Business in Action 6e Bovée/Thill Financial Markets and Investment Strategies Chapter 19

Stocks  Stock  Ownership of or equity in a company  a share of stock represents a specific portion of ownership  Securities  Investments such as stocks, bonds, options, futures, and commodities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-2

Types of Stock  Common Stock  Shares of ownership that include voting rights  Preferred Stock  Shares of ownership without voting rights but with defined dividends Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-3

Stock Valuation  Par Value  the value assigned when the stock is first issued  Book Value  The difference between the assets and liabilities as listed on the balance sheet Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-4

Stock Valuation (cont.)  Market Value  The price at which the stock is actually selling in the stock market  Intrinsic Value  An estimate of what a company is actually worth, independent of book and market values Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-5

Investment Categories of Common Stock Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-6

Stock Valuation  Price/ Earnings Ratio  The market value per share divided by the earnings per share  Stock Split  The act of dividing a share into two or more new shares and reducing the market value by the same ratio Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-7

How to Read a Stock Quotation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-8

Bonds  Face Value  The amount of money, or principal, a bond buyer lends to a bond issuer; also known as par value or denomination Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-9

Bonds (cont.)  Maturity Date  The date on which the principal of a bond will be repaid in full  Yield  Interest income a purchaser receives from the bond Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-10

How to Read a Bond Quotation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-11

Advantages of Bonds 1. Most bonds are less risky than stocks and many other investments 2. Bonds offer lower volatility than stocks 3. Corporate bonds with twice-yearly interest payments can provide a regular source of income Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-12

Bond Issuers  Treasury Bills  Short-term debt securities issued by the federal government  also referred to as T-bills  Treasury Notes  Debt securities issued by the federal government that are repaid within 1 to 10 years after issuance Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-13

Bond Issuers (cont.)  Treasury Bonds  Debt securities issued by the federal government that are repaid more than 10 years after issuance  Municipal Bonds  Bonds issued by states, cities, and various government agencies to fund public projects Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-14

Bond Issuers (cont.)  Treasury Inflation-Protected Securities (TIPS)  Treasury issues in which the principal amount is tied to the Consumer Price Index to protect the buyer against the effects of inflation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-15

Mutual Funds  Portfolio Diversification  Spreading investments across enough different vehicles to protect against significant declines in any one vehicle  Mutual Funds  Financial instruments that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-16

Mutual Funds  Expense Ratio  The annual cost of owning a mutual fund, expressed as a percentage  No-load Funds  Mutual funds that do not charge loads  Load  The sales commission charged when buying or selling a mutual fund Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-17

Mutual Funds (cont.)  Index Funds  Mutual funds that mirror the composition of a particular market or index  Index  A statistical indicator of the rise and fall of a representative group of securities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-18

Mutual Funds (cont.)  Exchange Traded Funds (ETFs)  Mutual funds whose shares are traded on public exchanges in the same way as stocks Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-19

How to Read a Mutual Fund Quotation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-20

Options  Option  The purchased right—but not the obligation— to buy or sell a specified number of shares of a stock at a predetermined price during a specified period Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-21

Types of Options Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-22

Financial Futures  Financial Futures  Contracts to buy or sell a financial instrument (such as stocks, Treasury bonds, and foreign currencies) for a set price at a future date Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-23

Financial Futures (cont.)  Commodities Futures  Contracts to buy or sell specific amounts of commodities for a set price at a future date  Currency Futures  Contracts to buy or sell amounts of specified currency at some future date Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-24

Financial Markets  Stock Exchanges  Organizations that facilitate the buying and selling of stock  Bond Market  The collective buying and selling of bonds  most bond trading is done over the counter, rather than in organized exchanges Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-25

Establishing Investment Objectives  Why do you want to get more money?  How much will you need - and when?  How much can you invest?  How much risk are you willing to accept?  How much liquidity do you need?  What are the tax consequences? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-26

Learning to Analyze Financial News  Bull Market  A market situation in which most stocks are increasing in value  Bear Market  A market situation in which most stocks are decreasing in value Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-27

Creating an Investment Portfolio  Investment Portfolios  Collections of various types of investments  Asset Allocation  Management of a portfolio to balance potential returns with an acceptable level of risk Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-28

Buying and Selling Securities  Broker  A certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors  Market Order  A type of securities order that instructs the broker to buy or sell at the best price that can be negotiated at the moment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-29

Buying and Selling Securities  Limit Order  An order that stipulates the highest or lowest price at which the customer is willing to trade securities  Stop Order  An order to sell a stock when its price falls to a particular point, to limit an investor’s losses Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-30