Chapter Investing in Stocks Evaluating Stocks 12

SLIDE 2 Chapter 12 Lesson 12.1 Evaluating Stocks GOALS Describe features of stock and types of stocks. Explain how to value a stock and decide a fair price to pay for a stock purchase.

SLIDE 3 Chapter 12 Owning Stock Nearly 50 million people in the US own stocks. People who own stock are called stockholders, or shareholders Two ways to profit from owning stock: Dividends are money paid to stockholders from the corporation’s earnings (profits). Capital gain is an increase in the value of the stock over time.

SLIDE 4 Chapter 12 Common Stock Common stock represents a type of stock that pays a variable dividend and gives the holder voting rights. A proxy is a stockholder’s written authorization to transfer his or her voting rights to someone else, usually a company manager.

SLIDE 5 Chapter 12 Preferred Stock Preferred stock represents a type of stock that pays a fixed dividend but has no voting rights. Preferred stockholders earn the stated dividend, regardless of how the company is doing. Preferred stock is less risky than common stock. Dividends on preferred stock may be lower than common stockholders would earn, if the company is thriving over time.

SLIDE 6 Chapter 12 Income stocks – Stocks that have a history of paying high dividends. Growth stocks - Profits are reinvested into the business. Little or no dividends paid. Emerging stocks – young, small companies that have higher overall risk. Often inexpensive but risky. Stock Investment Strategies

SLIDE 7 Chapter 12 Blue chip stocks – Large, established corporations with a record of profitability. Conservative investment. Defensive stocks – remains stable and pays dividends during a recession. Ex. - Utilities, pharmaceuticals, food, and health care stocks Cyclical stocks – do well when the economy is stable or growing. Ex. – travel (airlines, & hotels) and manufacturing (cars, construction) Stock Investment Strategies

SLIDE 8 Chapter 12 Valuing Stock The par value is an assigned dollar value given to each share of stock. Preferred stock – this is used to calculate dividend payments Common stock – not usually assigned. Market value is the price for which the stock is bought and sold in the marketplace. Reflects what investors are willing to pay.

SLIDE 9 Chapter 12 Stock Price Factors that affect price include: The company – In a good financial position. Debit low, profits high. Interest rates – When interest rates fall below inflation rate, people buy more stock The market - The demand for a particular product or service is on the rise or decline. Earnings per share – after-tax earnings decided by the number of common stock shares outstanding (owned by investors).

SLIDE 10 Chapter 12 Return on Investment Because you can make money on stocks from dividends and from an increase in the price of the stock (capital gain), you should consider both when computing the return on your investment. Your 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.

Computing Return on Investment SLIDE 11 Chapter 12 Current Profit on Stock Purchase Price + Commission = Return on Investment (ROI Example:Selling Price: $40/share Dividends received during year: $1/share Purchase price: $38/share Discount brokerage fee: $19 Number of shares owned: 100 Computations: Current profit: $40/share - $38/share = $2/share x 100 = $200 + $100 Dividends = total profits of $300 $300 (100 X$38) + $19 = 7.86%

SLIDE 12 Chapter 12 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 Average of the price movements of 30 major stocks listed on the NYSE. (blue chip stocks) Standard & Poor’s 500 NASDAQ Composite Index