Personal Finance FIN 235 Investing In Stocks & Bonds Chapter 14

Stocks (Common & Preferred) A. Common Stock 1. Basic form of corporate ownership 2. Common stockholders have voting power a. Amend the corporate charter b. Approve mergers and acquisitions c. Elect directors d. Raise ne capital (debt and equity) 3. Residual claim on income and assets B. Motives for Purchasing Common Stock 1. Receive dividends (if paid) 2. Participate in capital growth

Stocks (Common & Preferred) B. Preferred Stock 1. Preferred claim on dividends 2. May have one of several features; a. Cumulative b. Participating c. Convertible 3. Typically non-voting except if several dividend payments in a row are unpaid.

Evaluating Stock Investments A. What makes a particular stock an attractive investment? 1. Good growth opportunities 2. Good dividend yields 3. Market leader 4. Good management B. How do we find out about these stocks? 1. Research reports: Barron’s, Investor’s Business Daily 2. Brokerage recommendations (in-house research) 3. Investment websites: Zack’s, Motley Fool, The Street.Com 4. Individual Company websites 5. Stock Advisory Services: Value Line, Standard & Poor’s, Mergent 6. Magazines: Forbes, Business Week, Fortune, Money, Inc.

Important Decision Factors A. Earnings and Earnings Growth 1. Earnings Per Share: trailing vs. forecast 2. P/E ratio 3. PEG ratio B. Dividends 1. Dividend growth rates 2. Coverage C. Industry Characteristics 1. Growth 2. Mature 3. Declining

Stock Markets A. Primary 1. Where new issues are sold: e.g. IPO 2. Investment Bankers dominate this market B. Secondary Markets 1. Where “seasoned” issues are traded. 2. Examples; New York Stock Exchange, Nasdaq (OTC) C. Securities Exchanges 1. Specialists (provide liquidity) 2. Floor Traders (execute public trades)

Brokerage Services A. Full Service (Retail) 1. Best place to start for individual new to investing 2. More expensive to trade 3. Research reports available B. Discount Brokers 1. Best for experienced traders 2. Do your own research 3. Less expensive C. Online 1. Same as above, but typically higher incidence of trades 2. Investors totally comfortable with online training 3. Least expensive way to trade.

Details of Stock Transactions A. Types of Orders 1. Market: willing to buy at ASK, sell at BID a. Immediate execution 2. Limit: will trade at specified price a. Deferred execution 3. Stop: order becomes active when stop price is “hit” a. Stop [Sell] Loss: sell position when price gets too low. b. Stop Buy: add to position if prices start to move up. 4. Day Order: if no execution, automatically cancelled 5. Good till Cancel (GTC): stays active until executed 6. Fill or Kill: get it now or cancel order 7. All or Nothing: for large orders

Commission Schedules A. Retail Brokers 1. By the size of the order B. Online / Discount 1. Flat fee for trades up to 1000 shares. 2. More expensive if broker assisted. C. Bid-Ask Spread 1. Cost of liquidity 2. Bid = highest price of unexecuted orders to buy 3. Ask = lowest price of unexecuted orders to sell

Investment Strategies A. Short-Term 1. Attempting to time the market 2. Expensive and risky B. Long-Term 1. Buy and Hold 2. Occasional trading to rebalance portfolio or take profits C. Dollar Cost Average 1. Buying [small] dollar amounts of an issue over time. 2. Most popular technique with mutual funds and retirement plans

Investment Strategies A. Long versus Short Positions 1. Long: expect prices to go up 2. Short: expect Prices to go down B. Buying on Margin 1. Borrow money from broker to finance purchase 2. Maximum margin = 50% 3. Margin requirement controlled by Federal Reserve C. Selling Short 1. Margin Account 2. Borrow stock and sell it 3. Buy stock back and return: trick is to buy back at a lower price. 4. Example: Sell ABC short at $50, then buy back later at $40 5. Short sellers always expect stock price to decline.

Options and Futures A. Options 1. Right but not obligation to buy (call) or sell (put) a stock 2. Contracts are for round lots (100 shares) 3. Price of an option is called a premium. 4. Options have relatively short lives (6 – 7 months) a. Exception: LEAPS – run up to two years. 5. Options can be used to Speculate or to Hedge a. Speculate: bet on market move in one direction b. Hedge: protect an underlying stock position

Options and Futures B. Futures 1. Used to speculate or hedge commodity positions 2. Commodities: a. Financial (bills and bonds) b. Industrial (lumber, copper, gold) c. Agricultural (wheat, corn, cocoa) d. Exchange (Euro, Swiss Franc, UK Pounds) 3. Require greater net worth than stocks 4. Many hazards associated with futures trading

HOMEWORK A. Do the Math: 1, 2, 4 B. Be Your Own Personal Financial Planner 1. 2 – Compare different stocks as Investment (w/s 54) 2. 5 – Current Yield (w/s 58)