1. Personal Finance Stocks (Equities)
Bill Klinger

2. Personal Finance Review Asset classes Types of risk Measuring risk
Calculating returns
Taxes on returns

3. Equities Common Stock Preferred Stock Share of ownership in a company.
Common stock owners can vote on major company decisions
They expect to receive cash dividends and to benefit from capital gains. (Often no dividends are issued.)
Preferred Stock
Stock whose holders receive preference in the payment of dividends
Seldom confers voting rights
Dividends are fixed

4. Equities Convertible Securities
Bonds or stock that contains a conversion feature
Gives the holder the right to exchange their securities for a fixed number of shares of common stock

5. Buying Stock Stock exchanges Brokers Bid-ask spread Commissions
NYSE, AMEX
Over-the-counter, e.g. NASDAQ
Brokers
Bid-ask spread
Commissions

6. Stock Quotations
Source: finance/yahoo.com 1/12/17

7. Stock Quotes Bid – what a person is willing to pay
Ask – what a person wants for the stock
Market Cap – Value of the company = price x (# shares)
P/E – Price/earnings ratio = price / EPS
The higher the P/E, the more the market thinks the company’s profits will grow
EPS – earnings per share,
the profit on one share of stock = net income / # shares
Dividend – dividend paid per share of stock
( N/A means no dividends are paid )
Yield – dividend / price. ( N/A means no dividends are paid )

8. Buying and Selling Securities
Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors.
E*trade: An Online Brokerage Firm
Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.

9. Costs of Trading
When investors buy or sell securities through a brokerage firm, they pay a fee
These costs vary widely among brokerage firms
A full-service firm charges higher fees, but provides a large number of services and offers investment advice
A discount firm charges lower fees, but offers less advice and fewer services
Online brokerage firms charge some of lowest fees of all brokerage firms, and give their customers access to a wide range of investment information, though they do not provide advice to investors directly.

10. Buying and Selling Securities
Placing an Order
A market order instructs a brokerage firm to obtain the highest price possible – if the investor is selling – or the lowest price possible – if the investor is buying
A limit order instructs the brokerage firm not to pay more than a specified price for stock if the investor is buying, or accept less than a specified price if the investor is selling
Buying on margin
Borrow a portion of funds to purchase
Fed limits margin to 50%
Subject to margin call if value drops
Using leverage
Short selling
Sell stock you don’t own now
Purchase at a later date

11. Equity Returns Dividends Change in price Optional Usually quarterly
Sometimes one-time event
Not guaranteed for common stock
Change in price
Based on investors’ view of a firm’s future
Will cause a capital gain or loss

12. Not All Risk is the Same
Firm Risk = Systemic risk Idiosyncratic Risk
Business Cycles
Financial
Markets
Global
Conditions
Risk Unique to the
Firm
Source of Correlation
Idiosyncratic risk can be diversified away!

13. Stock Indexes Reflect the general activity of the stock market
Most common indices
Dow Jones Industrial Average (the Dow or DJIA),
Standard & Poor’s 500 (S&P 500),
NASDAQ composite
Foreign indices
DAX (Germany)
FTSE, FT-100 or “Footsie” (London),
Nikkei (Tokyo)

14. How’s the Market Doing?
Bull market
Bear market

15. In Class
In groups of two
Chapter 15 Financial Planning Exercises