McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER PLAYLIST SONG: “BIG MONEY“BIG MONEY” BY GARTH BROOKS Stocks

13-2 Learning Objectives “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” ~ Warren Buffet, Venture Capitalist (1930- ) LO 13-1 Understand the basic principles of stocks and the stock market. LO 13-2 Explain how stocks are valued. LO 13-3 Contrast how companies on the stock market are valued. LO 13-4 Summarize the basics of buying and selling stocks.

13-3 In the News How Tiger Woods Destroyed $12 Billion of Stock Market Value Do you think the drop in the market value of the impacted stocks will be short- or long-term? Why? What does this example (impact of the Tiger Woods incident on stock prices) tell you about the volatility of the stock market? List 7 types of events and what type of impact each event has on the stock market. Can you list a past newsworthy event that did not impact stock market prices?

13-4 Stocks Represent Privately held companies have a relatively small number of stockholders and the stock is not traded publicly (Cargill, Levi Strauss & Company, Facebook) Initial Public Offering (IPO):

13-5 Types of Stock Preferred Stock or Preferred Shares   Has priority over common shares for payment of dividends   Carries no voting rights Common Stock or Common Shares   Has growth potential  Includes voting rights to elect the board of directors 

13-6 Stock Exchanges New York Stock Exchange (NYSE Euronext) – NASDAQ Over-the-counter (OTC) Foreign Stock Exchanges  All computerized trading now

13-7 Stock Evaluation Expectations – The stock market is forward-looking as investors try to predict future sales and earnings Bull Market Bear Market

13-8 Market Indexes Provide an overall summary of a specific market or sector of a market Used as a benchmark to compare the performance of other stocks or mutual funds

13-9 Stock Price Index Trends 2001–2009 (Figure 13.1)

13-10 Market Indexes

13-11 Market Indexes The Dow Jones Industrial Average (DJIA)   Chosen to represent the market

13-12 Market Indexes S&P 500 – Standard & Poor’s 500   Representative of the stock market   Benchmark to judge overall U.S. market performance

13-13 Comparison of Disney to Indexes

13-14 Stock Quotes

13-15 Stock Quotes Opening/closing/current price 52-week high and low Market capitalization Dividend yield

13-16 Stock Quotes Dividends: Profits distributed to the stockholders; approved by the company’s board of directors Dividend yield: Price–to-earnings (P/E) ratio: Market value per share / Earnings per share Start-up companies generally don’t pay a dividend – they are using all excess cash to grow the business

13-17 Company Evaluation Research:  Company reports: 10K, 10Q, annual report   Online  Don’t buy stocks based on emotion “There are only two emotions in Wall Street: fear and greed.” ~ William Lefevre, Manhattan broker, Time magazine, May 1, 1978

13-18 Online Research Tools

13-19 Online Research Tools (Figure 13.7)

13-20 Stock Brokers Full-service brokers  Provide the most personal advice   Should know your investment objectives, risk tolerance, current assets, income, etc.   Execute trades for you Discount brokers   Might provide research tools on their website   Charge per trade 

13-21 Buying and Selling Stock Types of Trades  Market Order: Buy or sell stocks at current market price  Limit Order:  All-or-None Order: Trade is only executed if the entire order can be done in a single transaction (i.e., buy 500 shares of Disney)  Stop and Stop-Limit Order:  Short-Sell Order: Selling stock that you do not own believing the price will drop and you can buy the stock at a lower price than you sold it  Buy-to-Close Order:

13-22  Day Order: Expires at the end of the trading day if it is not filled  Good-’til-Canceled Order  Extended-Hours Order: Allows you to place orders through electronic trading networks after the market is closed  Trailing-Stop Order:  Bracketed Order: A trailing-stop order with an upper limit trigger price that places a sell order Buying and Selling Stock Types of Trades

13-23 Mechanics of Trading Stocks (Figure 13.9)

13-24 Investment Clubs Members contribute a set amount of money for the club to invest See if your college or university has an investment club Great way to become more familiar with trading stocks

13-25 Buying Stocks Directly Direct-Stock Purchase Plan – Investors buy stock directly from the company   Can be set for monthly automatic purchases from checking or savings account  Dividend Reinvestment Plan (DRIP)  Purchase stock directly from company   Allows fractional share ownership  Single Share Buying

13-26 Stock and Personal Finance Life Stages Dependent to Independent Stage: Stock makes a great gift from relatives Early Family: Empty Nest: Diversify your portfolio with wise stock purchasing; need to have a firm financial foundation before buying individual stocks Retirement: