Stock Market 101 Chapter 9

Common and Preferred Stocks Securities – all of the investments (stocks, bonds, mutual funds, options, and commodities) that are bought and sold on the stock market. Why Corporations Issue Common Stock- raise money to start up their business. Private Corporation – Company that issues stock to a small group of people. Public Corp – Company that sells shares openly on the stock market, where anyone can buy them. AT&T, Procter & Gamble, General Electric

A Form of Equity Corporations do not have to repay the money a stockholder pays for stock For a stockholder to make money on the stock, he or she sells to another investor Price of stock is set by how much buyer is willing to pay As demand for a company’s stock increases or decreases, the price goes up and down News on expected sales revenues, earnings, company expansions, or mergers with other companies can make demand go up or down

Why Investors Purchase Common Stock Income from Dividends- with a cash dividend, each common stockholder receives an equal share. Appreciation of Stock Value Increased value from Stock Splits – A stock split occurs when the shares of a stock owned by existing stockholders are divided into a larger number of shares. Voting rights and control of the company – one vote for each share they own

Best Buy Stock Split 3-for-2 Stock Split on August 3, 2005 one additional share for every two owned August 3 - $51.88 September 21 - $41.00 April 6 - $58.72 msn.com

Preferred Stock Par Value – an assigned dollar value that is printed on a stock certificate Why Corps. Issue Preferred Stock Used as a way to attract more conservative investors Why Investors purchase Preferred Stock Safer investment than the common stock

Preferred Stock Cumulative Preferred Stock – A stock whose unpaid dividends builds up and must be paid before any payment to common shareholders. Convertible Preferred Stock – Stock that can be exchanged for a specific number of shares of common stock. Participation Feature – Allows stockholders to share in the corporation’s earnings with common stockholders.

Types of Stock Investments Blue-Chip Stock – Generally considered a safe investment that attracts conservative investors Examples: General Electric, AT&T, Kelloggs Income Stocks – pays higher than average dividends compared to other stock issues. Examples: Dow Chemical, Stock issued by Gas and Electric Companies Growth Stock – issued by a corporation whose potential earnings may be higher than the average earnings predicted for all the corporations in the country. Generally, no dividends. Example: Google in 2004 $100 per share

Types of Stock Investments (cont.) Cyclical Stock – has a market value that tends to reflect the state of the economy. Examples: Ford Motor, Centex Homes Defensive Stock – A stock that remains stable during declines in the economy. Example: P&G; IBM, Smuckers Large-cap Stock – is a stock from a corporation that has issued a large amount of Capitalization Capitalization – the total amount of stocks and bonds issued by a corp.

Type of Stock Investments (cont.) Small-cap Stock – A stock issued by a company with a capitalization of $500mm or less. Penny Stock- Are issued by new companies whose sales are very unsteady. Risky stocks.

Sources for Evaluating Stocks Internet Yahoo NewsPaper Wall Street Journal

Key Information on WSJ YTD % Change – Reflects the stock price change for the calendar year to date. 52wk (high/low) – Highest and lowest price during past 52 weeks. Stock – name of company Div- Projected annual dividend for next year based on last dividend. YLD % - Percentage of return based on the dividend and current price of the stock. PE Ratio- Price earnings ratio

Factors that Influence the Price of Stock Bull Market - A market condition that occurs when investors are optimistic about the economy to buy stocks. Bear Market – A market condition that occurs when investors are pessimistic about the economy. Current Yield – The annual dividend of an investment divided by the current market value. Current Yield = Annual Dividend/Current Market Value

Numerical Measures of a Company Total Return – Includes the annual dividend plus any increase or decrease in the original purchase price of the investment. Current Return + Capital Gain = Total Return Earnings Per Share – A corporations net, or after-tax earnings divided by the number of outstanding shares of common stock EPS = Net Earnings/Common outstdg st

Numerical Measures (cont.) Price-Earnings Ratio (PE) – The price of one share of stock divided by the corporations earnings over the last 12 months. This is a key factor used by both seasoned and beginning investors. Price-Earnings = Market Price Per Share/Earnings per share

Dividend Rate The total expected dividend payments from an investment. Expressed on an annualized basis plus any additional non- recurring dividends that may be received during that period. Calculated by multiplying the most recent periodic dividend payments by the number of periods in one year. Example - an investment pays a dividend of $0.50 on a quarterly basis and pays an extra dividend of $0.12 per share because of a non-recurring event from which the company benefited. The dividend rate is $2.12 ($0.50 x 4 + $0.12) per year.

How the Stock Market Works You open an account with E*Trade. You send E*Trade a check for $1,000. E*Trade deposits the check into a trading account that is listed under your name. You log onto E*Trade and place an order to buy 100 shares of a stock in Company A, which is currently trading at $5. E*Trade uses it's network to tell the Nasdaq and all of it's related networks that there is demand for 100 shares of Company A's stock. The Nasdaq finds someone who is willing to sell 100 shares of Company A and, instantaneously, they execute the trading of stock between you and the person selling the shares. The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you. Basically, the clearinghouse will designate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares as yours.