Chapter 15 Investing in Stocks. Copyright ©2014 Pearson Education, Inc. All rights reserved.15-2 Chapter Objectives Identify the functions of stock exchanges

Chapter 15

Investing in Stocks

Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-2

Chapter Objectives

• Identify the functions of stock exchanges

• Describe how to interpret stock quotations

• Explain how to execute the purchase or sale of stocks

• Explain how to analyze a stock


Stock Exchanges

• Stock exchanges: facilities that allow investors to purchase or sell existing stocks

• New York Stock Exchange– Most popular organized exchange in U.S.– Floor traders: traders at a stock exchange who

execute trades to fulfill orders placed by other investors


Stock Exchanges (cont’d)

– Specialists: traders who help to make a market in one or more stocks by taking the position opposite of orders placed by clients

– A typical stock transaction on the NYSE

• Other stock exchanges– American Stock Exchange– Other regional exchanges in large U.S. cities



• Over-the-counter (OTC) market: an electronic communications network that allows investors to buy or sell securities

– Market-makers: traders who execute trades on the OTC market and earn commissions in the form of a bid-ask spread

– Less stringent listing requirements than for NYSE



– Electronic Communication Networks (ECN): computer systems that match up desired purchases and sales of stocks

• Allow for after-hours trading• No person needed to perform the exchange


Stock Quotations

• Price quotations readily available from the Internet, stock brokers or financial newspapers

• Provide information about the price of each stock over the previous day or a recent period


Stock Quotations (cont’d)


Purchasing and Selling Stocks

• Selecting a broker

– Analyst recommendations

• May be overly optimistic

• Must disclose ownership of stocks they recommend

– Individual broker skills

• Information available on the Internet


Purchasing or Selling Stocks (cont’d)

– Brokerage commissions

•Discount brokerage firm: a brokerage firm that executes your desired transactions but does not offer investment advice

•Full-service brokerage firm: a brokerage firm that offers investment advice and executes transactions


Financial Planning Online

• Go to finance.yahoo.com/?u

• Click “Get Quotes” after typing the symbol of a stock in which you are interested.

• This site gives analyst recommendations about a stock that you specify.


Purchasing and Selling Stocks (cont’d)

• Placing an order– Name of the stock

• Ticker symbol: the abbreviated term that is used to identify a stock for trading purposes

– Buy or Sell—specify what you want to do

– Number of shares• Round lot: shares bought or sold in

multiples of 100

• Odd lot: less than 100 shares of stock



– Market order or limit order• Market order: an order to buy or sell a stock at its

prevailing market price• Limit order: an order to buy or sell a stock only if the

price is within the limits that you specify

– Stop orders• Stop order: an order to execute a transaction when the

stock price reaches a specified level; a special form of limit order



– Stop orders• Buy stop order: an order for a brokerage firm

to buy a stock when the price rises to a specified level

• Sell stop order: an order for a brokerage firm to sell a stock when the price falls to a specified level

• Placing on order online– Low commission



• Go to www.etrade.com/

• This Web site provides information that you can use when making investment decisions. It also illustrates how you can trade stocks online, which typically reduces your transaction costs.



• Buying stock on margin

– On margin: purchasing a stock with a portion of the funds borrowed from a brokerage firm

– Federal Reserve limits margin to 50 percent

– Margin call: a request from a brokerage firm for the investor to increase the cash in the account in order to bring the margin back up to the minimum level



• Short selling stock– Short selling (shorting): a process by which

investors sell a stock that they do not own

– Borrow stock from another investor and will have to return it


Analyzing Stocks

• Technical analysis: the valuation of stocks based on historical price patterns

• Fundamental analysis: the valuation of stocks based on an examination of fundamental characteristics such as revenue or earnings, or the sensitivity of the firm’s performance to economic conditions


Analyzing Stocks (cont’d)

• Analyzing a firm’s financial condition

– Balance sheet: a financial statement that indicates a firm’s sources of funds and how it has invested its funds as of a particular point in time

– Income statement: a financial statement that measures a firm’s revenues, expenses, and earnings over a particular period of time





– Accounting fraud• Many firms recently used fraudulent financial

statements• Motivation for fraud

– Manager compensation

• Analyzing economic conditions– Economic growth: a measure of growth in a

country’s economy over a particular period



– Gross domestic product (GDP): the total market value of all products and services produced in a country

– Fiscal policy: the means by which the U.S. government imposes taxes on individuals and corporations and by which it spends its money

– Impact of international economies• One country’s strong economy can improve another’s

and the opposite is also true



– Interest rates

•Stocks perform better when interest rates are low

•Some stocks are more sensitive to interest rates than others

•The Federal Reserve uses monetary policy to influence interest rates



– Inflation: the increase in the general level of prices of products and services over a specified period

• Consumer price index (CPI): a measure of inflation that represents prices of consumer products such as groceries, household products, housing and gasoline

• Producer price index (PPI): a measure of inflation that represents prices of products used to produce other products, such as coal, lumber, and metals




• Go to www.oecd.org

• Click on: OECD Economic Outlook

• This Web site provides information about economic conditions that can affect the values of investments.



• Industry conditions

– Stock prices susceptible to industry conditions

• Industry indicators

• Integrating your analyses

– Analyzing the firm, the economy and the industry allows assessment of future performance




• Limitations of stock analysis

– Difficulty in forecasting future conditions

– Favorable attributes are reflected in the stock price



• Go to www.bloomberg.com

• Click on: Market Data

• This Web site provides a summary of recent stock performance.



• Go to finance.yahoo.com/indices?u

• This Web site provides recent quotations of indexes that can be used as benchmarks when assessing your investment portfolio’s performance. Click on “Charts” to review historical movements in any specific index.


How Stock Investment Methods Fit Within Your Financial Plan

• Key decisions about investing in common stock for your financial plan are:– Should you consider buying stock?

– What methods should you use for investing in stocks?


Documents

Chapter 15 Investing in Stocks. Copyright ©2014 Pearson Education, Inc. All rights reserved.15-2 Chapter Objectives Identify the functions of stock exchanges