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.
Commissiona fee charged by the brokerage firm for buying and selling securities
Type of Stock / Description / Advantages / DisadvantagesBlue Chip / attracts conservative investors- issued by strong/respected companies (GE, AT&T) / relatively safe
stable earnings
consistent dividends / Can still lose money. (amount invested)
Slower growth
Income / Good for investors looking for income producing investments
Pays steady dividends
Drug and G&E comp / Pays higher than average dividends
Predictable dividends / Not a ton of growth- but consistent
Growth / Issued by a company whose potential earnings may be higher than average than for all firms in the U.S.
Tech stocks/ companies / Potential for growth in value/price of stock and can sell for quick profit / Generally do not pay dividends
Potentially more risky
Cyclical / Stock reflects the state of the economy
John Deere, Auto makers / When economy is good – stock value is up / When economy is bad – stock value is down
Potential for economy to remain poor
Defensive / One that remains stable during declines in economy
(many blue chip and income stocks fall in this category – Proctor & Gamble and Kellogg) / Steady earnings
Continue to pay dividends even if decline in economy / Growth is slower than that of “growth stocks”-
Large Cap / Stock of a company that has issued a large number of shares of stock and has large capitalization
Typical DOW 30 stocks / For conservative investors - more secure/ less risk / Steady growth – not a quick money maker
Small cap / Stock issued for companies with less that $150 million in capitalization / Value may appreciate faster / Higher risk investment – may be newer companies – not a proven track record
Penny stock / Typically sell for less than $1 / Cheap investment – low money in / Very risky
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 Shortselling 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.