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INVESTING OPTIONSPutting it together to build your wealth
What we will cover…• STOCKS• BONDS• MUTUAL FUNDS• EXCHANGE TRADED FUNDS• REAL ESTATE• FUTURES CONTRACTS• COLLECTIBLES• COMMODITIES (INCLUDING CURRENCY)• PUTTING IT ALL TOGETHER USING MODERN
PORTFOLIO THEORY
STOCKSInvesting Option
STOCKS
What is a Stock and How Does the “Market” work? VIDEO
STOCKS
STOCK – OWNERSHIP IN A CORPORATION
(Also called: Shares, Equities, Securities)
STOCKS
Why do Companies
Issue Stock?• To raise capital
for• EXPANSION• NEW
EQUIPMENT & TOOLS
Why Do People Buy
Stock?
• Ownership of successful companies
• Hoping to get dividends
• STOCK SPLITS
Why Do People Sell
Stock?
• To get the money from appreciated stock prices
STOCKSSTEPS NEEDED FOR A COMPANY
TO ISSUE STOCK:
1. Incorporate Business and Get a Charter
2. Find an Investment Banker to issue an Initial Public Offering (IPO)
3. File and Register with the Securities and Exchange Commission
4. List Securities on an Exchange
TOP 10 INVESTMENT BANKERS
J.P. Morgan
Bank of America Merrill Lynch
Goldman Sachs
Morgan Stanley
Credit Suisse
Deutsche Bank
Citi
Barclays Capital
UBS
BNP Paribas
STOCK EXCHANGES
NYSE– Euronext
“New York Stock Exchange”• Largest stock exchange in the world• Over 8,000 listings• Total capitalization of $14.2 trillion• Only exchange that still has brokers on the floor
NASDAQ
“National Association of Securities Dealers Automated Quotations”
• Second-largest stock exchange in the world• 2,711 listings, • Total capitalization of over $4.5 trillion. • The NASDAQ has more trading volume than any other
electronic stock exchange in the world.
HOW TO GET LISTED:
• Caters to well-established companies (IBM, FORD, etc…)
• At least 1.1 million shares of stock outstanding• Boast pre-tax profits of $10 million or more over
the last three years• Have a global MARKET CAPITALIZATION
(number of shares outstanding X stock price) of at least $750 million
HOW TO GET LISTED:
• Gained prominence by trading cool high tech companies (Microsoft, Intuit, Dell)
• Sometimes called OVER THE COUNTER (OTC) Market – no trading floor to see
• At least 1.25 million shares outstanding• Pre-tax income of at least $11 or more over
the last three years• Market cap of $70 million or more
TRADING ON THE NYSE
•Watch a Trade:
TRADING ON THE NYSE
WHO’S WHO ON THE FLOOR?
Designated Market Makers (DMMs) 1. Barclays Capital
2. GETCO Securities, LLC 3. Goldman Sachs & Co.4. Knight Capital Group, Inc.5. J. Streicher & Co., LLC6. Virtu Financial Capital Markets, LLC
Trading Floor Brokers
Supplemental Liquidity Providers
TRADING ON THE NYSE
Designated Market Makers (DMMs)• Trade in booths in the center of the floor• Each DMM only deals with specific stocks (50-100 companies)• Execute trades for those stocks only
Trading Floor BrokersOn outside walls of floor, investment firms need to “buy seats” to have their brokers there on the floor
• Can trade in all stocks• Execute Trades with DMMs• Trading floor brokers use e-Broker hand-held devices, e-Quotes,
and algorithm programs to achieve individual parity with DMMs and the NYSE Display Book.
TRADING ON THE NYSE
Designated Market Makers (DMMs)• Also called, “Specialists” arrange the Opening and the Close• Trade in booths in the center of the floor• Each DMM only deals with specific stocks (50-100 companies)• Execute trades for those stocks only
Trading Floor Brokers• On outside walls of floor, investment firms need to “buy seats” to
have their brokers there on the floor• Can trade in all stocks• Execute Trades with DMMs• Trading floor brokers use e-Broker hand-held devices, e-Quotes,
and algorithm programs to achieve individual parity with DMMs and the NYSE Display Book.
Types of STOCK
Preferred Stock
Common Stock
Growth vs. Value
Blue Chip vs. Penny
Cyclical vs. Defensive
Types of STOCK
PREFFERED STOCK - a type of stock that gives the owner a set dividend that does not fluctuate based on how well the company performs
• Preferred stockholders receive their dividends BEFORE common stock holders
• Sometimes have limited voting rights
COMMON STOCK - what most of us own. • Entitles stockholder to voting privileges • May receive a dividend if the company does well,
dividends will fluctuate from quarter to quarter
Types of STOCK
GROWTH STOCK – company reinvests profits in an attempt to grow their business. Stockholders, therefore, rarely receive dividends.
VALUE STOCK – the company is well established and not trying to grow market share, so it usually gives dividends to stockholders.
vs
Types of STOCK
BLUE CHIP STOCK – from large companies with a long history of strong market performance
PENNY STOCK – stocks usually trading at less than $1.00, but never more than $5.00. They have high volatility.
vs
Types of STOCK
CYLICAL STOCK – stock from companies that are very much affected by the whims of the market
DEFENSIVE STOCK – stock from companies that maintain their value even through recession because people NEED their products
vs
What do people mean by “THE MARKET”
AVERAGES AND INDEXES
DOW JONES INDUSTRIAL AVERAGE (DJIA), the “DOW”
• Tracks the 30 largest “blue-chip” companies• Chosen by the Wall Street Journal• Add up price of a single stock from each of the 30 and
divide by a special divisor
The Dow Divisor is currently 0.132129493. Presently, every $1 change in price in a particular stock within the average, equates to a 7.57 (1/0.132129493) point movement.
AVERAGES AND INDEXES
AVERAGES AND INDEXES
STANDARD & POOR’S 500 (S&P 500)• Tracks 500 large companies that together
account for some 75% of the entire US stock market
• Weighted average market capitalization
Take market cap of each stock and sum them all up and divide by a special divisor
AVERAGES AND INDEXES
AVERAGES AND INDEXES
S&P MidCap 400• Tracks 400 medium sized companies
S&P SmallCap 600• Tracks 600 small companies
AVERAGES AND INDEXES
NASDAQ 100• Tracks 100 top stocks from the
NASDAQ• Focuses on tech and biotech• One of the most volatile indexes
Take market cap of each stock and sum them all up and divide by a special divisor
The formula for the divisor is as follows: • (Market Value after Adjustments/Market Value before Adjustments) X
Divisor before Adjustments
AVERAGES AND INDEXES
BEAR MARKET• Averages and indexes
are going down
BULL MARKET• Averages and indexes
are going up
AVERAGES AND INDEXES
INDEX TRACKS 3-Y 5-Y 10-Y
Dow Jones 30 large co 19% 24% 93%
S&P 500 500 large co 28% 24% 88%
S&P MidCap 400 400 med co 40% 58% 214%
S&P SmallCap 600 600 med co 48% 72% 176%
NASDAQ 100 100 leading NASDAQ co 20% 11% 114%
December 29, 2006
AVERAGES AND INDEXES
INDEX TRACKS 3-Y 5-Y 10-Y
Dow Jones 30 large co -15% -13% -2%
S&P 500 500 large co -25% -16% -24%
S&P MidCap 400 400 med co -25% -4% 41%
S&P SmallCap 600 600 med co -23% 0% 54%
NASDAQ 100 100 leading NASDAQ co -23% -14% -31%
December 31, 2008
What the HECK happened?
MAJOR STOCK MARKET DECLINES:
October 19, 1987(Rachel and Alex)
October 27, 1997(Zabron)
September 17, 2001(Tyler and Eric)
Sept-Oct, 2008(Jancas and Pat)
May 6, 2010(Jessica & Andrea)
August , 2011(Alexa and Samantha)
Some Fundamental Stock Measurements
CASH FLOW PER SHARE
Let’s you see what you are paying for a share of the company’s cash flow
Computation:
Company’s cash flow (stream of cash through the business) / number of shares outstanding
CURRENT RATIO
Most popular gauge of a company’s ability to pay its short-term bills. Let’s you see if the company can handle unexpected expenses or opportunities. Look for companies with a current ratio of at least 2-to-1
Computation:Company’s Assets / Company’s Liabilities
DIVIDEND YIELD
Shows you the company’s annual dividend in relationship to its stock price. Look at Dividend Yield over time and you want to see it going up.
Computation:Annual Cash Dividend / Current Price of Stock
EARNINGS PER SHARE (EPS)
Shows the company’s earnings in relation to the number of shares of stock outstanding. The bigger the number, the better.
Computation:
Company’s Earnings (reported on Annual Statement) / Number of shares outstanding
NET PROFIT MARGIN
A high profit margin tells you a company is good at managing and controlling costs.
Computation:
Revenue/Expenses
PRICE PER SHARE (P/E) RATIO
Allows you to compare many stocks by determining how much you are paying for a company’s earning power. The higher the P/E, the more risky – but potentially more rewarding
Computation:
Earnings per share / stock price
RETURN ON EQUITY (ROE)
Shows how much money the company is making off the investments that shareholders have made. A good ROE is anything above 20%
Computation:Net Income/Total Shareholder’s Equity
VOLUME
The amount of stock that’s traded on any given day, well or another other time period. Measures market “interest” on stock.
Rising volume on a rising stock price shows something good is going on at the company
What are BONDS?
• A bond is a debt security, similar to an I.O.U.
• Also called bills, notes, debt securities, or debt obligations.
BONDSWHY DO COMPANIES ISSUE BONDS?• TO RAISE MONEY• When you purchase a bond, you are lending money to
a government, municipality, corporation, federal agency or other entity known as an ISSUER.
WHY DO PEOPLE BUY/SELL BONDS?• Issuer promises to pay a specified rate of interest
during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.
How BONDS Work:1. You pay $1,000 for a 15 year AT&T Bond at 7.5%
interest/year.
2. Each year, you get $75 (1000*.075)
3. After 15 years, you get your $1000 back
TOTAL EARNED = $75*15 years = $1125
BASIC BOND CHARACTERISTICS• Legal document that details all
the conditions of the bondBond Indenture
• When a bond will be repaid (usually 1-30 years)Maturity
Date• Amount paid to a bondholder at
the maturity date, given the issuer doesn't default.Face Value
BASIC BOND CHARACTERISTICS• The amount of interest paid to
bondholders, normally on an annual basis
Coupon Amount
• Corporate bond earnings are taxable, most government bond earnings are notTax Status
• Allows the company to pay off the bond early and get out of their debt to bondholderCall Feature
BOND BASICS5-6% Return Over Time
SHORT TERM <5 years
LONG TERM 10-30 years
GOVERNMENT (TREASURY)
Safest, federal gov. isn’t going anywhere, lowest return
TIPS (Treasury Inflation-Protected Securities)
VERY safe, sold at auction a few times/year, interest rate stays same, but principle changes with inflation, pay
fed. taxes only
MUNICIPLE (state/local government)
Pretty safe, includes local and state governments
CORPORATELonger term usually has a better return than shorter term, but you are betting the co. will still be around
MORTGAGE BONDSSold by banks, used to be considered a good investment
until sup-prime mortgages hit the market
HIGH YIELD (JUNK)Highest rate of return, but the riskiest of all the bonds
READING A BOND
1. Bond Name
2. Coupon rate
3. Maturity Date
4. Current Bid (expressed as a percentage of par value)
5. Yield – annual return until the bond matures
MUTUAL FUNDS
What is a MUTAL FUND?
Pools of money from investors that a mutual fund manager uses to buy a bunch of stocks, bonds and other assets that meet the fund’s investment criteria.
How does a Mutual Fund work?
Why do people buy MFs?1. Professional Management: A portfolio manager and
team of researchers analyze and purchase suitable investments for the fund
2. Cost Efficiency: Fund managers can buy and sell securities for a fraction of the cost that individual investors pay, and spread the cost of research over thousands of investors
Why do people buy MFs?3. Diversification: Most funds own stock from dozens
(usually 25-100) of companies – possibly across industries
Why do people buy MFs?4. Reasonable Investment Minimums: Usually $1,000
or less. Some funds even offer monthly investment plans
Basic Mutual Fund Characteristics:
TRADE TIME
End of day
4:00pm
Basic Mutual Fund Characteristics:
MANAGEMENT FEE
A fee levied annually for professional mutual fund services – paid regardless of the performance of the fund
(usually around 1%)
Basic Mutual Fund Characteristics:
LOADSThe amount that investors
pay when they purchase (front-end load) or redeem (back-end load) shares in a mutual fund, similar to a commission.
Basic Mutual Fund Characteristics:
NET ASSET VALUEThe total market value of all the assets held
in the mutual fund portfolio less the liabilities, divided by all the outstanding units. That amounts to nothing but the “book value”.
Cost of one unit of fund
Basic Mutual Fund Characteristics:
Can only be bought by investors buying the period they are up for sale – called the New Fund Offer (NFO) period.
Can buy and sell its units at any time – so as an investor, you can purchase and sell your holdings in such funds at any time.
Combines the features of open-ended and closed-ended schemes, making the fund open for sale or redemption during pre-determined intervals.
• Basket of securities (stocks & bonds like mutual funds, or commodities)
• Traded throughout the day, not at closing
• Lower management fee than mutual funds
• Smaller initial investment• DESIGNED TO TRACK A SPECIFIC
INDEX OR BENCHMARK
EXCHANGE-TRADED FUNDS
MOST POPULAR ETFsStandard & Poor’s Depository
Receipt (SPDR). Called Spiders
• Basket of stocks is the S&P 500 index. • Quick and easy significant diversification. • Relatively inexpensive compared to what it would cost
to create this type of portfolio yourself.
Symbol Name Index Holdings
SPY (SPDR)
S&P 500 S&P 500 Apple, EXXON, IBM, MS, GE
DIA Dow Jones Industrial Average
DOW IBM, Chevron, Caterpillar, McDonalds
USO US Oil Fund West Texas Intermediate (WTI) light, sweet crude oil
Morgan Stanley Inst Liquidity Gov Inst, Future Contract On Wti Crude Future Apr12
XLF Financial Select Sector The Financial Select Sector Index
Wells Fargo, JP Morgan, Berkshire Hathaway
Other POPULAR ETFs
COMMODITIES AND FUTURES
COMMODITIES AND FUTURES CONTRACTS
COMMODITIES• Objects that come out of the earth• People buy and sell commodities based
on speculation.
• Example, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible.
COMMODITIES
• Grains (wheat, corn, soybeans)• Energy (crude oil, gasoline, heating oil, natural
gas)• Metals (gold, silver, copper)• Softs (many food products, like cocoa, coffee,
sugar, cotton)• Livestock (cattle, hogs)
TYPES:
TRADED ON:Chicago and NY Board of Trades, NY Mercantile
FUTURES CONTRACTS
• Legal agreements to buy or sell a commodity on a specific date or during a specific month
• Also called OPTIONS• Designed for commercial
businesses, NOT individuals
FUTURES CONTRACTS
WHY DO IT?1.Investor sets amount and price
today2.Takes possession in the future
(or sells it once he gets it)3.Sell the product for MORE than
you paid for it
How Do Futures Contracts Work?
Could you make
it in the PIT?
Try to “corner the market” on a single commodity by trading with others
FIRST TEAM TO 250 POINTS WINS!!!
• Buying real estate with the hope that the value will increase
• Buying real estate and renting it for additional income
REAL ESTATE
• Assets that appreciate in value because they are rare and in demand
• Examples: coins, fine art, sports cards, antiques, jewelry, precious metals
• Stay within your CIRCLE OF COMPETENCE (Buffett)
COLLECTIBLES
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