1. Learning Objective # 3 Explain how you can evaluate stock investments. LO#3

2. Stock Valuation  Important to understand different approaches used by experts to analyze stocks  Fundamental Analysis  A way to value stocks by looking at micro and macro factors that might influence the economic value of stocks  Technical Analysis  The idea that changes in investor sentiment are responsible for changes in trends, and that the value of a stock can be predicted by extrapolating price from historical patterns  Efficient Market Hypothesis  States that future prices cannot be predicted from past trends and patterns LO#3

3. Classification of Stock Investments  Blue chip stock  Safe investment in strong and respected companies  Attracts conservative investors  ex. Bell Canada, Royal Bank  Income stock  Pays higher than average dividends, ex. utility stock  Growth stock  Earns above average profits of all firms in the economy.  Less than 30% of earnings are paid out as dividends, with rest reinvested in research & development  ex. Southwest Airlines, Home Depot LO#3

4. Classification of Stock Investments  Cyclical stock  Follows the business cycle of advances and declines in the economy  ex. automobiles, timber, and steel  Defensive stock  Remains stable during declines in the economy  ex. Kellogg, Procter & Gamble and utility stocks LO#3

5. Classification of Stock Investments  Large cap stocks  Issued by a large corporation that has a large amount of stock outstanding & a large amount of capitalization  Capitalization  The total amount of securities--stocks and bonds-- issued by a corporation  Small cap stocks  Issued by a company that has a capitalization of $150 million or less  Penny Stocks  Typically sell for less than $1 per share LO#3

6. Sources of Information on Stocks  Newspapers  The Internet  Stock Advisory Services  Charge a fee  Hundreds to choose from  Corporate News  Disclose information about corporate earnings, assets and liabilities, products or services LO#3

7. Factors that Influence the Price of Stocks  Bull market  Investors are optimistic about nation’s economy  More investors are buying stock and the stock market increases  Bear market  Investors are pessimistic about economy  More investors are selling stock so and the stock market declines LO#3

8. Measures of Corporate Risk, Performance and Shareholder’s Return  Annual Shareholder’s Return  A stock’s annual dividend and increase in value divided by its beginning-of-year stock price LO#3 Annual Shareholder = Annual Dividend + Appreciation in Value Return Initial Stock Investment

9. Measures of Corporate Risk, Performance and Shareholder’s Return  Dividend Yield  A stock’s annual dividend divided by its beginning-of- year stock price  If the dividend is divided by the end-of-year stock price, it is referred to as its trailing dividend yield LO#3 Annual Dividend Yield = Annual Dividend Initial Stock Investment

10. Measures of Corporate Risk, Performance and Shareholder’s Returns  Capital Gains Yield  A stock’s increase in value divided by its beginning-of- year stock price LO#3 Capital Gains Yield = Appreciation in Value Initial Stock Investment

11. Measures of Corporate Risk, Performance and Shareholder’s Returns  Earnings Per Share  Are the corporation’s after tax-earnings divided by the number of outstanding shares of common stock LO#3 Earnings Per Share = After-Tax Earnings Number of outstanding shares of common stock

12. Measures of Corporate Risk, Performance and Shareholder’s Returns  Price-Earnings (PE) Ratio  Price of one share of stock divided by the earnings per share of stock over the past 12 months  A low price-earnings ratio means a stock could be a good investment LO#3 Price-Earnings Ratio = Price Per Share Earnings per share of stock Outstanding over the last 12 months

13. Measures of Corporate Risk, Performance and Shareholder’s Returns  Beta  Is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general LO#3