

Numeric Measures to Consider
When Evaluating a Stock
(continued)
 Look at the price earnings ratio
 also called the P-E
 price of one share of stock divided by the earnings per share of stock over the last 12 months
 a low number means could be a good time to buy it, however many technology stocks have high P-Es
 Look at the beta for the stock
 stock with a beta >1.0 means more volatility

Earnings Per Share are a corporation’s after-tax income divided by the number of outstanding shares:
Assume XYZ Corporation has after-tax earnings of
$2,500,000. Also assume that XYZ has 1,000,000 shares of common stock. This means their Earnings per share would be $2.50:
After-tax income
Earnings per share = Number of shares outstanding
$2,500,000
1,000,000 = $2.50

The price of a share of stock divided by the corporation’s earnings per share of stock.
Using the example in the last slide, the Earnings Per Share were $2.50. Assume that XYZ’s stock is selling for $50 per share. Their P/E Ratio would be 20:
Price per share
Price-earnings (P/E) ratio = Earnings per share
$50.00
= $2.50 = 20

Dividend payout is the percentage of a firm’s earnings paid to stockholders in cash. Assume Ford Motor Company paid out an annual dividend of $0.40 per share. Also assume
Ford Motor Company earned $1.44 share. The Dividend
Payout would be 28%:
Dividend amount
Dividend payout = Earnings per share
$0.40
= $1.44 = 0.28 = 28%

Current yield is the yearly dollar amount of income generated by an investment divided by the investment’s current market value. Assume Ford is currently selling for
$10 per share. The current dividend yield is 4%:
Annual income amount
Current yield = Market value
$0.40
Current yield = $10.00 = 0.04 or 4%

Primary Market
Initial Public Offering (IPO)
Secondary Market
Security Exchange
New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
Regional Stock Exchanges (Chicago, San
Francisco, Philadelphia, Boston, etc.)
Over-the-Counter Exchange
NASDAQ

Market Order
Day Order
Week Order (Good This Week, GTW)
Month Order (Good This Month, GTM)
Limit Order
Stop Order

Buy-and-Hold Technique
Dollar Cost Averaging
Value Cost Averaging

Direct Investment Plan allows you to purchase stock directly from a corporation without having to use an account executive or a brokerage firm.
Dividend Reinvestment Plans (DRIP) allows you the option to reinvest your cash dividends back into your portfolio to purchase additional shares of stock.