Chapter 13 In-Class Notes

Stock Quotations Where can you find stock quotes? Stockbrokers, financial newspapers, business sections of local newspapers, financial news television networks, financial websites Examples of information obtained from a stock quote Ticker symbol, closing price, net change in price, volume traded, highs and lows, dividend yield, price- earnings ratio Firm Analysis Annual report, balance sheet, income statement, firm-specific characteristics, Value Line Investment Survey 13-2Copyright © 2009 Pearson Education Canada

Economic and Industry Analysis of Stocks Economic Analysis Involves Assessing: Economic growth (GDP, fiscal policy) Interest rates Inflation (CPI) Industry Analysis Changes in consumer demand Threat of new entrants and more competition Industry indicators 13-3Copyright © 2009 Pearson Education Canada

Stock Valuation Historical price patterns using technical analysis Fundamental characteristics using fundamental analysis P/E method: compare your estimated value of the firm’s stock to its market value to determine whether the stock is currently undervalued or overvalued according to industry standards. P/S method: especially popular for valuing firms that have negative earnings 13-4Copyright © 2009 Pearson Education Canada

Stock Market Efficiency Efficient stock market: A market in which stock prices fully reflect information that is available to investors. Stock selections by an investor will not consistently beat the market. Inefficient stock market: A market in which stock prices do not reflect all public information that is available to investors. Stock selections by an investor may beat the market. 13-5Copyright © 2009 Pearson Education Canada

Stock Exchanges Canadian Stock Exchanges Toronto Stock Exchange (TSX) – senior equity exchange TSX Venture Exchange – public venture capital market Montreal Exchange – derivatives exchange Other Stock Exchanges NYSE Euronext NASDAQ American Stock Exchange (AMEX) 13-6Copyright © 2009 Pearson Education Canada

Purchasing or Selling Stocks Analyst recommendations Brokers and analysts tend to be overly optimistic about stocks. Discount brokerage firm Executes transactions but does not offer investment advice. Online brokerage services Very low commissions, convenient. Placing an order Name and class of the stock, buy or sell, number of shares (board lot vs. odd lot) Market order, limit order, and stop orders 13-7Copyright © 2009 Pearson Education Canada

Buying Stock on Margin Involves completing a stock purchase with a small amount of personal funds and a portion of the funds borrowed from the brokerage firm. If the stock price declines substantially, the brokerage firm will make a margin call. Buying stocks on margin will magnify profits and/or losses. 13-8Copyright © 2009 Pearson Education Canada

Assessing Performance of Stock Investments Compare Returns to an index ER = R – R i where ER = excess return R = the return on the stock R i = the return on the stock index 13-9Copyright © 2009 Pearson Education Canada