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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER PLAYLIST SONG: “BIG MONEY“BIG MONEY” BY GARTH BROOKS Stocks
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13-2 Learning Objectives “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” ~ Warren Buffet, Venture Capitalist (1930- ) LO 13-1 Understand the basic principles of stocks and the stock market. LO 13-2 Explain how stocks are valued. LO 13-3 Contrast how companies on the stock market are valued. LO 13-4 Summarize the basics of buying and selling stocks.
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13-3 In the News How Tiger Woods Destroyed $12 Billion of Stock Market Value Do you think the drop in the market value of the impacted stocks will be short- or long-term? Why? What does this example (impact of the Tiger Woods incident on stock prices) tell you about the volatility of the stock market? List 7 types of events and what type of impact each event has on the stock market. Can you list a past newsworthy event that did not impact stock market prices?
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13-4 Stocks Represent Privately held companies have a relatively small number of stockholders and the stock is not traded publicly (Cargill, Levi Strauss & Company, Facebook) Initial Public Offering (IPO):
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13-5 Types of Stock Preferred Stock or Preferred Shares Has priority over common shares for payment of dividends Carries no voting rights Common Stock or Common Shares Has growth potential Includes voting rights to elect the board of directors
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13-6 Stock Exchanges New York Stock Exchange (NYSE Euronext) – NASDAQ Over-the-counter (OTC) Foreign Stock Exchanges All computerized trading now
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13-7 Stock Evaluation Expectations – The stock market is forward-looking as investors try to predict future sales and earnings Bull Market Bear Market
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13-8 Market Indexes Provide an overall summary of a specific market or sector of a market Used as a benchmark to compare the performance of other stocks or mutual funds
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13-9 Stock Price Index Trends 2001–2009 (Figure 13.1)
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13-10 Market Indexes
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13-11 Market Indexes The Dow Jones Industrial Average (DJIA) Chosen to represent the market
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13-12 Market Indexes S&P 500 – Standard & Poor’s 500 Representative of the stock market Benchmark to judge overall U.S. market performance
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13-13 Comparison of Disney to Indexes
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13-14 Stock Quotes
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13-15 Stock Quotes Opening/closing/current price 52-week high and low Market capitalization Dividend yield
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13-16 Stock Quotes Dividends: Profits distributed to the stockholders; approved by the company’s board of directors Dividend yield: Price–to-earnings (P/E) ratio: Market value per share / Earnings per share Start-up companies generally don’t pay a dividend – they are using all excess cash to grow the business
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13-17 Company Evaluation Research: Company reports: 10K, 10Q, annual report Online Don’t buy stocks based on emotion “There are only two emotions in Wall Street: fear and greed.” ~ William Lefevre, Manhattan broker, Time magazine, May 1, 1978
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13-18 Online Research Tools
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13-19 Online Research Tools (Figure 13.7)
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13-20 Stock Brokers Full-service brokers Provide the most personal advice Should know your investment objectives, risk tolerance, current assets, income, etc. Execute trades for you Discount brokers Might provide research tools on their website Charge per trade
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13-21 Buying and Selling Stock Types of Trades Market Order: Buy or sell stocks at current market price Limit Order: All-or-None Order: Trade is only executed if the entire order can be done in a single transaction (i.e., buy 500 shares of Disney) Stop and Stop-Limit Order: Short-Sell Order: Selling stock that you do not own believing the price will drop and you can buy the stock at a lower price than you sold it Buy-to-Close Order:
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13-22 Day Order: Expires at the end of the trading day if it is not filled Good-’til-Canceled Order Extended-Hours Order: Allows you to place orders through electronic trading networks after the market is closed Trailing-Stop Order: Bracketed Order: A trailing-stop order with an upper limit trigger price that places a sell order Buying and Selling Stock Types of Trades
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13-23 Mechanics of Trading Stocks (Figure 13.9)
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13-24 Investment Clubs Members contribute a set amount of money for the club to invest See if your college or university has an investment club Great way to become more familiar with trading stocks
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13-25 Buying Stocks Directly Direct-Stock Purchase Plan – Investors buy stock directly from the company Can be set for monthly automatic purchases from checking or savings account Dividend Reinvestment Plan (DRIP) Purchase stock directly from company Allows fractional share ownership Single Share Buying
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13-26 Stock and Personal Finance Life Stages Dependent to Independent Stage: Stock makes a great gift from relatives Early Family: Empty Nest: Diversify your portfolio with wise stock purchasing; need to have a firm financial foundation before buying individual stocks Retirement:
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