Investing in the Stock Market

1
Investing in the Stock Market
2
Stocks

• The main reason that investors buy stock is for
  capital appreciation and growth.
• Although past performance is no guarantee of
  future results, stocks have historically provided
  a higher average annual rate of return than other
  investments, including bonds and cash
  equivalents.
• Correspondingly, though, stocks are generally
  considered to have more volatility than bonds or
  cash equivalents.

3
Growth Stocks

• Growth stocks have earnings that are increasing
  at a faster rate than their industry's average.
• These are usually in new or fast-growing
  industries and have the potential to give
  shareholders returns greater than those offered
  by the stocks of companies in older, more
  established industries.
• Growth stocks are the most volatile class of
  stock, however, and are just as likely to go down
  in price.

4
Value Stocks

• Value stocks are those of companies with good
  earnings and growth potential that are currently
  selling at a low price relative to their
  intrinsic value (theyre devalued)
• Due to some problem that may be only temporary in
  nature, investors are ignoring these stocks.
  Since it can take quite some time for their true
  value to be reflected by their price, value
  stocks are usually purchased for the long term.

5
Income Stocks

• Income stocks are generally not expected to
  appreciate greatly in share price, but
  consistently pay steady dividends (the share in a
  companys profits).
• These are typically utilities, financial
  institutions, and other stable and
  well-established companies.

6
Blue Chip Stocks

• Blue chip stocks are the stocks of large,
  well-known companies with good reputations and
  strong records of profit growth.
• They also generally pay dividends.

7
Penny Stocks

• Penny stocks are very risky speculative stocks
  issued by companies with short or erratic
  performance histories.
• These stocks are so named because they sell for
  under 5 per share. Their low price appeals to
  investors willing to assume a total loss in
  exchange for the potential of explosive growth.

8
Initial Public Offering (IPO)

• During an initial public offering (IPO), new
  issues of stock are sold on the basis of a
  prospectus (a document that gives details about a
  company's operation). I
• Investment bankers or brokerage houses buy large
  quantities of the stock from the company and sell
  them to investors. After the IPO, the stock may
  trade on a stock exchange or over the counter.

9
Brokerages

• Normally, stock is purchased through a brokerage
  account and a commission or fee is charged on
  your transaction.
• Stock certificates may be transferred from one
  owner to another since they are negotiable
  instruments. The certificates are issued in the
  buyer's name or, more typically, held by the
  brokerage house in the street name (i.e., the
  brokerage firm's name) on behalf of the investor.
• The advantage of a street-name registration is
  that if you decide to sell, you do not have to
  sign and deliver the stock certificates before
  the sale can be completed. And you don't have to
  worry about losing the stock certificates.

10
Market Indexes

• When investors want to know what's up (or down)
  in the stock market, they check the major market
  indexes and averages.
• The most often-quoted market average is the Dow
  Jones Industrial Average. The prices of a
  specially selected group of 30 industrial stocks
  (some of the largest companies in the United
  States) are averaged each day to determine the
  Dow Jones Industrial Average.

11
Standard Poors 500 Index

• This index tracks 500 stocks and is why many
  people think this index gives a clearer picture
  of the stock market than other stock market
  averages or indices.
• Since the SP 500 includes so many companies and
  industries, it's known as a broad-based index.

12
Nasdaq

• Nasdaq has become very popular as the market for
  smaller companies. Stocks traded
  over-the-counter, rather than on a traditional
  stock exchange, are reported here.
• The Nasdaq Stock Market now accounts for over
  half of the volume of all stocks traded every
  day, and the Nasdaq Composite currently tracks
  the prices of more than 3,000 stocks.
• Investors use the composite to get an idea of
  what's going on with young, and possibly
  fast-growing, companies.

13
Over-the-Counter

• The phrase "over-the-counter" can be used to
  refer to stocks, debt securities, and other
  financial instruments that trade via a dealer
  network as opposed to on a centralized exchange.
• In general, the reason for which a stock is
  traded over-the-counter is usually because the
  company is small, making it unable to meet
  exchange listing requirements.
• Also known as "unlisted stock", these securities
  are traded by broker-dealers who negotiate
  directly with one another.

14
Price to Earnings Ratio

• The price-to-earnings ratio (P/E) provides a
  useful clue about what investors think a stock is
  worth. It can help you decide if a stock is over-
  or underpriced.
• The P/E in the newspaper is based on a company's
  earnings per share for the most recent 12 months,
  so it is called a trailing P/E. Since the paper
  shows you both yesterday's price of the stock, as
  well as yesterday's P/E, you could use simple
  math to find the company's reported earnings.

15
P/E Example

• For example, say you owned shares in ABC, Inc.
  The share price for ABC, Inc. was 30 and the P/E
  was 20. Simply divide the price of ABC's stock by
  the P/E to find the earnings per share (30 20
  1.50). The P/E of 20 tells you that investors
  were willing to pay 20 for every dollar and
  fifty cents of ABC's earnings. This can be an
  important sign of what investors have been
  thinking about ABC's stock.

16
Looking up a Stocks Performance

• E-Trade