Personal Finance Stocks (Equities) Bill Klinger

Personal Finance Review Asset classes Types of risk Measuring risk Calculating returns Taxes on returns

Equities Common Stock Preferred Stock Share of ownership in a company. Common stock owners can vote on major company decisions They expect to receive cash dividends and to benefit from capital gains. (Often no dividends are issued.) Preferred Stock Stock whose holders receive preference in the payment of dividends Seldom confers voting rights Dividends are fixed

Equities Convertible Securities Bonds or stock that contains a conversion feature Gives the holder the right to exchange their securities for a fixed number of shares of common stock

Buying Stock Stock exchanges Brokers Bid-ask spread Commissions NYSE, AMEX Over-the-counter, e.g. NASDAQ Brokers Bid-ask spread Commissions

Stock Quotations Source: finance/yahoo.com 1/12/17

Stock Quotes Bid – what a person is willing to pay Ask – what a person wants for the stock Market Cap – Value of the company = price x (# shares) P/E – Price/earnings ratio = price / EPS The higher the P/E, the more the market thinks the company’s profits will grow EPS – earnings per share, the profit on one share of stock = net income / # shares Dividend – dividend paid per share of stock ( N/A means no dividends are paid ) Yield – dividend / price. ( N/A means no dividends are paid )

Buying and Selling Securities Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors. E*trade: An Online Brokerage Firm Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.

Costs of Trading When investors buy or sell securities through a brokerage firm, they pay a fee These costs vary widely among brokerage firms A full-service firm charges higher fees, but provides a large number of services and offers investment advice A discount firm charges lower fees, but offers less advice and fewer services Online brokerage firms charge some of lowest fees of all brokerage firms, and give their customers access to a wide range of investment information, though they do not provide advice to investors directly.

Buying and Selling Securities Placing an Order A market order instructs a brokerage firm to obtain the highest price possible – if the investor is selling – or the lowest price possible – if the investor is buying A limit order instructs the brokerage firm not to pay more than a specified price for stock if the investor is buying, or accept less than a specified price if the investor is selling Buying on margin Borrow a portion of funds to purchase Fed limits margin to 50% Subject to margin call if value drops Using leverage Short selling Sell stock you don’t own now Purchase at a later date

Equity Returns Dividends Change in price Optional Usually quarterly Sometimes one-time event Not guaranteed for common stock Change in price Based on investors’ view of a firm’s future Will cause a capital gain or loss

Not All Risk is the Same Firm Risk = Systemic risk + Idiosyncratic Risk Business Cycles Financial Markets Global Conditions Risk Unique to the Firm Source of Correlation Idiosyncratic risk can be diversified away!

Stock Indexes Reflect the general activity of the stock market Most common indices Dow Jones Industrial Average (the Dow or DJIA), Standard & Poor’s 500 (S&P 500), NASDAQ composite Foreign indices DAX (Germany) FTSE, FT-100 or “Footsie” (London), Nikkei (Tokyo)

How’s the Market Doing? Bull market Bear market

In Class In groups of two Chapter 15 Financial Planning Exercises