1. Chapter 12 The Stock Market

2. CHAPTER 12  Who are the owners of a corporation?  Stockholders (shareholders)  If a corporation does well financially, stockholders will profit in two ways. What are these two ways mentioned in your text?  - Through dividends  - Through capital gains

3.  What are dividends? Part of a corporations profit paid to stockholders What are capital gains? Increase in the value of stock above the price initially paid for it.

4. Chapter 12  If you bought stock in Walmart at $5.00 a share and the value of a share rose to $10.00 then you would have a capital gain of how much? If you sold the stock at $10.00 a share, then you would have a realized gain (profit) of $5.00. If you continued to hold the stock, then it would be an unrealized gain of $5.00.

5. Chapter 12  Stocks are traded in round lots or odd lots. A round lot is 100 shares or multiples of 100 shares of a particular stock. An odd lot is fewer than 100 shares of a particular stock.

6. Chapter 12  If you purchased stock in Target for $6.00 a share and the value of Target’s stock dropped to $5.00 a share, then you would have a gain or loss of what? You would have a realized loss of $1.00 per share if you sold your stock. If you held your stock, then you would have an unrealized loss of $1.00 per share.

7. Type of Stock ▪ Common Stock - pays a variable dividend - voting rights - more risky than preferred ▪ Preferred Stock - pays fixed dividend - no voting rights

8. Common Stock  True or False? Do common stockholders directly manage the corporation? Do common stockholders vote on major policy decisions? Does each share have the same voting power?

9. Common Stock  Does a common stockholder have to be present to vote?  No, may vote by proxy  A proxy is a written authorization to transfer voting rights to someone else.

10. Common vs. Preferred  In case of company failure, who is paid first, preferred or common stockholders?

11. Classifying Stock  When researching and evaluating common stock, investors often classify stock into different categories. What are some of these classifications?  Income, Growth, Less-Established,Blue Chip, Defensive, and Cyclical

12.  Corporations use their profits in two ways, distribute to shareholders as dividends or reinvest their profits into the business to help it grow.  Growth stocks: Stocks that reinvest profit into company for future capital gains

13.  Growth stocks pay little or no dividends.  Income Stock Stocks that have a constant history of paying high dividends ● Less-Established Young, often smaller, corporations with higher overall risk.

14. Stock Value  Market Value (Purchase and sale price is based on market value)  Par Value (arbitrary value on a stock certificate)

15. Undervalued Stock Stocks that are worth more than the price for which they are selling. Is this good for investors? Yes, this makes a good bargain Is it good for business? No, company is vulnerable to a takeover

16. Overvalued Stock  Stock selling at a price that is not justified by its earnings potential.  Is this a good situation for investors? No, possibility the stock will drop

17.  Stock prices go up and down all the time. The wider the price swings – the riskier the investment.

18. Factors that affect stock price  Company’s financial status  Interest Rates  The Market Place  Earnings Per Share

19. Market Place  When a company’s product is in demand and the company is part of a popular industry it’s stock will tend to rise.

20. Earnings Per Share  A corporation’s after tax earnings divided by # of shares outstanding.  For example, if Munch Inc. reported an after tax earnings (net profit) of $100,000 and has issued 10,000 shares of common stock the the EPS would be ($100,000/10,000) $10

21. Why use EPS  Investors use this as a measure of a company’s profitability.