Unit 3 – Investing: Making Money Work for You



SECURITIES:

Stocks & Bonds

I. When a business sells investments

A. Businesses raise money in the form of selling investments to the consumer

B. Consumers GIVE the company money today, in the hopes of making a return on their investment in the future

C. Consumers can buy stocks and bonds

D. Businesses take this money & build up the company more.

II. Why do businesses sell investments?

A. They can’t get a commercial/business loan

B. They don’t have enough money saved from profits (retained earnings)

III. What do Businesses do with profits/retained earnings?

A. Purchase capital resources

B. Helps finance expansions

C. Pay bills, like income taxes

D. Distribute dividends to stockholders

E. Set aside for future spending (retained earnings)

IV. Stocks

TERMS TO KNOW:

1. PAR – the face value of a share of stock

2. PROSPECTUS – a circular which describes securities being offered for sale

3. “GOING PUBLIC” – allow the public to purchase ownership (shares of stock) of a company via the stock market; Selling off a part of their company

• Corporations go public (Initial Public Offering) via IPO

4. STOCKHOLDER – a person that owns a share of stock

• Each share of stock represents partial ownership to a company: the more shares you own, the more ownership you have

5. TICKER SYMBOL – an abbreviation to identify the company name

6. DIVIDEND – profits get divvied up (divided) to stockholders if the company wants to disperse them.

7. Bull Market – people trust the stock market and are actively buying & selling shares of stock; high amounts of transactions are occurring

• The market rises (prices of stocks) for months on end due to the demand

• “Bulls” are people who are charging ahead to buy stocks because they expect the stock prices to rise

8. Bear Market – people are hoarding their money to themselves, not buying & selling in the stock market; low amount of transactions

• The market (stock prices are decreasing) continually drops due to the lower demand in stocks (bad economy)

• “Bears” are people who are going into hibernation from participating in the stock trades

How do businesses go public? (IPO)

1. Work with an attorney – to complete all legal paperwork

2. Work with an accountant – to value the company, review all of the financials of the company, & determine the initial stock price (“offering”).

3. Work with investment firm/stock brokers – to push the popularity of the stock onto their clients so on the opening day, people are purchasing the available shares of stock

V. Major Stock Exchanges in United States:

A. NYSE – New York Stock Exchange

• A physical place that securities are bought & sold “auction style”

• Has a trading floor (Wall Street) where live buying & selling occurs

• Includes some non-U.S. companies

• World’s largest equity market

B. NASDAQ – National Association of Securities Dealers Automated Quotation System

• Trading done via telecommunications (via computers)

• No “physical” location

• Mostly small & new companies (Amazon, Apple, Google)

• BUT technology companies are traded here

C. AMEX – American Stock Exchange

• Has more “growing” mid-size companies

D. ANOTHER TRADING SYSTEM:

Over-the-Counter trading (OTC)

• Another part of the stock market

VI. TYPES OF STOCK

A. Common Stock

• lower priced

• you have voting rights BUT, if can’t attend a stockholders’ meeting, fill out a PROXY (absentee ballot)

• You have ONE vote per share of stock owned; the more common stock you own, the more ownership & votes you have!!

• last ones to get paid a “dividend” (only if there are “leftovers”)

B. Preferred Stock

• sold at a higher price than common stock

• NO voting rights at stockholders’ meetings

• if dividends are paid out to stockholders, YOU get it first

C. Blue Chip Stocks – well-known, large companies, they are older companies (history of being strong, stable, successful)

D. Penny Stocks – smaller companies, on-the-rise companies, not as well-known

VII. SELLING YOUR STOCK

A. Capital Gains – when you sell your shares of stock at a higher price than what you paid for it: Pay taxes on it!!

B. Capital Loss – when you sell your shares of stock at a lower price than what you paid for it: Get a tax “break” (can use as a tax “deduction”)

OTHER STUFF TO KNOW:

The DOW Jones Industrial Average (DJIA)

▪ “representative” of the market (but not a “true” average)

▪ Divisor used to account for stock splits, company restructuring

▪ Only General Electric is still 1 or the 30 (since 1928)

The Securities & Exchange Commission (SEC)

▪ Federal government agency

▪ Responsible for protecting investors in the sale of stocks & bonds

▪ Prevents fraud, deceit, & misrepresentation

▪ Investigate insider trading cases

▪ “Stock Watch”

The Federal Trade Commission (FTC) – to protect the consumer against anything illegal

▪ Insider Trading/Getting inside information – illegal!!

Confidential information, unavailable to the public

▪ Employees know about this information!!

▪ Federal Trade Commission (FTC) & Securities Exchange Commission (SEC) will investigate & prosecute anyone that is caught!

▪ Fact about a company that influences you to buy or sell your stocks/investment in the company AND you PROFIT from this information

VIII. BONDS

▪ Help to finance long-term spending for the government & corporations

▪ Can buy with various maturity dates (10-30 years)

▪ The government or corporation pays back both the principal borrowed plus interest at the maturity date, usually doubling your money

Bonds are rated by 2 firms for their potential for profit & financing health & condition:

1. Standard & Poor

2. Moody’s Investors Service

▪ Rated Aaa, Aa, A, Bbb, Ba, B etc. (least risky to most risky)

▪ The United States has recently been DOWNGRADED to Aa, from Aaa!!

▪ These rating influence the rates paid: lower the rating, more interest has to be paid out

▪ Yield – the actual % return earned over time on a bond investment; figured by dividing the annual interest by the price paid (APY)

A. Government Bonds

1. U.S. Savings Bonds (Series EE) – consumer or business is the lender, government is the borrower!

• Sold on-line only by the U.S. Treasury:

• Purchase in amounts: $25, $50, $100

• Fixed interest rate for up to 30 years

• Low interest rates and lowest RISK (safest bond to buy)

• “Loaning” money to the government

• War Bonds – to fund W W II

• Purchase at ½ of the face value ($50 buy for $25)

• Can be cashed after 20+ years

• Penalized if cashed within the 1st 5 years of owning

• AKA: Treasury Bonds

2. Municipal Bonds – issued by STATE & CITY governments

B. Corporate Bonds – Issued by COMPANIES

• Pay the highest interest rates

• But, are the riskiest to buy as company may go bankrupt!!

• Investing in a company directly

IX. How to buy STOCKS & BONDS:

A. Through a registered BROKER – give advice & buy it for you

B. Get advice through INVESTMENT ADVISOR (but they CAN’T make the purchase for you)

C. Banks & Investment FIRMS have investment advisors/portfolio managers

D. Online discount stock brokerage firms: ScotTrade

ADVICE:

▪ If it sounds too good to be true, it probably is!

▪ Don’t get emotional about your investments! – Wall Street movie

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