Chapter 14

Investing in Stocks

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 14 Learning Objectives

•  Identify the most important ____________ of common and preferred stocks

•  Explain how you can ___________ stock investments

•  Analyze the ________ measures that cause a stock to increase or decrease in value

•  Describe how stocks are bought and sold

•  Explain the trading techniques used by long-term investors and short-term speculators

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Common and Preferred Stocks Objective 1: Identify the most important

features of common and preferred stocks

•  Good investors know something about the company before they invest in the company’s stock

•  Gather information to evaluate a potential investment in a stock

•  Learn what the information you gather means –  Are sales increasing? –  Is net income increasing over time? –  Are earnings per share increasing over time?

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Common and Preferred Stocks

Objective 1: Identify the most important features of common and preferred stocks (Continued)

•  There are periods where stocks ___________ in value

•  The key to success is to allow investments to work for you over the long-term

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•  To raise money for start-up costs and help pay for expansion and their ongoing business activities

•  They don’t have to repay the money a stockholder pays for stock

•  The investor can ____________ a share of stock to another investor

Why Corporations Issue Common Stock

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•  Dividends are not ________________. •  Most corporations distribute _______% of their earnings

to stockholders •  In return for investing in the company, stockholders

have voting rights

Why Corporations Issue Common Stock

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Why Investors Purchase Common Stock

•  They can make money in three ways –  _______________________ in the form of cash or

additional stock –  Dollar ____________________ of stock value –  Possible increased value from ________________

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Why Investors Purchase Common Stock (Continued)

•  WHAT HAPPENS WHEN A CORPORATION SPLITS

ITS STOCK? –  A stock split happens when the shares owned by

existing stockholders are divided into a _________ number of shares

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Preferred Stock

PREFERRED STOCK

•  A “middle” investment and represents an ownership position

•  Investors in preferred stocks receive cash dividends __________ common stock holders are paid any cash dividends

•  Investors that need a more __________ source of income will chose preferred rather than common stock

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Evaluating a Stock Issue

Objective 2: Explain how you can evaluate stock investments

CLASSIFICATION OF STOCKS ____________ stock Large cap Cyclical Mid cap Defensive Small cap Growth Micro cap Income Penny stock

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Evaluating a Stock Issue (continued)

THE INTERNET •  Most corporations have a Website, and the

information is useful in the following ways –  The ________________ is easily accessible

–  More up to date ___________ than the printed material

–  Websites like Yahoo and other search engines can also be used to obtain information about stock investments

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Evaluating a Stock Issue (continued)

THE INTERNET •  The Internet can also be used to

access professional advisory services like

•  ____________________________ •  ____________________________ •  http://www.standardandpoors.com/ •  http://www.valueline.com/ •  http://www.morningstar.com/

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Evaluating a Stock Issue (continued)

STOCK ADVISORY SERVICES •  Prepare printed materials that are more detailed

than information in newspapers •  ___________________________ •  Hundreds to choose from

–  Standard and Poor’s reports –  Value Line –  Mergent’s Investor Service –  Morningstar

•  As an investor, your job is to _______________ the information provided

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Evaluating a Stock Issue (continued) HOW TO READ THE FINANCIAL SECTION OF THE

NEWSPAPER •  Stock quotes are still available in most metropolitan

newspapers such and The Wall Street Journal •  Basic information is provided

–  __________________

–  __________________ –  __________________

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Evaluating a Stock Issue (continued)

•  Corporate News •  The Federal government requires companies to

disclose information to the public •  http://www.sec.gov/ is a website to access much of

the information •  Hong Kong: Hong Kong Stock Exchange

____________________ •  Use of annual report

–  learn about the _______________ –  learn about __________________ –  learn about __________________ –  learn about _________________ –  footnotes have important information

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Numerical Measures That Influence Investment Decisions

Objective 3: Analyze the numerical measures that cause a stock to increase or decrease in value

WHY CORPORATE EARNINGS ARE IMPORTANT •  Corporate earnings play a large part in the increase

or decrease in the price of a stock

•  _______________________ are the corporation’s after-tax earnings divided by the number of outstanding shares of a common stock.

•  An increase in earnings is generally a healthy sign

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Numerical Measures That Influence Investment Decisions

Objective 3: Analyze the numerical measures that cause a stock to increase or decrease in value (Continued)

•  _____________________________ –  Price of one share of stock divided by the earnings

per share of stock over the last 12 months

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Numerical Measures That Influence Investment Decisions (continued)

OTHER FACTORS THAT INFLUENCE THE PRICE OF A STOCK

•  Dividend payout = •  Dividend yield =

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Numerical Measures That Influence Investment Decisions (continued)

OTHER FACTORS THAT INFLUENCE THE PRICE OF A STOCK (continued)

•  Total return = _______________ + _____________ •  ___________________________ •  =____ Total return___ X __1__

Original investment N N=______________________________ is held

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Numeric Measures That Influence Investment Decisions (continued)

•  _________ A measure of _________ compared to the S&P 500.

•  ______________________

Assets-Liabilities Shares Outstanding

–  If a share costs more than the book value the company may be overextended or it may have a lot of money in research and development

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Numeric Measures That Influence Investment Decisions (continued)

•  ____________________ Market value per share Book value per share

–  A low market to book may indicate an undervalued stock

–  A high market to book may indicate an overvalued stock

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Numeric Measures That Influence Investment Decisions (continued)

INVESTMENT THEORIES

•  _________________________

–  Based on the assumption that a stock’s ______ or real value is determined by the company’s future earnings

–  Fundamentalists consider the… •  _______________________ of the company •  Type of industry company is in •  New-product development •  __________________ of the overall economy

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Numeric Measures That Influence Investment Decisions (continued)

•  ______________________ – Based on the assumption that a stock’s value

is determined by the forces of _________ and __________ in the stock market as a whole

– Not based on expected ____________ or the intrinsic value of a stock but rather on factors found in the market as a whole

–  ________ plot past price movements and other market averages to observe trends they use to predict a stock’s future value

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Numeric Measures That Influence Investment Decisions (continued)

•  _______________________________

–  Based on the assumption that stock price movements are purely _____________

–  A stock’s current market price reflects its ______ value

–  It is impossible for an investor to _____________ the average for the stock market as a whole over a period of time

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Buying and Selling Stocks

Objective 4: Describe how stocks are bought and sold

•  _________________ market

–  A market in which an investor purchases financial securities through an investment bank, or other representative, from the issuer of those securities

–  An investment bank is a financial firm that assists corporations in raising funds, usually by helping to sell new security issues

–  An ______ occurs when a corporation sells stock to the general public for the first time

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Buying and Selling Stocks Objective 4: Describe how stocks are bought

and sold (Continued)

•  _____________________ market –  A market for ____________ financial securities that are

currently traded among investors through brokers

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Buying and Selling Stocks (continued)

_____________________

•  A marketplace where member brokers who

represent investors meet to buy and sell securities

•  The securities sold at an exchange must be ____, or accepted for trading, at the exchange

•  New York Stock Exchange, Regional Exchanges, or Foreign Security Exchanges

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Buying and Selling Stocks (continued)

SECURITY EXCHANGES (continued)

–  Most OTC securities are traded over the NASDAQ which is an electronic marketplace for approximately 3,200 stocks

–  Network of dealers who buy and sell the stocks of companies not listed on a securities exchange

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Buying and Selling Stocks (continued)

BROKERAGE FIRMS AND ACCOUNT EXECUTIVES

•  An account executive, or stockbroker, is a licensed individual who buys and sells securities for his or her clients

•  ___________________ should be communicated to the account executives, and the investor must be actively involved in the investment decisions

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Buying and Selling Stocks (continued)

BROKERAGE FIRMS AND ACCOUNT EXECUTIVES (continued)

•  __________________ versus __________________ –  How much advice do you want? –  Nearest office and toll-free phone number? –  Online and phone trading services and costs? –  Fees, charges and commissions?

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Buying and Selling Stocks (continued)

STOCK TRANSACTIONS

•  M_____________: Request to buy or sell stock at the current market value

•  L______________: Request to buy or sell a stock at a specified price

•  S______________: Request to sell a stock at the next available opportunity after its market price reaches a specified amount

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Long-Term and Short-Term Investment Strategies

Objective 5: Explain the trading techniques used by long-term investors and short-term speculators

•  Long-term techniques –  Buy and hold –  ____________________ –  Direct investment

and __________________________________

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Long-Term and Short-Term Investment Strategies

Objective 5: Explain the trading techniques used by long-term investors and short-term speculators

•  Short-term techniques –  ____________ trading –  Buying stock on _____________ (borrowing money) –  __________________________ (borrowing stock) –  Trading in ________________ (predetermined price)

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End of Lecture

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