1. The Stocks & Investments Issue
The Stocks & Investments Issue

2. Principles Discussed Stocks Stock Tables Bonds Mutual Funds
The Stocks & Investments Issue

3. Understanding Stocks
A share stock is part ownership of a company. A company issues stock shares to raise business capital. Investors buy stock shares to participate in the future growth of a company. You own a part of the profit generated. Dividends are the investor’s share of profits, usually paid to the investor semiannually or annually. The more shares you own, the larger portion of the company and profits you own.
Stock Market – a market linking buyers and sellers. Approved and regulated in the US by the SEC (Securities and Exchange Commission).
The Stocks & Investments Issue

4. Types of Stocks Common Stock Preferred Stock
Board of Directors decide what to do with profits
Preferred Stock
Fixed dividends are paid out
Stock represents ownership in a company. There are two types of stock: common and preferred.
Common stock owners elect directors, who hire the day-to-day managers of the business. Owners vote on issues at the stockholder’s meetings. The board of directors determine what is done with any profits.
Preferred stock owners are paid before any dividends are paid to common stock holders. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so.
The Stocks & Investments Issue

5. Stock Advantages
Stocks have higher potential growth and reward than fixed investments
Long-term growth of stocks has out-paced interest paid on fixed investments
Stocks have higher potential growth, thus higher potential reward, than a “cash” investment such as a Certificate of Deposit (CD), or Money Market account or a fixed investment like savings bonds. This is because the investor is willing to assume the risk of ownership in a company. Historically, the long-term capital growth of stocks has outpaced the interest paid on fixed investments.
The Stocks & Investments Issue

6. Stock Disadvantages Stocks have higher risk than fixed investments
Single stock investment is particularly risky due to lack of diversification
However, stocks have a higher risk than fixed investments, some of which are backed by the Federal Deposit Insurance Corporation (FDIC), or even government bonds, which pay a known rate of return and are backed by the full faith and trust of the government. A single stock investment is especially risky because it lacks diversification, which is the strategy of investing in a variety of assets expected to react differently to changes in market conditions. Stock mutual funds tend to have less risk because they are broadly diversified.
The Stocks & Investments Issue

7. Understanding the Stock Table
This slide illustrates a stock table. Here is how to read it:
The first HI--LO column shows the highest and lowest prices at which the stock traded in the past year (52 weeks). In our example, the highest price is $47 and the lowest was $37.
SYM is the abbreviated name for the firm issuing the stock or the “ticker symbol.”
DIV refers to dividends, the annual amount per share the firm pays to its stockholders.
VOL refers to the volume of shares (in hundreds) that were traded that day and gives an indication of the breadth of the shares.
YLD refers to the dividend yield, or the return on invested capital, calculated by dividing the amount in the “DIV” column by the amount in the CLOSE column (the closing price of the stock).
PE signifies the price per earnings ratio, and shows the amount an investor is willing to pay per $1 earnings per share. It is calculated by dividing the price by the earnings per share (EPS).
HI-LO represents the highest and lowest amounts the stock was traded for during a trading day, not over the course of the year as in the first column.
CLOSE is the price at which the last trade was made during the day.
NET CHG stands for the difference between the closing price the previous day and the closing price the current day.
The Stocks & Investments Issue

8. Understanding Bonds
The Stocks & Investments Issue

9. What Are Bonds? An IOU Issued by corporations or governments
“Fixed income” investments
Bonds are debt securities; IOUs issued by corporations or governments. The investor is loaning money to the corporation or government that needs funds for a defined period of time at a specified interest rate. In most instances, bond issuers agree to repay the loans by a specific date (date of maturity) and to make regular (usually annual or semiannual) interest payments to the investor until that date. That’s why bonds are referred to as “fixed-income” investments.
The Stocks & Investments Issue

10. Types of Bonds Corporate bonds Municipal bonds Treasury bonds
Treasury notes
Treasury bills
U.S. Savings Bond
Zero coupon bonds
Bonds can mature at different times. They can be short-term (less than 5 years), intermediate-term (5-10 years), or long-term (more than 10 years).
Corporate bond-a bond issued by a corporation
Municipal bond-a bond issued by state, city, or local government to finance operations or special projects. (Generally, the interest earned is tax-free.)
Treasury bond-a bond issued by the U.S. government, considered a safe investment because the taxing authority of the U.S. government backs it- Terms are for more than ten years. (Issuance of the 30-year bond has recently been suspended.)
Treasury note-same as treasury bond except that the note is issued for a shorter time-It is typically issued in maturities of two, five, and ten years.
Treasury bill-an instrument issued by the U.S. government-Maturities range from three months to two years.
U.S. Savings Bond-government-issued and backed debt instruments that make periodic interest payments-Series EE/E and Series I bonds are zero coupon bonds (defined below). In the Series HH/H bond, payments are received as current income. (Series E and Series H are older bonds, no longer issued but still in circulation. Series EE and Series HH are their replacements.)
Zero coupon bond-bond with no periodic interest payments -Investor receives one payment, which includes principal and interest, at maturity.
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11. Issuer Maturity Credit Quality Risks
Selecting Bonds
Issuer Maturity Credit Quality Risks
Factors to consider before buying bonds include:
Issuer-Bonds are issued by the U.S. Treasury, U.S. government agencies, corporations, and state or local governments. The issuer affects credit risk (defined below) which, in turn, affects the price.
Maturity-date when the issuer agrees to repay the principal (face value) of the loan-The longer it takes the bond to mature, the more it will fluctuate with changes in interest rates. Short-term is more predictable and less risky than long-term.
Credit Quality-A bond’s quality is measured by the issuer’s ability to pay interest and repay principal in a timely manner. Treasury bonds have the highest credit quality, and corporate high-yield (“junk”) bonds have the lowest credit quality.
Risks-Call Risk is the risk that an issuer will opt to pay off some or all of its bonds before the maturity date, forcing the investor to find a new source of income in a lower-interest-rate environment. (Not all bonds are callable.) Credit Risk is the risk that an issuer will default (fail to pay principal and/or interest) on the bond. Interest Rate Risk is the risk that rising interest rates will reduce the value of a bond. (This applies if the investor plans to sell before maturity.)
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12. Bond Advantages Predictability
Fixed income for defined period of time
Generally higher source of income than cash investments or stocks
Inclusion in portfolio provides diversification
Income from some bonds is tax-exempt
There are several potential advantages to buying bonds. Bonds tend to be more predictable than other securities. They provide a source of fixed income for a defined period of time. Bonds generally offer higher income than cash investments such as money market funds, CDs, etc. They generally produce more income than stocks because stocks tend to focus more on capital appreciation than income generation. Having bonds in your portfolio provides diversification, reducing overall volatility. Income from some bonds is tax-exempt.
The Stocks & Investments Issue

13. Bond Disadvantages Fluctuations in interest rates Call risk
Risk of issuer default
Value of interest affected by inflation
Corporate decisions may affect credit quality and/or market value
There are also potential disadvantages.
Some of the risk involved with bonds comes from interest rate changes. Interest rates and bond prices move in opposite directions. Interest rates go up, bond prices fall; interest rates go down, bond prices rise. For example: If you buy a $10,000 bond with a coupon rate of 6%, and interest rates go up, a new bond issue may offer a 7% coupon rate. Since this means a person can earn more interest by purchasing the new bond, the value of the original bond is reduced. If you wanted to sell the original, you would have to discount the price to make up for its lower interest rate. On the other hand, if interest rates go down, a new bond may offer only a 5% coupon rate. If that happens, the original bond becomes more valuable and is said to be trading at a premium.
During periods of falling interest rates, issuers may call their loans before maturity to reissue them at a lower rate. The investor, then, must reinvest this prepaid principal sooner than planned, possibly at a lower interest rate.
Investors can lose money if the bond issuer defaults.
The value of the interest income can be eroded by inflation.
Mergers, leveraged buyouts and other corporate restructuring can adversely affect credit quality or market value of a bond.
The Stocks & Investments Issue

14. Understanding Mutual Funds
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15. Investment Objectives
High Risk/Higher Returns
Balanced
Future Income
Increase in Capital
A mutual fund is a regulated investment company run by a manager or team of managers that buys and sells securities for individuals and institutions to achieve stated investment objectives.
High Risk/Higher Returns - higher-risk investments that offer potential for higher returns - The goal is rapid growth of capital. These funds often invest in small or emerging companies.
Increase in Capital-The goal is increasing capital. Growth companies are usually more mature and have established a very strong market position in their industry.
Balanced-These funds invest in a combination of stocks and bonds. The allocation percentages are usually fixed, and these funds generally have at least 25% of their assets in fixed-income securities. They seek both income and capital growth.
Future Income- Funds with this objective exclusively seek income from the interest and dividends generated by their investments in fixed-income securities like bonds, bills, or cash.
The Stocks & Investments Issue

16. Categorizing Mutual Funds
Size
Investing Style
Market
Mutual funds are generally categorized by size, investing style or market. A fund’s prospectus will include information on all three.
Size - These definitions are provided as a frame of reference; they may vary from one mutual fund tracking service to another.
Small-cap stocks are defined as those of companies whose market capitalization is less than $1 billion.
Mid-cap stock companies have market capitalization between $1 billion and $10 billion.
Large-cap companies are those with over $10 billion market capitalization.
Investing Style - The two main investing styles are growth and value. They tend to rotate in and out of favor.
Growth investing is a strategy of buying stock with increasing earnings with the hopes that the earnings will drive the stock prices higher. Growth stocks are usually more volatile than value stocks but have delivered similar returns over the past 20 years.
Value investing is the strategy of buying stock at a price below what the investor thinks it is actually worth, with the expectation that the prices will go up and the investor will sell at a profit.
Market - A mutual fund may be classified by whether the assets are invested in the domestic market, which includes stocks or other securities registered in the United States, or foreign markets, which include securities registered outside the U.S. Many funds have holdings from both markets. Classification is based on which market holds most of the fund’s assets.
The Stocks & Investments Issue

17. Evaluating a Mutual Fund
Value
Performance
Distributions
Mutual fund value is determined at the end of each trading day by calculating net assets. Net assets are divided by the number of shares outstanding to achieve the net asset value per share, which appears each day in the newspaper. That’s the price investors would get if they sold shares that day. The offering price in the paper may be the same or higher based on sales charges.
Performance is measured by calculating the gain or loss in net asset value from the start of the measurement period to the end of the period.
Mutual fund distributions include capital gains and/or income dividends which may be taken in cash or reinvested in additional shares. Capital gains distributions are the prorated share of net gains realized by the fund on securities sold that year. Income dividend distributions are the prorated share of interest and dividends earned on securities in the portfolio after expenses have been deducted. At the end of January each year, shareholders of non-tax-qualified accounts receive an IRS Form 1099-DIV, which reports fund earnings paid as distributions through the year.
The Stocks & Investments Issue

18. Advantages and Disadvantages
Professional Management
Marketability
Diversification
Regulations to protect consumer
Lack of insurance
Inflation risk
Systematic risk
Mutual Funds can also provide an easy way for investors to diversify their portfolios by adding foreign or global companies. Professional managers select and monitor securities, so the individual doesn’t have to. Open-ended mutual funds can be liquidated at net asset value on any day the national stock markets are open. Many funds are well diversified and can function as the core of your investment program. Mutual funds are highly regulated to protect the consumer from fraud.
Mutual funds are not insured and do not protect against loss in a down market. Inflation risk is a factor because, after taking into consideration inflation and taxes on interest earned, money can lose purchasing power. The longer the money is left in fixed interest accounts, the greater the impact. While diversification can reduce the impact of a single company’s failure, it does not eliminate the risk that stock or bond markets will go down in value over time.
The Stocks & Investments Issue

19. Questions
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