1. Stocks and Bonds
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2. Review 1) How can you apply the rule of 72 to investing?
Tells us how long it takes for an investment to double in value at a given interest rate
2) Tom and Sarah have a two month old baby girl and they are already planning for her college costs. Do you recommend that Tom and Sarah look mainly at low, moderate, or high risk investments?
Moderate risk because of the moderate to long term time frame.
3) Elliot’s stock broker is suggesting that he consider investing in a diversified portfolio. Why is a diversified portfolio desirable?
Decreases risk by investing money in a variety of investment tools
4) How is risk related to return?
The higher risk you take on, the higher potential for return
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3. Stocks Stock: share of ownership in a company, also called a share
Stockholder: owner of the stock, also called a shareholder
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4. Why Companies Issue Stock
When a company would like to grow, it issues stocks to raise funds and pay for ongoing business activities.
Research better ways to make things
Create new products
Improve the products they have
Hire more employees
Enlarge or modernize their buildings
It is popular because:
The company does not have to repay the money
Paying dividends is optional
Dividends are distributions of earnings paid to stockholders
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5. Stocks
Buying stock can be risky, since while the price of the stock may go up, it may also go down.
If the company goes bankrupt, then you could potentially lose all the money you invested in the stock.
Purchasing stock is taking a risk, in the hope of making money on your investment, with no guarantee that you will make money.  
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6. Types of Stock
Common stock: Could pay variable dividends and gives owners (stockholders) voting rights
Could vote on issues such as who the company directors will be
Preferred stock: guarantees a fixed dividend but does not provide voting rights
Less risk than common stock so the stock typically costs more
If the company goes bankrupt, preferred stockholders would be paid before common stockholders
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7. Stocks Terms
Blue Chip: a safe investment that generally attracts conservative investors, usually issued by the strongest and most respected companies, ex. AT&T, Nike, Microsoft, Visa
Capitalization: total amount (value) of stocks and bonds issued by a corporation
Small-Cap Stocks: a stock issued by a company with a capitalization of $500 million or less, ex. many energy companies
Large-Cap Stocks: a stock from a corporation that has issued a large number of shares and has a large amount of capitalization, ex. Apple, IBM, Exxon
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8. Stock Symbols
Stock Symbol- a group of letters standing for a particular stock, mutual fund, or other security. Also called a ticker symbol or stock abbreviation.
Can you name these tickers?
MMM HD AA
XOM
AXP
JNJ KO
MCD GE
WMT GM
DIS
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9. Buy Low, Sell High
The stock market is an everyday term we use to talk about a place where stocks and bonds are "traded" – meaning bought and sold. The goal is to buy the stock, hold it for a time, and then sell the stock for more than you paid for it.
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10. Market Conditions
Bull Market: Market condition that occurs when investors are optimistic about the economy and buy stocks
Bear Market: Market condition that occurs when investors are pessimistic about the economy and sell stocks
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11. Stock Exchange
A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities.
The New York Stock Exchange (NYSE)
Hybrid market combining floor-based and electronic trading
Large companies such as Coca Cola, Wal-Mart and McDonalds
NASDAQ
Computer based trading system
Tech companies such as Cisco, Dell, Intel, Microsoft and Oracle
American Stock Exchange (AMEX)
Smaller stock exchange
Small cap stocks
Ex. Small companies specializing in energy, metal, oil, etc.
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12. Stockbroker
To purchase company stock listed on the NYSE, the investor places an order through a stockbroker or a brokerage account.
Stockbroker: a financial representative who handles the buying and selling of securities
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13. Stock Market Index
A stock index or stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks. It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.
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14. Stock Market Indices Dow Jones Industrial Average (“DOW”)
Lists the 30 leading industrial blue chip stocks (stock of a large, well-established and financially sound company that has operated for many years)
Standard and Poor’s 500 Composite Index
Covers market activity for 500 stocks
More accurate than DOW because it evaluates a greater variety of stock
National Association of Security Dealers Automated Quotations (“NASDAQ”)
Monitors fast moving technology companies
Speculative stocks, show dramatic ups and downs
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15. Supply vs. Demand
The stock exchange is organized based upon the laws of supply and demand
Supply is the relationship of prices to the quantities of a good or service sellers are willing to offer for sale at any given point in time
Demand is the relationship of prices to the quantities and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.
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16. Bonds
Form of lending to a company or the government (city, state, or federal)
Annual interest is paid to investor
Once the maturity date is reached, the principal is repaid to the bondholder
Less risky than stocks, but lower potential return
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17. Bond Terms
Face Value: The amount that a bondholder will receive at bond’s maturity
Maturity Date: The date when a bond will be repaid
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18. Government Bonds
Issued by the U.S. Treasury or by U.S. government agencies
Low risk investments when held to maturity
The interest earned from most of these investments is subject to federal taxes but not state and local taxes
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19. Municipal Bonds Issued by states, counties, cities, and towns
Used to pay for projects, such as roads or public buildings
Do not have to pay federal, state, or local taxes on the income from municipal bonds
Considered low risk investments
Although it is possible for a government unit to go bankrupt, it is not very likely.
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20. Corporate Bonds Issued by corporations to raise money
A form of borrowing for the company
Build a new factory or buy equipment
Corporate bonds pay a coupon rate
Coupon rate: the fixed rate of interest that is paid semiannually for the life of a bond
So, the reason many people invest in corporate bonds is to receive regular (semiannual) interest payments, and at maturity, the bond can be redeemed for face value
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21. Bond Ratings
Investors can use bond ratings to judge the risk of buying a bond.
Three main rating agencies:
Moody’s Investors Services
Standard & Poor’s
Fitch ratings
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22. Types of Bonds
Investment-grade bonds: have high ratings (AAA, AA, A, and BBB) and are considered fairly low-risk
Junk bond: Junk bonds are risky investments, but have appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them
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23. Corporate Reports
The federal government requires corporations selling stocks or bonds to provide investors with a:
Prospectus- Document that discloses information about a company’s earnings, assets, and liabilities
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24. Stock or Bond? 1) A share of ownership in the company
2) Lending a company money to help finance a project
Bond
3) High risk, potential for high return
4) Prices determined by supply and demand
5) Ratings are used to judge the risk
6) Subject to federal, but not state/local taxes
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