Chapter 31 Investing in Stocks pp

Learning Objectives After completing this chapter, you’ll be able to: 1.Define 1.Define stock. 2.Explain 2.Explain how stock is bought and sold. continued

Learning Objectives After completing this chapter, you’ll be able to: 3.Identify 3.Identify the indexes that track stock prices over the long run.

Why It’s Important Making good investment decisions helps you reach your financial goals.

Key Words investing stock yield dividends capital gain capital loss common stock continued

Key Words preferred stock broker stock exchange mutual fund blue-chip stocks speculative stocks

Investing in Stocks Investing is putting your money to use in order to make money on it.

Figure 31.1 POSSIBLE INVESTMENTS

Investing in Stocks Stock is a share of ownership in a business. One way a corporation raises money to start or to enlarge its business is by selling stock.

Investing in Stocks When you buy stock, you receive a stock certificate indicating that you are now part owner of the company. Sole proprietorships and partnerships don’t sell stock.

Return on Stocks The return on an investment, or yield, is the amount of money the investment earns.

Types of Return One type of return is through the payment of dividends, which is a share of profits. Dividends are usually paid quarterly.

Types of Return Stockholders can also earn income on their stocks by selling their stock shares for more than they paid for them.

Types of Return Selling stock for more than you paid for it is called a capital gain. Selling stock for less than you paid for it is called a capital loss.

Types of Return The government taxes the amount you make in dividends or in capital gains.

Rate of Return The rate of return on stocks is always expressed as a percent of the original investment and figured on an annual basis.

Rate of Return A single share of stock whose value increases from $50 to $55 in a year and pays a $5 dividend during the year has a 20 percent rate of return.

Types of Stocks Common stock is the primary form of ownership in a corporation. For each share of common stock that you own, you get a vote in how to run the corporation.

Types of Stocks The Board of Directors is responsible for representing the interests of the stockholders in the running of the corporation.

Types of Stocks Preferred stock gives its holders certain privileges that common stockholders don’t have.

Types of Stocks If the company pays dividends, dividends on preferred stocks are paid before dividends on common stocks.

Types of Stocks If a company fails, preferred stockholders get a share of whatever assets are left after the company’s debts are paid before the common stockholders do.

Types of Stocks Preferred stockholders have limited voting privileges and so they play a smaller role in the company’s affairs.

Graphic Organizer Types of Stock Graphic Organizer Dividend rate not fixed Common Stock Preferred Stock Both Voting rights Fixed dividend rate Dividends and claims paid first Limited voting rights Represent ownership No maturity date

If you’re involved in the world of business, or have invested part of your savings in shares of corporate stock, you must be able to understand stock market quotations. continued Reading Stock Market Quotations Business Building Blocks

continued Sample of a Stock Quotation Business Building Blocks Week Hi Lo StockSymDivYld % PEVol 100s HiLoCloseNet Chg 66½ 45¼ McDon- alds MCD , ½65 ⅞+3 1  16

Stockbrokers A broker is a person who acts as a go-between for buyers and sellers. Brokers charge either a percent of the value of the stock or a set amount for each transaction as a fee for their services.

Stock Exchanges Most stocks are bought and sold through a trading market known as a stock exchange.

Stock Exchanges When people sell stocks through their stockbrokers, their wishes are sent to the broker’s representative on the stock exchange floor.

Stock Exchanges Only the stocks listed on an exchange can be traded. To be listed on an exchange, a corporation must prove to the exchange that it is in good financial condition.

Over-the-Counter Markets Many stocks not listed on a major exchange can be bought and sold through the National Association of Securities Dealers Automated Quotations (NASDAQ) market.

Over-the-Counter Markets The NASDAQ is a system that quotes over-the-counter securities—that is, all investments bought and sold.

Mutual Funds A mutual fund is a fund created by an investment company that raises money from many shareholders and invests it in a variety of stocks.

Mutual Funds A mutual fund has much greater buying power because it has a greater amount of money available to invest.

Mutual Funds Mutual funds are a way to limit your risk of investing in the stock market. The risk is spread out because a mutual fund consists of stocks in many companies.

Mutual Funds Many people prefer mutual funds because the professional managers of the mutual funds have more experience in selecting stocks than they do.

Stock Indexes An index is a measuring system that tracks stock prices over the long run.

Stock Indexes The two most common indexes are: The Dow Jones Industrial Average (DJIA) Standard & Poor’s (S&P)

Figure 31.2 WHAT’S YOUR FINANCIAL ID? Are you a risk taker? This quiz will help you gauge your own risk tolerance. At the end you’ll add up your points to see how you fared (1 point = a, 2 points = b, and 3 points = c). On a piece of paper, answer the questions on the left.

Fast Review 1.What kind of businesses can sell stocks? 2.What privileges do preferred stockholders get? continued

Fast Review 3.What kind of fees do brokers charge for their services? 4.Name the advantages of a mutual fund.

Levels of Risk The two basic categories of stocks that offer different levels of risk are: Blue-chip Speculative

Blue-Chip Stocks Blue-chip stocks are stocks in large, well-established companies that have a good track record of profitability and success.

Speculative Stocks Speculative stocks are stocks in relatively new firms that don’t have an established track record of success.

Day Trading Day trading means buying and selling stock, usually on the Internet, based on minute-by-minute changes in the price of the stock.

Day Trading Because online trading is so easy, it’s easy to buy too much stock and go quickly into debt.

Liquidity Liquidity refers to how easily an investment can be turned into cash. Stocks are very liquid because they can be turned into cash quickly by selling them.

Inflation Risk Inflation risk is whether the rate of return on an investment keeps up with the rate of inflation. Your stock needs to go up in value to earn a return on your investment.

Fast Review 1.What is the difference between blue-chip stocks and speculative stocks? 2.Why is online trading very risky?

What are some reasons you might sell stock? Name one of the best-known exchanges. continued

True or false: An exchange trades companies it wants. Are stocks considered to have great liquidity?

End of Chapter Investing in Stocks 31