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INVESTING IN STOCKS

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INVESTING IN STOCKS Money Management Chapter 12 Notes BUYING STOCKS According to our book, over 50,000 Americans own stock in more than 34,000 different publicly ... – PowerPoint PPT presentation

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Title: INVESTING IN STOCKS


1
INVESTING IN STOCKS
  • Money Management
  • Chapter 12 Notes

2
NEWS IMPACTING STOCK PRICES
3
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!

4
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.

5
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.
  • How to Buy Preferred Stock http//www.forbes.com/
    columnists/forbes/2003/0303/108.html

6
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

7
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.

8
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
    well-established, and usually profitable
    businesses.
  • Most people have heard of these companies because
    their products have been around for decades.
  • Companies like McDonalds, Coca-Cola, Microsoft,
    and Ford Motor Company are examples.

9
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 cant afford an expensive vacation.

10
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.

11
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
12
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!

13
HOW THE NYSE WORKS
  • 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
    computers to that firms 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 930 am - 400 pm each day.

14
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.

15
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.

16
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!

17
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. Thats 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!

18
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 its
    stock is getting too expensive. They want the
    price to be cut in half. So they execute a two to
    one (21) 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! Thats a
    pretty great deal!
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