1. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Identify the most important features of stock  A Form of Equity  Dividends Not Mandatory  Voting Rights and Control of the Company Why Corporations Issue Common Stock TM 12-1

2. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  They can make money in three ways. –Income from dividends –Dollar appreciation of stock value. –Possible increased value from stock splits. Why Do Investors Purchase Common Stock? TM 12-2

3. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Procter & Gamble Stock Transaction TM 12-3 Assumptions 100 shares of common stock purchased January 18, 2005, sold January 18, 2007; dividends of $2.05 per share for the investment period. Costs when purchasedReturn when sold 100 shares @ $55 =$5,500100 shares @ $65 =$6,500 Plus commission+ 55Minus commission-55 Total investment$5,555 Total return$6,445 Transaction summary Total return$6,445 Minus total investment-5,555 Profit from stock sale$ 890 Plus dividends+ 205 Total return for the transaction $1,095

4. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Investors in preferred stock receive cash dividends before common stock holders are paid any cash dividends.  The dividend amount is either a stated amount of money for each share of preferred stock, or a percentage of the par value.  Par value is an assigned dollar value that is printed on a stock certificate. Preferred Stock TM 12-4

5. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Cumulative feature. –Unpaid cash dividends accumulate and must be paid before any cash dividends are paid to the common stock holders.  Conversion feature. –Can be traded for shares of common stock. Features of Preferred Stock TM 12-5

6. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  A logical place to start the evaluation process is with the classification of stock investments  Blue Chip Stock.  Income Stock.  Growth Stocks.  Cyclical Stock.  Defensive Stock.  Large Cap Stocks.  Small Cap Stocks.  Penny Stocks. Objective 2: Explain how you can evaluate stock investments TM 12-6

7. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  The following can be used to evaluate stock investments. –The Internet –Stock Advisory Services –Newspapers –Prospectus –Annual Reports –Government Sources –Business Periodicals Sources of Information TM 12-7

8. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Corporate earnings play a large part in the increase or decrease in value of a stock.  Earnings per share are the corporation’s after-tax income divided by the number of outstanding shares of common stock. An increase in earnings is generally a healthy sign.  Price-earnings (PE) ratio is the price of one share of stock divided by the earnings per share of stock. Numeric Measures That Influence Investment TM 12-8

9. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  The dividend yield is the annual dividend amount of income generated by an investment divided by the investment’s current market value.  The total return for an investment is equal to the dividends plus capital gains. Numeric Measures That Influence Investment (continued) TM 12-9

10. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Buying and Selling Stocks  Primary market. –A market in which an investor purchases financial securities via an investment bank, or other representative, from the issuer of those securities.  Secondary market. –A market for existing financial securities that are currently traded among investors via brokers. Objective 4: Describe how stocks are bought and sold TM 12-10

11. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  A Securities Exchange is a marketplace where member brokers who represent investors, meet to buy and sell securities.  The Nasdaq market is a network of dealers who buy and sell the stocks of 3,200 different companies not listed on a securities exchange. Securities Exchanges and Nasdaq TM 12-11

12. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. market order  A market order is a request to buy or sell stock at the current market value. limit order  A limit order is a request to buy or sell a stock at a specified price or price range. stop order  A stop order is a request to sell a stock at the next available opportunity after its market price reaches a specified amount. A Sample Stock Transaction TM 12-12

13. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Transactions can be done on the phone or online.  Brokerage firms have minimum commissions for buying and selling stock ranging, from $7 to $55, depending of the number of shares sold and the value of the stock.  Full service and discount brokers charge more than online brokerage transactions, but online you have to make your own decisions. A Sample Stock Transaction (continued) TM 12-13

14. McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Long-term techniques. –Buy and hold. –Dollar cost averaging. –Direct investment and dividend reinvestment plans.  Short-term techniques. –Buying stock on margin (borrowing money). –Selling short (borrowing stock). –Trading in options (predetermined price). Objective 5: Explain the trading techniques used by long- term investors and short-term speculators TM 12-14