Chapter 14 Investing in Stocks

Common Stock  Issued to finance their business start-up costs and help pay for expansion and their ongoing business activities  Private or Public Corporation  A form of equity  Dividends not mandatory  Voting rights and control of the company

Why Investors Purchase Common Stock  Income from dividends  Dollar appreciation of stock value  Stock split

Preferred Stock  Receives cash dividends before common stockholders  Attracts more conservative investors  Limited or no voting rights

Classification of Stock Investments  Blue-chip—very safe  Cyclical—follows the business cycle of advances and declines in the economy  Defensive—stable during declines in the economy  Growth—has the potential of earning profits above the average profits of all firms in the economy  Income—higher-than-average dividends

Classification of Stock Investments  Large cap—large number of shares and capitalization, more than $10 billion  Midcap—capitalization of between $2 and $10 billion  Small cap—capitalization of between $250 million and $2 billion  Micro cap—capitalization of $250 million or less  Penny stock—typically sells for $1 or less per share

Evaluating a Stock Issue  Internet  Stock advisory services  Newspaper  Corporate news

Factors That Influence the Price of a Stock  Earnings per share  Price-earnings ratio (PE ratio)  Dividend payout  Dividend yield  Total return  Annualized holding period yield  Beta  Book value  Market-to-book ratio

Investment Theories  Fundamental analysis  Technical analysis  Efficient market hypothesis

Primary Market  Investment bank—assists corporation in raising funds, usually by helping to sell new security issues  IPO (initial public offering)— sells stock to the general public for the first time  Money goes to the company to startup or expand

Secondary Market  NYSE (New York Stock Exchange)  AMEX (American Stock Exchange)  OTC (Over-the-counter) Nasdaq (National Association of Securities Dealers Automated Quotation)

Stock Transactions  Market order  Limit order  Stop order

Investment Strategies  Long-Term Buy and hold Dollar cost averaging Direct investment and dividend reinvestment plan  Short-Term Day trading Buying stock on margin Selling short Trading in options