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STOCKS

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Investing in the Stock Market: Where and How. Fundamental vs. Technical Analysis ... Stock prices reflect market's expectation of the company ... – PowerPoint PPT presentation

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Title: STOCKS


1
STOCKS
  • Presented by Adam Vitarello, Kyle Eudailey, and
    Ashfia Rahman

2
Overview
  • What is a STOCK?
  • How are they traded?
  • How do you value a stock?
  • The stock market and all the factors involved.
  • Volatile investment with high yields.

3
What are STOCKS?
Partial ownership in publicly traded company
  • For Seller Source of finance for the company,
    without liabilities associated with debt financing
  • For Buyer Claim on the assets and profits of the
    company, without managing day-to-day operations

4
Why and How Does a Company Issue Stock?
  • Stocks are a form of Equity Financing
  • No Interest to pay
  • No Principle to pay back
  • Stocks are issued as Initial Public Offerings on
    Exchanges
  • Company and underwriters decide the number and
    price for shares of the IPO
  • Market Capitalization (price of shares) x
    (number outstanding shares)

5
What Are The Types of Stocks?
  • Categorization of Stock
  • Preferred
  • Common
  • Profit Allocation
  • Dividend
  • Non-Dividend

6
Where And How Does An Investor Trade Stock?
7
Public Exchanges
  • Listed Exchanges
  • NYSE
  • AMEX
  • London Stock Exchange
  • Over-the-Counter Market
  • Nasdaq

8
Brokerage Firms
  • Middlemen between the companies and investors
  • Vary in levels of service
  • Full service Brokerage Firms
  • Ex. Goldman Sachs
  • Discount Brokerage Firms
  • Ex. e-trade

9
Areas To Invest
  • Various levels of market capitalization
  • Large Cap
  • Small Cap
  • Various Industries
  • Ex. Health Care, Defense Contractors, etc.
  • Mutual Funds
  • Money Markets (Short-Term Debt)
  • Fixed Income (Bonds)
  • Equity (Stocks)
  • Mixed
  • Index Investing

10
(No Transcript)
11
How To Read a Stock Table
12
Techniques for Investing
  • How to Increase Both Yield and Risk

13
Short Selling
  • Anticipation that the share price will decrease
  • How is this profitable?
  • Advantages and Drawbacks
  • Way to hedge your long investments
  • Losses are unlimited
  • Inflation is working against you

14
Margin Trading
  • Taking out a loan from the broker, so to increase
    buying power and leverage.
  • Can borrow up to 50 of the purchase price
  • Advantages and Drawbacks
  • Can increase profits
  • Can lose more than invested
  • Can be called on your loan (Margin Call)

15
Options
  • A contract allowing the investor to buy or sell
    stock at a specific price on or before a later
    date.
  • Call ? right to buy a stock within a certain time
    period
  • Put? right to sell a stock within a certain time
    period

16
Day Trading
  • Buy and sell stocks within same day (often
    quicker) to earn quick profits
  • Two types
  • Scalpers buy and sell in large volume within
    seconds or minutes
  • Momentum traders trade stocks that are in a
    moving pattern during the day

17
Investing in the Stock Market Where and How
  • Fundamental vs. Technical Analysis

18
Fundamental Analysis
  • Qualitative
  • Corporate Culture (Management)
  • Product and Services
  • Industry and Competition
  • Strength of a Brand Name

19
Fundamental Analysis
  • Quantitative
  • Ratio Analysis of Financial Statements
  • EPS (Net Income - Dividends on Preferred Stock)
    / (Average outstanding shares)
  • P/E Ratio (Market Value per share) / (Earnings
    per share)
  • P/B (market value per share) / Book Value per
    share)
  • PEG (P/E) / Annual EPS Growth
  • ROE Net Income / Shareholders Equity
  • D/E Total Liabilities / Total Assets
  • Current Ratio Current Assets / Current
    Liabilities
  • Beta (calculated using regression analysis)
  • A measurement of the stocks volatility in
    relation to the rest of the Market.

20
Fundamental Investing
  • Growth vs. Value Investments

21
Growth Investments
  • Focus on the future potential of the company
    (earnings and revenues)
  • Stock trades higher than intrinsic worth
  • Generally younger companies
  • Relies heavily on forecasting!!

22
Characteristics of Growth Stocks
  • Strong Historical Earnings
  • Projected 5-yr earnings increase of about 10-12
  • Increasing ROE
  • Watch Profit Margins Carefully
  • Compare to industry standards

23
Value Investments
  • Value Investing Pioneered by Graham and Dodd
  • Investing based upon the Intrinsic value of the
    company
  • Looking for Undervalued Stocks
  • Generally more established companies
  • Ex. Microsoft and General Electric

24
Characteristics of Value Stocks
  • Share price no more than 2/3 of Intrinsic worth
  • P/E ratio in lowest 10 tier of all equity
    securities
  • PEG
  • D/E
  • Current Assets 2 times greater than Current
    Liabilities
  • Dividend Yield 2/3 of long term AAA bond yield.
  • Earnings 7 per annum compounded over last 10
    yrs.
  • Compare to industry standards

25
Growth vs. Value Over Time
Growth vs. ValueWhich Way From Here? By Dr.
Eileen Fitzpatrick
26
Technical Analysis
  • Analyze Historical Trends to Predict Future
    Performance
  • Based on Indicators Generated by Market Activity,
    Past Prices, and Volume
  • Candle Stick Charting
  • Moving Average
  • Relative Strength Index
  • Money Flow Index
  • Outside Variables

27
Candle Stick Charting
28
Moving Average
29
Relative Strength Index
  • RSI 100 - 100/(1 RS)
  • RS (Avg. of n-day up closes)/(Avg. of n-day
    down closes)
  • n days (most analysts use 9 - 15 day RSI)

30
Outside Variable The Presidential Election
  • Political Cycles Effect Market
  • Market grows 10 under Democratic Presidents
    compared to 2 under Republicans
  • 2nd and 3rd year of Presidency Tend to Have
    Market grow at more favorable rate than in years
    1 and 4
  • Growth mostly due to Unexpected policy moves -
    Hard to Predict Future Effects

31
Diversifying Your Investments
  • Mutual Funds and Index Funds

32
Equity-Based Mutual Funds
  • Largest Type of Mutual Fund
  • Many types of equity-based mutual funds (see
    right)
  • Varying degrees of risk
  • Specialty Funds
  • Industry-Based
  • Regionally-Based
  • Socially-Responsible
  • Index Funds

33
Mutual Funds Pros and Cons
  • Cons
  • Professional Management?
  • Costs
  • Dilution
  • Taxes
  • Higher commissions (1.5) without higher returns
  • Pros
  • Professional Management
  • Diversification without requiring large
    investment
  • Economies of Scale
  • Liquidity
  • Simplicity

34
What are Stock Indices?
  • The Market
  • Portfolio of Stocks Representing Portion of
    Overall Market
  • Kinds of Indices
  • Select Large Cap Indices (Dow Jones Industrial,
    1884)
  • Broad Large Cap Indices (SP 500, 1923)
  • Small Cap Indices (Russell 2000)
  • Composite Indices (Nasdaq, Wilshire 5000)

35
Differences In Indices
  • Selected vs. Composite
  • Purpose Representative of Market, Industry?
  • Volatility
  • Overly Optimistic?
  • Price-based Weighting vs Market Capitalization
    Weighting
  • Stock Splits
  • Share in Market
  • Small Cap vs Large Cap

36
Historical PerformanceSP 500, 1960 - Present
37
Historical Comparison Russell 2000, DJIA, SP
500, Nasdaq 1987 - Present
38
Index Investing
Index Committee, not Mutual Fund Managers,
Provides Companies for Investment
  • Pros
  • Index Funds Outperform Normal Mutual Funds
  • Ex. Only 4 of Mutual Funds have outperformed
    SP over last 10 years
  • Smaller Brokerage Fees (.2) compared to mutual
    funds
  • Higher long-term returns
  • Cons
  • More Susceptible to Macroeconomic Downturns (i.e.
    Presidential Elections, wars)
  • Little Creativity In Choosing Up-and-Coming
    Companies

marketbeaters.com
39
Four Points to Remember
  • Stocks are equity financing
  • Stock prices reflect markets expectation of the
    company
  • Two Major ways to Analyze Stocks Fundamental and
    Technical
  • Various ways to invest in stocks, with higher and
    lower risk and reward
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