What is a stock?

Presented by: Sean Sturges, CFP®Senior Vice President, Director of Financial PlanningD.A. Davidson & Co.

What is a stock?

Ownership interest in a company• Often called equity• Can be public or private

How does it become public?• Private owners => Investment bankers => Investing public• Initial public offering (IPO)

How else are stocks acquired?• Secondary market (stock exchanges) after IPO

Why do companies issue stock?

Raise capital:

• Via a larger investor base• To expand operations, product lines, etc.• So that initial investors/owners can cash-out • To reduce debt / restructure balance sheet

Why do people buy stocks?Potential for investment returns

Source: SunGard. This does not represent an offer to buy or sell securities. Past performance is not a guarantee of future results. All investing involves risk. Results shown are annual index averages over the time period shown, and not representative of an investment in any security.

Why don’t people buy stocks?

Potential for volatility and loss

Source: SunGard. This does not represent an offer to buy or sell securities. Past performance is not a guarantee of future results. All investing involves risk. Results shown are annual index averages over the time period shown, and not representative of an investment in any security.

An argument for diversification

What are returns made of?

Two main components

Capital gain (or loss)• Difference between the purchase price and sales price• Not unique to stocks

Dividends• Essentially a distribution of profits to shareholders• Can be stock, most often are cash• Usually on a fixed schedule• No obligation to pay

What are returns made of?How important are dividends?

Source: http://us.spindices.com/documents/research/WhitePaper_500_Dividend_Aristocrats.pdf

This does not represent an offer to buy or sell securities. Past performance is not a guarantee of future results. All investing involves risk. Results shown are informational in nature and not representative of an investment in any security. It is not possible to invest directly in an index.

Dividends – why or why not?To pay or not to pay a dividend…

Why would a company pay a dividend?• Share profits with shareholders• Market expectation

Why wouldn’t a company pay a dividend?• Use cash for other reasons

• Research and development• Acquisition of other companies• Share buybacks• It’s “uncool”

Stock price determinants

Fundamentals• Price to earnings ratio and other metrics• Comparison with peer companies

Opinion / Expectation• Estimated or anticipated future performance• Public, media and market opinion• Emotion

Ultimately decided by what people are willing to pay for it.

Recap

• What is a stock?• Why do companies issue stock?• Why do/don’t investors buy stock?• How can you mitigate investment risk?• What are the two main components of

return?• Why would/wouldn’t a company issue

dividends?• What determines a stock’s price?

Reading the financial pagesPresented by: Sean Sturges, CFP®Senior Vice President, Director of Financial PlanningD.A. Davidson & Co.

Reading a stock tableKey terms

• Symbol – abbreviation used to identify a stock

• Range – refers to variance in price over a time period such as a day or year

• P/E (Price to earnings) ratio - computed as price divided by annual earnings per share

• Dividend – annual dividend in dollars per share

• Yield – annual dividend divided by price of one share

Reading a stock table

Source: Google Finance. This is not an offer or recommendation to buy or sell securities.

Reading a stock table

Online resources:

• http://finance.yahoo.com/

• http://www.google.com/finance

• http://www.morningstar.com/

Reading a mutual fund table

Key terms

• NAV (net asset value) – value of one share of a mutual fund

• Load – initial cost (%) of purchasing a fund

• Turnover – measure of how often underlying holdings of the fund are bought and sold

• Investment style – generalized description of the type of investments the fund invests in

Reading a mutual fund table

Source: Morningstar. This is not an offer or recommendation to buy or sell securities.

Reading a mutual fund table

Online resources:

• http://www.morningstar.com/

• http://finance.yahoo.com/funds/

• http://www.google.com/finance

Reading a bond tableKey terms• Yield – may refer to current yield, yield to maturity, or

yield to call. The table shown on following page uses “yield to worst” or the worst possible yield an investor would have if the security was held to maturity or earlier redemption.

• Interest rate – generally the “coupon” rate of the bond

• Maturity date – date on which principal of the bond comes due

• Ratings – credit rating assigned by a credit agency

Reading a bond table

Source: MSRB EMMA. This is not an offer or recommendation to buy or sell securities.

Reading a bond table

Online resources:

• http://cxa.gtm.idmanagedsolutions.com/finra/MarketData/Default.aspx

• http://emma.msrb.org/default.aspx

Note: it can be difficult to find information on bonds.

What is a bond?

Presented by: Sean Sturges, CFP®Senior Vice President, Director of Financial PlanningD.A. Davidson & Co.

What is a bond?

Buy bond (lend money to borrower)

Receive principal and final interest payment

Receive semi-annual interest payments

Buy bond (lend money to borrower)

Receive principal and accumulated interest

Coupon Bond

Zero-Coupon Bond

What is a bond?

Who issues IOUs (bonds)?

• Sovereign Governments (U.S. and foreign)• Gov’t Agencies / Gov’t. Sponsored Enterprises (Fannie

Mae, Freddie Mac, TVA)• Municipalities (states, cities, counties, etc.)• Corporations (U.S. and foreign)

What are the main differences?

• Taxation• Credit quality• Implied or explicit guarantees

What is a bond?Setting the coupon rate / pricing the zero• Credit rating (how likely are you to get paid back)

• Time to maturity (how long does the issuer get to use your money)

• Prevailing interest rate environment / market conditions (what do similar bonds cost, what are current interest rates)

• Taxation (municipal bonds specifically)

• Other features (call options, conversion features, insurance, etc.)

What is a bond?What happens after you buy a bond?

• Does the price change?

• Holding to maturity versus selling before maturity

• How does this impact risk?

• What are the long-term price prospects for a 30 year bond in a rising interest rate environment?

Why do people buy bonds?Potential for investment returns

Source: SunGard. This does not represent an offer to buy or sell securities. Past performance is not a guarantee of future results. All investing involves risk. Results shown are annual index averages over the time period shown, and not representative of an investment in any security.

Why do people buy bonds?Historically less volatile

Source: SunGard. This does not represent an offer to buy or sell securities. Past performance is not a guarantee of future results. All investing involves risk. Results shown are annual index averages over the time period shown, and not representative of an investment in any security.

What is a bond?Recap• What is a bond?

• Who issues bonds?

• What determines a bond’s coupon?

• What determines a bond’s price?

• What do the following mean: par value, coupon, yield to maturity, yield to call, issuer, credit rating, zero coupon bond, default?

• Why would you/would you not buy bonds?

What is a mutual fund?Presented by: Sean Sturges, CFP®Senior Vice President, Director of Financial PlanningD.A. Davidson & Co.

What is a mutual fund?

What is a mutual fund?

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What is a mutual fund?Types of funds

Structure • Open-end (what are commonly call mutual funds)• Closed-end (CEF)• Exchange-traded (ETF)

Underlying Investments• Equity• Bond• Sector• Index

Why do people buy mutual funds?

• Diversification

• Access to broader investment pool

• Convenience

• Professional management

What is a mutual fund?Key Terms & Review

• Net Asset Value

• Load / No-load

• Investment style

• Turnover

• Diversification

• CDSC (contingent deferred sales charge)

• Share class

• Manager / manager tenure

• Benchmark

Questions?