1. Investing in Stocks

2. Purpose of Stocks Business perspectiveBusiness perspective –Raise funds Investor perspectiveInvestor perspective –Investment instrument –Short and long term earnings potential –Barrier against inflation

3. Stocks Classification IncomeIncome –Consistent history of paying high dividends –You buy the stock to keep a long time, expecting to make money through dividends (a share of the company’s profit) GrowthGrowth –Most of company profits reinvested instead of distributed –You buy the stock to sell it later, expecting the price per share to increase

4. Quality of Stocks New and small companies are less establishedNew and small companies are less established –Future uncertain –May be very profitable Blue chip stocks – large companies that have been aroundBlue chip stocks – large companies that have been around

5. 5 Capitalization Capitalization is the dollar market value of all of a company’s outstanding sharesCapitalization is the dollar market value of all of a company’s outstanding sharesCapitalization Shares outstanding Shares outstanding X current market price per share X current market price per share Large-cap (over $10 billion)Large-cap (over $10 billion) Mid-cap ($2 to 10 billion)Mid-cap ($2 to 10 billion) Small-cap (less than $2 billion)Small-cap (less than $2 billion)

6. Defensive vs. Cyclical Defensive stock – remains stable; pays dividends during economic declineDefensive stock – remains stable; pays dividends during economic decline –Utilities, drugs, food, health care Cyclical stocks – profits fluctuate during the year; do poorly during recessionsCyclical stocks – profits fluctuate during the year; do poorly during recessions –Travel-related business (especially leisure travel)

7. How do stocks work? Company sells all of part of the value of the business (assets)Company sells all of part of the value of the business (assets) –Cash, machines, stock, vehicles, buildings Divide value into piecesDivide value into pieces –Each piece is a share of stock, or a share in the value of the company –People buy shares, often in blocks

8. Where’s the profit? Company perspectiveCompany perspective –Get revenue they need without having to rely in loans –No interest payments Investor perspectiveInvestor perspective –Sell stocks later for a higher price –Get a share of the company’s profit through dividends

9. Types of Stock Ownership Common stockCommon stock –Pays a variable dividend (based on how much the company earns) Corporate earnings are divided by the number of sharesCorporate earnings are divided by the number of shares No profit means no dividendsNo profit means no dividends Ex: If dividends per share = 50 cents, and you own 100 shares, you earn $50.Ex: If dividends per share = 50 cents, and you own 100 shares, you earn $50. –Voting rights (major policy decisions)

10. Preferred Stock Pays a fixed dividend (stock holders are guaranteed a dividend check)Pays a fixed dividend (stock holders are guaranteed a dividend check) No voting rightsNo voting rights

11. What is stock worth? Par value – assigned dollar value printed on a stock certificatePar value – assigned dollar value printed on a stock certificate Market value – the current selling price at any given momentMarket value – the current selling price at any given moment –What people are willing to pay –Stock prices can be over or undervalued

12. Stock prices are affected by … Financial health of the companyFinancial health of the company –Is it making a profit? How much debt? Interest ratesInterest rates –When interest rates are lower than rate of inflation, more people will invest in stocks; prices rise. The market the company is in.The market the company is in. –Ex: technology, health services, travel Earning per shareEarning per share –Profit – taxes and expenses ÷ # shares

13. Return on investment, or ROI, is the profit (or loss) from buying and selling stocks (or any investment).Return on investment, or ROI, is the profit (or loss) from buying and selling stocks (or any investment). To calculate ROI:To calculate ROI: Why we invest … ROI ! = ROI ___Current Profit on Stock__ Purchase Price + Commission

14. 14 Earnings per share (EPS) The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. = EPS Net Income – Preferred Stock Dividends Outstanding Shares of Common Stock

15. 15 Formula Review = ROI ___Current Profit on Stock__ Purchase Price + Commission = EPS Net Income – Preferred Stock Dividends Outstanding Shares of Common Stock

16. 16 Questions?

17. 17 The Securities Market

18. 18 The Securities Market Where securities are bought and sold inWhere securities are bought and sold in –Securities exchange OR –Over-the-counter-market You need a licensed trading agent to buy and sell stocksYou need a licensed trading agent to buy and sell stocks

19. 19 The Securities Exchange Securities = stocks and bondsSecurities = stocks and bonds Securities exchanges: where …Securities exchanges: where … A marketplace where brokers who are representing investors meet to buy and sell securities

20. 20 Major Stock Exchanges NYSE – the Big Board Located at 11 Wall Street in NYCLocated at 11 Wall Street in NYC Largest stock exchange in the world by dollar volume and market valueLargest stock exchange in the world by dollar volume and market value Second largest by companies representedSecond largest by companies represented Trading floor is 2/3 size of football fieldTrading floor is 2/3 size of football field Hours 9:30 A.M. to 4:00 P.M.Hours 9:30 A.M. to 4:00 P.M. Text page 339

21. 21 Major Stock Exchanges AMEX (American Stock Exchange) Located at 86 Trinity Place, NYCLocated at 86 Trinity Place, NYC TSE (Tokyo Stock Exchange) Located Tokyo, JapanLocated Tokyo, Japan Second largest stock exchange in the world by market valueSecond largest stock exchange in the world by market value

22. 22 Over-the-Counter (OTC) Market A network of brokers buy and sell securities NOT listed on a stock exchangeA network of brokers buy and sell securities NOT listed on a stock exchange Trade through telephones and computersTrade through telephones and computers NASDAQ (National Association of Securities Dealers Automated Quotient) –Located everywhere electronically –Largest stock exchange by number of companies listed

23. 23 Market Cycles Bull MarketBull Market –Stocks prices rise over long period of time of time –Investor optimism Bear marketBear market –Stock prices fall over long period of time –Investor pessimism

24. 24 Investing Strategies Short-termShort-term –Buy on margin: Share cost of stock with broker; buying stock on credit (leverage)Share cost of stock with broker; buying stock on credit (leverage) Investment dollars go fartherInvestment dollars go farther Interest expense / greater riskInterest expense / greater risk –Sell short Selling stock you borrow from the brokerSelling stock you borrow from the broker Make money if price of stock dropsMake money if price of stock drops

25. 25 Investing Strategies Long-termLong-term –Buy and hold Stock split: one share becomes two or moreStock split: one share becomes two or more Dividend reinvestment: buy more shares instead of taking the dividends as incomeDividend reinvestment: buy more shares instead of taking the dividends as income –Dollar-cost averaging Spread stock purchase over timeSpread stock purchase over time –Direct investment Purchase stock directly from companyPurchase stock directly from company

26. 26 Questions?

27. 27 Reading the Stock Listings Sources:Sources: –Wall Street Journal –Many places online Main columns and SMG siteMain columns and SMG siteMain columnsSMG siteMain columnsSMG site See text Pg 347 for more examplesSee text Pg 347 for more examples

28. 28 Stock Indexes How investors measure / judge investment performance (How is the stock doing?)How investors measure / judge investment performance (How is the stock doing?) Dow Jones Industrial AverageDow Jones Industrial Average –30 major stocks on the NYSE Standard and Poor’s 500 (S&P 500)Standard and Poor’s 500 (S&P 500) NASDAQ Composite IndexNASDAQ Composite Index Check on YahooCheck on YahooYahoo