Stocks

Stocks: Buying Corporations can raise funds by issuing stocks Stocks represent ownership in the corporation. Stocks are issued in portions known as shares. By selling shares of stocks, corporations raise money to start, run, and expand their businesses. Stocks are also called equities, or claims of ownership in the corporation. Benefits of Buying Stocks: 1. Dividends: When corporations pay out part of their profits, to their stockholders. Usually paid four times a year (quarterly). The size depends on the corporation’s profit. 2. Capital Gains: To sell the stock for more than you paid for it. If you sell the stock for a price less than you paid that is a capital loss.

Types of Stocks: Stock can be classified in two main ways: 1. Whether or not it pays dividends Income Stock: Pays dividends at regular times during the year. Growth Stock: Pays few or no dividends, instead the issuing company reinvests its earnings in its business. The business (and its stock) thus increases in value over time.

Types of Stocks: Stocks can be classified in two main ways: 2. Whether or not the stockholders have a vote in company policy. Common Stock: Investors who buy this stock are voting owners of the company. Usually receive one vote for each share of stock owned. This vote can be used to elect the company’s board of directors. In some cases, a small group of people can own enough shares to give them control over the company. Preferred Stock: Investors who buy this stock are nonvoting owners of the company. Although they can’t vote, these investors receive their dividends first.

Stock Splitting: Used in Common Stocks Owners vote whether or not shares can be split into more than one share. This may be popular when the price of the stock becomes so high it discourages potential investors from buying shares. Stockholders like stock splits because prices tend to rise afterward.

Risks of Buying Stocks: Firms selling stocks may earn lower profits than expected, or even lose money. If this occurs dividends will be lower than expected or nothing at all. The market price of the stock will also likely decrease. Capital losses can occur. If a company goes bankrupt stockholders only receive dividends after the other creditors (such as bond holders) have been paid. Returns on stocks are generally higher than other financial securities due to this high risk.

How are Stocks Traded? When you want to buy stocks you don’t call up the company to place an order, instead you contact a stockbroker A person who links buyers and sellers of stocks. Usually work with individual investors, advising them to buy or sell particular stocks. Stockbrokers work for brokerage firms Businesses that specialize in trading stocks Stockbrokers and brokerage firms cover their costs and earn a profit by charging a commission, or fee, on each stock transaction. They can also act as dealers of stock They buy shares at a lower price and sell them to investors at a slightly higher price, profiting from the difference, or “spread”. https://wetheeconomy.com/films/the-street/

Stock Exchanges: Where stocks are bought and sold. Also called Stock Markets Major Unites States Stock Exchanges: 1. New York Stock Exchange (NYSE) The country’s largest and most powerful exchange. Began in 1792 as an informal outdoor exchange Over time the financial market developed and the demand to buy and sell financial assets grew. Moved inside, limited number of members who buy “seats” allowing them to trade on the exchange. Handles stock and bond transactions for only the largest and most established companies in the country. The largest and best-known companies listed on the NYSE are referred to as blue-chip companies. Blue-chip stocks are often in high demand.

Stock Exchanges: Major United States Stock Exchanges: 2. NASDAQ-AMEX The American Stock Exchange (AMEX) used to be the second largest exchange but lost business when people started trading over the Internet. In 1998 AMEX merged with the National Association of Securities Dealers’ Automated Quotation system (NASDAQ). Merged AMEX’s large list of firms with NASDAQ’s Internet technology. This combined exchange sells slightly riskier stocks from less-established and smaller companies than the NYSE does. Specializes in American high-tech and energy stocks. It also offers global stocks in cooperation with foreign exchanges.

Stock Exchanges: Despite the importance of the organized stock exchanges like NYSE and NASDAQ-AMEX, most stock is not traded on exchanges. Instead, it is traded on the OTC Market OTC: Over-the-Counter The trading is done through an electronic marketplace for stock that is not listed or traded on an organized exchange. Most of the stocks listed on the OTC Market are issued by new and growing companies. As a result of this, almost no OTC companies pay dividends. These companies reinvest any earnings they make to finance additional growth.

Trading: Futures and Options Futures: contracts to buy or sell commodities at a specific date in the future at a price specified today. Many of the markets in which futures are bought and sold are associated with grain and livestock exchanges. Including: the New York Mercantile Exchange and the Chicago Board of Trade. Options: contracts that give investors the choice to buy or sell stock and other financial assets. Investors may buy or sell a particular stock at a particular price up until a certain time in the future—usually three to six months. The option to buy shares of stock at a specified time in the future is known as a call option. The option to sell shares of stock at a specified time in the future is called a put option.

Daytrading: Most people who buy stock hold their investment for a period of time—sometimes many years—with the expectation that it will grow in value. Recently, however, a different type of stock trading, called daytrading, has become popular. Daytraders try to predict minute-by-minute price changes based on computer programs that tell the trader when to buy and sell. These traders might make dozens of trades in a day in the hopes of making a profit. Daytrading is a risky business in which traders can lose a great deal of money.

Measuring Stock Performance: Bull vs. Bear Market Bull= when the stock market rises steadily over a period of time Investors expect an increase in profits and thus buy stocks. The longest sustained bull market in American history occurred in the 1980s and 1990s. Bear = when the stock market falls for a period of time Investors expect a decrease in profits and thus sell stocks. The Dow: The Dow Jones Industrial Average Has shown how certain stocks have traded on every business day since 1896. To make sure that the stocks remain representative of the stock markets as a whole, over the years the companies on the Dow have changed. Today the Dow represent 30 large companies in various industries, such as food, entertainments, and technology.

Measuring Stock Performance: S & P 500 Standard & Poor’s 500 Gives a broader picture of stock performance. Tracks the price changes of 500 different stocks as a measure of overall stock market performance. Reports mainly on stocks listed on the NYSE, but some of its stocks are traded on the NASDAQ-AMEX, and OTC markets.

Bonds

Bonds: Basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor. Typically pay the investor a fixed amount of interest at regular intervals for a fixed amount of time. Generally low-risk investments with a lower rate of return. Three Components of Bonds: Coupon rate: the interest rate that the bond issuer will pay to the bondholder. Maturity: the time at which payment to the bondholder is due. Different bonds have different lengths of maturity. Typically mature in 10, 20, or 30 years. Yield: the annual rate of return on a bond, if the bond is held to maturity. Par Value: the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity. Also called face value or principal.

Bond Features: Buying bonds at a discount, called a discount from par Interest rates change, causing the value of bonds to change Bond Ratings: Two firms publish bond ratings (bond quality) Standard’s & Poor’s and Moody’s Rate bonds on a number of factors: can the issuer make future interest payments and can they pay back the principal. The range goes from the highest investment grade AAA to D which generally means a bond is in default. (Table showing all the possible ratings is on page 279 in your book) The higher the bond rating, the lower the interest rate the company usually has to pay to get people to buy its bonds.

Issuer Issues: Bonds are good investments because they are relatively safe. Other Advantages: 1.Once the bond is sold the coupon rate will not go up or down Know they will be making fixed payments for a specific length of time 2. Bondholders do not own a part of the company. Therefore the company does not have to share profits with its bondholders. Disadvantages 1. The company must make fixed interest payments, even in bad years when it does not make money. Also interest payments cannot be change even if interest rates have changed. 2. If the company does not maintain financial health, its bonds may be downgraded to a lower bond rating and harder to sell.

Types of Bonds: Savings Bonds: Treasury Bonds, Bills, and Notes Low denomination ($50 to $10,000) Issued by the government Government uses funds from the sale of saving bonds to help pay for public works projects. Like other government bonds, these bonds have virtually no risk of default. Interest is paid on the bond but you don’t get it until you cash in the bond. Treasury Bonds, Bills, and Notes Issued by the Treasury Department Called (T-Bills and T-Notes) Offer different lengths of maturity These securities are among the safest investments Interest on government bonds is exempt from state and local taxes

Types of Bonds: Municipal Bonds: Issued by state and local governments and municipalities (government units with corporate status) These bonds are issued to finance improvements such as: highways, state buildings, libraries, and schools. Called “munis” Because state and local governments have the power to tax investors can assume that these governments will be able to keep up with interest payments and repay the principal. Most are considered safe investments Interest is not subject to income taxes at the state or federal level

Types of Bonds: Corporate Bonds: Junk Bonds: Issued to help companies to raise money to expand business. Issued in fairly large denominations Interest earned is taxed as income Moderate level of risk Watched not just by S&P and Moody’s but also by the SEC (Securities and Exchange Commission) Independent government agency Enforces laws prohibiting fraud and dishonest investment practices. Junk Bonds: High-yield securities Lower rated Popular in the 80s and 90s

Other Types of Financial Assets: Certificates of Deposit Money Market Mutual Funds Financial Asset Markets: Capital Market: Markets in which money is lent for periods longer than the a year Money Markets: Markets in which money is lent for periods less than a year Primary Market: Financial assets that can be redeemed only be the original holder. Secondary Market: Financial assets can be resold