Stocks Ownership in a company When investors buy shares of stock in a company, the company uses that money to start up their business and/or help pay for its ongoing activities. If the company earns a profit, the stockholders earn a return on their investment. There are two types of stock: 1. Common Stock 2. Preferred Stock

Common Stock – Why Corporations Issue It 1. Form of Equity – – Corporations don’t have to repay the money a stockholder pays for stock. 2. Dividends Not Mandatory – – The corporate board of directors, a group of people elected to make decisions for the corporation, decide whether or not profits will be paid to stockholders as dividends.

Common Stock – Why Corporations Issue It 3. Voting Rights/Control of the Company – – Publicly held corporations are required by law to hold a meeting every year. – At this meeting, stockholders vote on company business. Investors typically get one vote for each share they own. – Investors vote in person or by proxy. A proxy is a document that transfers voting rights to someone else.

Common Stock – Why Investors Purchase It 1. Income from Dividends – – While dividends are not mandatory, board members typically vote to pay dividends as long as the company is able to. After all, since stockholders are funding their business they do want to keep them happy. – When dividends are paid, every stockholder receives an equal amount of dividends per share. – Most dividends are paid quarterly; every 3 months.

Common Stock – Why Investors Purchase It 2. Dollar Appreciation of Stock Value – – The market value of a stock depends on the demand for the stock. – If the demand increases, the price goes up. – If the demand decreases, the price goes down. – Investors profit when they sell stock at a market price higher than the price originally paid. – Investors buy stock they think will increase in value!

Common Stock – Why Investors Purchase It 3. Possibility of Increased Value From Stock Splits – – A process in which the shares of stock owned by existing stockholders are divided into a larger number of shares. – The public believes corporations split their stock only when the company’s financial future looks good, so they expect the stock price to rise. Often, the stock price does rise after a stock split, but there is never a guarantee! – Investor’s own more shares after a stock split, which is beneficial when dividends are paid!

Preferred Stock – Why Corporations Issue It 1. Used less often than common stock as a way of raising money, and only by a few corporations. 2. Attract more conservative investors - who would otherwise not buy common stock. 3. Limited voting rights - usually voting only in the case of financial trouble.

Preferred Stock – Why Investors Purchase It 1. Steady Source of Income - – Preferred stockholders receive cash dividends before common stockholders. – The amount of dividend is specific, stated on the stock certificate, and doesn’t change. – Unfortunately, since the dividend is specific, preferred stocks lack the potential for growth that common stocks offer.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 1. Blue Chip Stock  Blue Chip stocks are considered safe investments and attract conservative investors.  Issued by the strongest and most respected companies, who are leaders in their industry, have a history of stable earnings, and consistency in the payment of dividends.  AT&T; General Electric; Kellogg

8 Categories of Stock (Note: A particular stock can fall into more than one category) 2. Income Stock  Pay higher than average dividends compared to other stocks.  Buyers of preferred stock are also attracted to this type of common stock because the dividends are predictable.  Stable and well-established industries, including utilities (gas and electric companies) and financial institutions are typically income stocks.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 3. Growth Stock  Issued by corporations exhibiting fast growth in earnings, which generally causes the stock price to go up, compared to other companies of its kind.  Look for signs that the company is engaged in activities that will produce higher earnings and sales: building new facilities; introducing new products; or conducting R&D.  Generally DO NOT pay dividends, but appeal to investors looking for greater price appreciation over time.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 4. Cyclical Stock  The market value of a cyclical stock tends to reflect the state of the economy. This is because the products and services of these companies are linked directly to the activities of a strong economy.  When the economy is improving, the market value of a cyclical stock usually goes up. During an economic decline, the market value of a cyclical stock generally decreases.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 4. Cyclical Stock (cont.)  Investors buy these stocks when they are inexpensive, just before the economy starts to improve. They sell them just before the economy declines.  The stock of automobile/airline companies, building/construction firms and retail stores is considered cyclical.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 5. Defensive Stock  These stocks remain stable during declines in the economy.  The company has steady earnings and can continue to pay dividends even in periods of economic decline.  Many Blue Chip and Income stocks may also be considered Defensive stocks.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 6. Large-Cap Stock 7. Small-Cap Stock  “Cap” refers to capitalization, which is the total amount of stocks and bonds issued by a corporation.  A large cap stock is the stock of a corporation that has issued a large number of shares of stock therefore has a large amount of capitalization.  Large cap stocks are typically issued by larger companies. They are considered secure and appeal to conservative investors.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 6. Large-Cap Stock 7. Small-Cap Stock (cont.)  A small cap stock is issued by a company with capitalization of $500 million or less. Since these companies are generally smaller, their stock is considered to be a higher investment risk. Stocks are often referred to by a combination of the characteristics discussed in the previous slides, such as shares of a “small-cap growth” stock, or a “large-cap income” stock.

8 Categories of Stock (Note: A particular stock can fall into more than one category) 8. Penny Stock  Penny stocks typically sell for less than $1 per share (up to $5).  Issued by new companies whose sales are very unsteady.  The prices of these stocks can go up or down wildly.  Information about penny stocks is hard to find so it is hard to track their performance.  Very Risky!

Remember Risk? Some Stocks Are Riskier Than Others! – Conservative Risk (Low): Blue Chip, Income, and Large Cap stocks. The value/price of the stock does not change quickly. LOW RISK = LOW POTENTIAL RETURN OR LOSS – Moderate Risk: Growth stocks – stocks that grow faster and higher in value/price than stocks of other companies with similar sales and earnings. Young companies with great potential! – Speculative Risk (High): Penny stocks. Stocks with unpredictable results, but potential to earn very high returns. HIGH RISK = HIGH POTENTIAL RETURN OR LOSS

Sources for Evaluating Stocks Internet There is a huge number of web sites that deal with personal finance and investments. – thestreet.com; finance.yahoo.com; fool.com; money.cnn.com; marketwatch.com; moneycentral.msn.com In addition, most corporations have their own home pages, which are often more up-to-date than their printed publications.

Sources for Evaluating Stocks Stock Advisory Services Advisory services that are widely used to evaluate potential stock investments include… – Standard & Poor’s – Value Line – Moody’s Investors Service – Mergent’s Financial Investors Service Most charge fees for their information

Sources for Evaluating Stocks Business Periodicals Financial publications/magazines include… – Barron’s, BusinessWeek*, Fortune, Kiplinger’s Personal Finance, Money*, and Smart Money News Programs Specific show channels like… – Jim Cramer’s Mad Money, CNN Financial In addition to specific shows and channels, financial and economic news is part of most regular news programs

Sources for Evaluating Stocks Newspaper Most major newspapers contain information about stocks listed on the major exchanges and the over-the-counter market. Most newspapers provide the same basic financial data. Students: You must understand how to read a stock table. Refer to Activity 1 – How to Read a Stock Table in your handout packet. Study it when preparing for this chapter test.

Sources for Evaluating Stocks Summary Boxes (Top Gainers - Top Losers - Most Active) Found in the Wall Street Journal and other financial newspapers, and online. Think about it…how could knowing the top gainers and top losers help you in the Stock Market Game?

Sources for Evaluating Stocks Statistical Averages (Indexes) An index is a statistical average showing the general direction of a particular type of investment. Indexes are valuable for showing trends, but they can’t pinpoint the value of a specific investment. Stock Indexes NYSE Index AMEX Index NASDAQ Composite Stock Index Dow Jones Industrial Average (DJIA) Standard and Poor’s 500 Stock Index (S&P 500) Other Indexes Lipper Mutual Funds Index Dow Jones Bond Average

Sources for Evaluating Stocks Annual Report Annual and quarterly reports provide information on what the company does, its financial performance, as well as plans for the future. Every publicly traded company is legally required to publish an annual report. Used as a tool to analyze the corporation.

Annual Report Income Statement (Profit and Loss Statement) Looks at the sales, costs and earnings of the corporation over the year. Figures for 3 years are usually shown so investors can measure performance over time. Purpose  determine profitability Sales – Costs = Income Income – Taxes = Net Income

Annual Report Income Statement (Profit and Loss Statement) (cont.) Sales: – Investors want to see rising sales, which suggests the company is producing popular goods/services. Net Income: – Net income can be either distributed to shareholders as dividends or reinvested back into the company. – Investors want to see rising net income!

Annual Report Performance Ratios Current Yield (Yield %): – Indicates the rate of return to common stockholders in terms of cash dividend distributions. – Important to investors whose investment objective is income instead of price appreciation. – An increase in yield is generally good: an increased yield % means dividends have increased… increased dividends mean profits have increased  that is good! – Be careful…the yield can also increase if the market value of the stock goes down. Make sure an increase in current yield goes along with a stable or increasing market price!

Annual Report Performance Ratios Price-Earnings Ratio (P/E Ratio): – Measures how many times greater the stock price is than the earnings per share. – Gauge for judging what you are getting for your money when you buy a certain stock. In other words, how much investors are willing to pay for a dollar of earnings. – Generally… Low P/E  willing to pay less  poor growth prospects  possibly undervalued? High P/E  willing to pay more  strong growth prospects  possibly overvalued? – Compare to others in the same industry to determine if the P/E is high or low. – Investors are looking for the P/E to be stable or increase over time.

Sources for Evaluating Stocks Internet Stock Advisory Services Business Periodicals News Programs Newspapers Summary Boxes Statistical Averages Annual Report BE SMART! No one source for evaluating stocks is fool-proof or consistently accurate! Do your research and consider all the information you have about a company before making a decision to invest!