12.2
12.2
INVESTING IN
STOCKS
BUYING AND SELLING STOCK
LESSON 12.1
EVALUATING STOCKS
• Standard 4.0 Investigate opportunities available
for saving and investing.
• 4.3
Evaluate methods of investing.
a. Stocks and Bonds
GOALS
• ROI, Margins and indexes.
• Explain how to value a stock and decide a fair
price to pay for a stock purchase.
Chapter 12
SLIDE 2
RETURN ON INVESTMENT
• Because you earn from dividends and capital gain
• Use both computing the return on your investment.
• Profit is the difference between what you paid for the
stock and what you sold it for, plus any dividends you
earned.
• To compute the total costs, add any commission you
paid to the stockbroker to the purchase price of the
stock.
Chapter 12
SLIDE 3
RETURN ON INVESTMENT
• Profit / Cost = ROI
• Profit = Capital Gains+ Dividends
• Cost = Purchase Price + Commission+
interest
• Capital Gains = Total Gains from sale
– Cost
Chapter 12
SLIDE 4
RETURN ON INVESTMENT
• Sell = $40 / Share
• Dividend = $1 / Share
• Purchase price = $38 / Share
• Commission = $ 19
• Shares owned = 100
Profit / cost = ROI
Capital gain + Dividends/ Purchase price + Commission
(200 + 100 -19) / (3800 + 19) = 7.36%
Chapter 12
SLIDE 5
STOCK INDEXES
• A stock index is a benchmark that investors
use to judge the performance of their
investments.
• Examples of commonly used indexes include:
• Dow Jones Industrial Average
• Standard & Poor’s 500
• NASDAQ Composite Index
Chapter 12
SLIDE 6
THE SECURITIES MARKET
• A securities exchange is a marketplace where brokers
who are representing investors meet to buy and sell
securities.
• New York Stock Exchange
• American Stock Exchange
• The over-the-counter (OTC) market is a network of
brokers who buy and sell the securities of corporations
that are not listed on a securities exchange.
• Pink sheets
Chapter 12
SLIDE 7
BULL AND BEAR MARKETS
• A bull market is a prolonged period of rising stock
prices and a general feeling of investor optimism.
• A bear market is a prolonged period of falling stock
prices and a general feeling of investor pessimism.
Chapter 12
SLIDE 8
STOCK SPLIT
• A stock split is an increase in the number of
outstanding shares of a company’s stock.
• Outstanding shares selling price are lowered in
direct proportion.
• A stock split lowers the selling price of the stock,
making the shares more affordable
• As investors buy more stock at the lower price, the
share price often rises.
• If you held the stock before the split, then this price
increase makes your stock worth more.
Chapter 12
SLIDE 9
INVESTING STRATEGIES
Short-term techniques
Long-term techniques
• Buy on margin
• Sell short
•
•
•
•
Chapter 12
Buy and hold
Dollar-cost averaging
Direct investment
Reinvesting dividend
SLIDE 10
BUY ON MARGIN
• You can borrow money from your broker to buy
stock if you open a margin account and sign a
contract called a margin agreement.
• Leverage is the use of borrowed money to buy
securities.
• When the market value of a margined stock
decreases to approximately one-half of the original
purchase price, the investor will receive a margin
call from the broker.
• This means the investor must pledge additional cash
or securities to serve as collateral for the loan.
Chapter 12
SLIDE 11
1. Stock Price $10,000
Owed broker -5,000
Equity
5,000
BUYING ON MARGIN
2. Stock Price $11,000
Owed broker -5,000
Equity
6,000
3. Stock Price $9,000
Owed broker -5,000
Equity
4,000
Chapter 12
SLIDE 12
SELL SHORT
• Short selling is selling stock borrowed from a
broker that must be replaced at a later time.
• To sell short, you borrow a certain number of
shares from the broker.
• You then sell the borrowed stock, knowing that
you must buy it back later and return it to the
broker.
• You are betting that the price will drop, so that
you can buy it back at a lower price than you
sold it for, thus making a profit.
Chapter 12
SLIDE 13
LONG-TERM INVESTING
TECHNIQUES
•
•
•
•
Buy and hold
Dollar-cost averaging
Direct investment
Reinvesting dividends
Chapter 12
SLIDE 14
BUY AND HOLD
• Most investors consider stock purchases as long-term
investments.
• All stocks go up and down, but over a number of years,
the overall trend of non-speculative stocks is
moderately up.
• If you “buy and hold” stocks for many years, you can
ride out the down times.
• When you are ready to sell years later, most likely your
stock will have gained value.
• In addition, many stocks pay dividends, so you are
earning income while you hold the stock.
Chapter 12
SLIDE 15
DOLLAR-COST AVERAGING
• The dollar-cost averaging technique involves the
systematic purchase of an equal dollar amount of the
same stock at regular intervals.
• The result is usually a lower average cost per share.
Chapter 12
SLIDE 16
DIRECT INVESTMENT
• You can save money using direct investment, or
buying stock directly from a corporation.
• By buying directly, you avoid brokerage and other purchasing
fees.
• You may also be able to obtain shares at prices lower than on
open exchanges.
Chapter 12
SLIDE 17
REINVESTING DIVIDENDS
• Dividend reinvestment means using dividends previously
earned on the stock to buy more shares.
• Buying stock this way avoids a broker fee and other
costs that apply, such as taxes, when you receive cash
dividends on the stock.
Chapter 12
SLIDE 18
READING THE STOCK LISTINGS
Excerpt from stock exchange listings:
52 Wks
High
Low
Stock
Div
Yld%
P/E
Ratio
Sales
100s
High
Low
Close
Net
Change
1
2
3
4
5
6
7
8
9
10
11
58.75
44.00
Enger
2.20
4.8
12
109
46.38
45.50
46.00
–.50
45.00
23.00
Eng pf
2.25
8.9
10
25
26.25
24.00
25.38
+.38
10.50
9.00
Entld
.10
1.0
3
8
10.13
9.50
10.00
----
24.00
16.00
Epsco
1.00
5.0
7
12
21.00
19.00
20.00
+.88
6.38
4.00
Exlab
----
----
15
300z
5.75
5.12
5.50
----
57.00
32.00
ExeB
2.50
5.7
11
48
46.00
43.00
44.00
+1.00
Chapter 12
SLIDE 19
STOCK PROGRESS CHART
Closing Prices for 10 Days
Total
Change
(+ or –)
Stock
Names
1
2
3
4
5
6
7
8
9
10
1. Enger
28.00
28.12
29.00
28.00
27.00
28.00
28.50
29.00
29.50
30.00
+2
2. Glastn
38.00
40.00
41.00
41.50
––
40.00
39.00
38.00
38.00
38.00
0
3. Karbr pf
61.00
61.25
61.13
61.00
61.38
61.00
62.00
62.38
61.00
61.13
+.13
4. Maxln
50.13
49.00
50.00
50.25
51.00
51.00
51.13
52.00
52.00
53.50
+3.37
5. Totlmb
10.00
11.00
11.13
11.50
11.00
10.88
10.00
9.00
8.00
8.50
–1.50
Chapter 12
SLIDE 20
BOOK ASSIGNMENT
•Page 268 q's 1-14
•Page 278 q's 1-11,13
Chapter 12
SLIDE 21