1 Module 5 Stocks

2 Module 5 Learning Objectives Define what a stock is and explain why companies issue stock. Explain how an investor makes a return on stocks. Categorize stocks as small, medium or large cap; as growth or income; and by industry. Define the common stocks, preferred stocks, tracking stocks, spin-offs, stock splits, and IPO. Explain how stocks are traded. Find and interpret a stock quote using a financial website. Differentiate market, limit, and stop loss orders. Explain the role of the Securities and Exchange Commission in financial markets. Explain how a stock exchange works. Differentiate between the New York, American and NASDAQ exchanges. List stock ownership rights. Differentiate between institutional, insiders and individual investors. Use a stock index to measure stock performance. Differentiate between the Dow Jones Industrial Average, the Standard and Poor’s 500, the Russell 2000, the Wilshire 5000, the Standard and Poor’s 400, and the NASDAQ Composite. Create and track a stock portfolio.

3 When you buy stock in a company, you are mainly investing in: What the company has done. Real estate. Future cash or earnings.

4 What Is Stock?

5 Companies issue stock to: Make a killing. Pay for buildings, systems, or other things that will help grow the earnings of the company. So they don’t have to borrow.

6 Why Companies Issue Stock

7 How Do You Make Money With Stocks?

8 Calculate Capital Gain and Dividend Yield You bought General Motors at $50 per share in 1998 and sold it at $74 in For each share, you received $2 in dividends in 1998 and You bought Ford at $25 per share in 1998 and sold it at $29 in For each share, you received $1.07 in 1998 and $1.17 in1999 in dividends. You bought Daimler-Chrysler at $70 per share in 1998 and sold it at $54 in For each share, you received $2.13 in 1998 and $2.13 in 1999 in dividends.

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10 Here’s another way of looking at how stocks performed

11 Choices Industry Size (Market Cap) Growth or Income (Capital Gain or Dividend)

12 Small caps are better performers over the long run

13 Classify this stock by market cap, industry, and price earnings. Tootsie Roll sells—tootsie rolls and all kinds of candy. The company has 49.5 M shares outstanding and is currently selling at $46. Earnings per share for the year was $1.53, and the company gives dividends of 28¢ per share. Market cap is calculated by taking shares outstanding and multiplying by price. Price earnings is price divided by earnings per share. It tells you what you’re paying for every dollar of earnings. Growth stocks have higher PEs than the market. Value stocks have lower PEs than the market.

14 True or False? If you own common shares in a company you-- Choose the colors for the company logo Vote for the board of directors Are not allowed to look at the financial statements for the company. These are private and not disclosed to anyone outside. Are entitled to any extra cash the company has. Can sell your stock anytime you want.

15 Preferred Stock About 500 listed on the NYSE and 200 listed on the AMEX and NASDAQ Preferred shareholders have rights to assets over common shareholders Usually no voting rights Dividend based on fixed rate when issued Moves very much like a bond

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17 Stock Splits Average stock price $30 to $45 When a stock price gets too high, some companies believe that small investors won’t buy Splitting the stock does nothing to the fundamentals of the company But does tend to give a psychological lift to the stock price

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19 IPOs More IPOs in up markets. Overall do good the first year and then it’s anyone’s guess. Only about 20% of the company is offered the first time around. Many risks.

20 Where are they now? Best performing IPOs in Internet Capital Group ICGE Commerce One CMRC VerticalNet VERT Brocade Communications BRCD PurchasePro PPRO

21 How Do You Buy Stocks? You need to understand what you’re doing Check the following before you sign on the dotted line: –Are you protected if the firm goes under? –Have there been any complaints filed against the firm? –What about margin accounts? –Have you read the account agreement carefully? What is binding arbitration? What is discretionary authority? Check out online brokerage agreements.

22 The Auction Process Stock trades are executed through an auction process. Stocks are worth whatever someone will pay for them. Bid: What the buyer wants to pay. Ask: What the seller want to sell for.

23 Finding the stock quote Using finance.yahoo.com, find the stock quote for Coca Cola

24 Placing the Order How many shares? (Remember prices fluctuate) Right ticker symbol (Especially if you’re trading online) Type of Order (Market, limit, stop limit, stop loss) How long is the order good for? (Immediate or cancel, Good Til Canceled)

25 What type of order? Case 1: You have decided to buy a stock that is very volatile. Daily prices can go up and down $5. The current price is $50. You only have $5000 to invest in this stock. What kind of order should you place? Case 2: The market took a big fall yesterday, and all indications are that it will fall again today. You want to sell your stock if it hits $40 and prevent any further losses. It started out yesterday at $55 and is hovering around $48 today. What do you do?

26 Securities and Exchange Commission (SEC) Ensures financials are “real” or disclosure That people who know more don’t benefit at the expense of small investors That brokers and firms don’t engage in shenanigans Funds behave properly as well

27 Stock Exchanges

28 New York Stock Exchange (NYSE)

29 National Association of Securities Dealers Automated Quote System NASDAQ

30 American Stock Exchange (AMEX)

31 Types of Shares and Dilution

32 Types of Investors

33 Evaluating Stocks Over the long term (over 10 years) stocks perform the best Passive strategy –Buy index funds and hold (you still need to watch your investments) Active strategy - Select stocks –Fundamental analysis –Technical analysis –Speculation

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36 Monitoring Your Stocks Whether you use an active or passive strategy, you still need to monitor your stocks Measure stock performance against stock index

37 Dow Jones Industrial Average (DJIA) Oldest and most well- known stock index. Covers 30 very large companies. Price-weighted index so the stock with the highest price (IBM) has the most influence.

38 Standard and Poor’s Large Cap 500 largest stocks Market value- weighted index. GE, Exxon Mobil, Microsoft, Citigroup, and Pfizer are the largest companies Used as an index for large companies

39 Russell Small Cap Also S&P 600 Take the top 3000 companies and select the bottom 2000 Russell 2000 is the index for small cap companies

40 Wilshire Total Market All U.S. (7000) companies listed on the exchanges True index for total stock market

41 Standard and Poor’s Mid Cap Next 400 stocks after the S&P 500 Measure of medium cap stocks

42 Other Indices

43 Summary For US large cap stocks – S&P 500 For US mid cap stocks – S&P 400 For US small cap stocks – S&P 600 International – MSCI EAFE Emerging – MSCI Emerging Bond – Lehman Brothers Aggregate

44 Measure Your Performance Measure your portfolio against the appropriate index If your portfolio is not performing well, might consider index Don’t make snap judgments - even the best advisors have bad years