Stocks
Stocks
Chapter 9
Pages 271 – 301
Securities – all the investments, including stocks, bonds, mutual funds, options and commodities that are traded – on the securities exchanges or the over the counter market
Private corporation- shares are owned by small group of people – not traded on the stock market. Ex. VonMaur)
Public corporation –shares are traded on the open markets- anyone can buy them (ex. IBM, Deere)
Stock split –your profits will increase. The company divides the number of shares outstanding into a larger number of shares – Usually 2 for 1 split (if you owned 100 shares before – you now will have 200) The value of the shares reduces in ½ also. They do it b/c they want to make it more attractive and affordable for others to buy.
Par value- an assigned dollar value that is printed on the stock certificate (par value * dividend rate= dividend in dollar form per share)
Bull Market – a market that is rising – people are optimistic- buy stocks- the overall stock market value increases.
Bear Market- a falling market – people are generally pessimistic that the economy is doing poorly, earning are down, etc.- people are selling stocks
Current Yield- annual dividend divided by the investment’s current market value. Increase in current yield is good.
Rate of Return - skip
Total return – calculation that includes annual dividends as well as any increase or decrease in the original price of the investment. (multiply dividend per share * number of shares held * length of time held) (see pg 288)
Earnings per share- corporations net earnings divided by number of shares outstanding of common stock. Measures the amount of corporate profit assigned to each share of common stock- shows profitability (see pg 289)
Dividend-distribution of money, stock or property a corporation pays to stockholders (not guaranteed – based on corporate earnings)
Price-earnings ratio (P/E)- the price of one share of stock divided by the corporation’s earnings per share of stock outstanding over the last 12 months – used frequently to compare companies in the same industry (ex. Compare Wells Fargo to Bank of America) Low PE indicates a good investment – the company has lots of earnings per share of stock.
Initial Public Offering (IPO)- occurs when a company sells shares of stock for the first time to public investors. Used to fund new start up companies
Securities Exchange – a market place where brokers represent investors and meet to buy/sell securities. Examples NYSE, AMEX. People can trade on one exchange or another worldwide – 24/7
Over-the-counter market- a network of dealers who buy and sell securities not listed on the exchanges. (must match the buyer and seller) NASDQ
Portfolio –consists of all securities held by an investor.
Commission a fee charged by the brokerage firm for buying and selling securities
|Type of Stock |Description |Advantages |Disadvantages |
| | attracts conservative investors- issued|relatively safe |Can still lose money. (amount invested) |
|Blue Chip |by strong/respected companies (GE, AT&T)|stable earnings |Slower growth |
| | |consistent dividends | |
| |Good for investors looking for income |Pays higher than average dividends |Not a ton of growth- but consistent |
|Income |producing investments |Predictable dividends | |
| |Pays steady dividends | | |
| |Drug and G&E comp | | |
| |Issued by a company whose potential |Potential for growth in value/price of |Generally do not pay dividends |
|Growth |earnings may be higher than average than|stock and can sell for quick profit |Potentially more risky |
| |for all firms in the U.S. | | |
| |Tech stocks/ companies | | |
| |Stock reflects the state of the economy |When economy is good – stock value is up|When economy is bad – stock value is |
|Cyclical |John Deere, Auto makers | |down |
| | | |Potential for economy to remain poor |
| |One that remains stable during declines |Steady earnings |Growth is slower than that of “growth |
|Defensive |in economy |Continue to pay dividends even if |stocks”- |
| |(many blue chip and income stocks fall |decline in economy | |
| |in this category – Proctor & Gamble and | | |
| |Kellogg) | | |
| |Stock of a company that has issued a |For conservative investors - more |Steady growth – not a quick money maker |
|Large Cap |large number of shares of stock and has |secure/ less risk | |
| |large capitalization | | |
| |Typical DOW 30 stocks | | |
| |Stock issued for companies with less |Value may appreciate faster |Higher risk investment – may be newer |
|Small cap |that $150 million in capitalization | |companies – not a proven track record |
| | | | |
| |Typically sell for less than $1 |Cheap investment – low money in |Very risky |
|Penny stock | | |No track record of performance |
| | | | |
Long term Strategies
Buy-and-Hold- long tern investment strategy, buy and hold for a number of years- generally increase in value over time.
Dollar cost Averaging – put an equal amount of money into an investment an equal period of time. Example: Buy 100 shares of IBM at $50 per share January 1st and put in $5000 each month into IBM stock – theory is that over time the price you pay will average out over time- see top of pg 299
Direct Investment and Dividend Reinvestment- buy directly from the company and use DRIP (dividend reinvestment plan)- dividends paid from the company will be used to purchase more shares of the stock. Good plan for those that don’t have a lot of $$ to invest
Short term Strategies
Buying Stock on Margin- borrow money against your other investments from the brokerage house to buy more stocks – can be risky – if the overall market value of your investments goes down – you may have a “margin call” and be expected to put in cash to cover the declining value.
Selling Short selling of stock that you have borrowed from the brokerage house – you are betting against or for the market. Make money if stock price goes down – you can buy the stock you need to replace back at a cheaper price and you keep the difference. See page 301 for steps. Very risky – if stock price increases – you must replace it at a higher price and therefore lose money.
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