STOCKS

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STOCKS

• Presented by Adam Vitarello, Kyle Eudailey, and
  Ashfia Rahman

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Overview

• What is a STOCK?
• How are they traded?
• How do you value a stock?
• The stock market and all the factors involved.
• Volatile investment with high yields.

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What are STOCKS?

• Partial ownership in publicly traded company

• For Seller Source of finance for the company,
  without liabilities associated with debt financing

• For Buyer Claim on the assets and profits of the
  company, without managing day-to-day operations

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Why and How Does a Company Issue Stock?

• Stocks are a form of Equity Financing
• No Interest to pay
• No Principle to pay back
• Stocks are issued as Initial Public Offerings on
  Exchanges
• Company and underwriters decide the number and
  price for shares of the IPO
• Market Capitalization (price of shares) x
  (number outstanding shares)

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What Are The Types of Stocks?

• Categorization of Stock
• Preferred
• Common
• Profit Allocation
• Dividend
• Non-Dividend

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Where And How Does An Investor Trade Stock?
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Public Exchanges

• Listed Exchanges
• NYSE
• AMEX
• London Stock Exchange
• Over-the-Counter Market
• Nasdaq

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Brokerage Firms

• Middlemen between the companies and investors
• Vary in levels of service
• Full service Brokerage Firms
• Ex. Goldman Sachs
• Discount Brokerage Firms
• Ex. e-trade

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Areas To Invest

• Various levels of market capitalization
• Large Cap
• Small Cap
• Various Industries
• Ex. Health Care, Defense Contractors, etc.
• Mutual Funds
• Money Markets (Short-Term Debt)
• Fixed Income (Bonds)
• Equity (Stocks)
• Mixed
• Index Investing

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How To Read a Stock Table
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Techniques for Investing

• How to Increase Both Yield and Risk

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Short Selling

• Anticipation that the share price will decrease
• How is this profitable?
• Advantages and Drawbacks
• Way to hedge your long investments
• Losses are unlimited
• Inflation is working against you

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Margin Trading

• Taking out a loan from the broker, so to increase
  buying power and leverage.
• Can borrow up to 50 of the purchase price
• Advantages and Drawbacks
• Can increase profits
• Can lose more than invested
• Can be called on your loan (Margin Call)

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Options

• A contract allowing the investor to buy or sell
  stock at a specific price on or before a later
  date.
• Call ? right to buy a stock within a certain time
  period
• Put? right to sell a stock within a certain time
  period

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Day Trading

• Buy and sell stocks within same day (often
  quicker) to earn quick profits
• Two types
• Scalpers buy and sell in large volume within
  seconds or minutes
• Momentum traders trade stocks that are in a
  moving pattern during the day

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Investing in the Stock Market Where and How

• Fundamental vs. Technical Analysis

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Fundamental Analysis

• Qualitative
• Corporate Culture (Management)
• Product and Services
• Industry and Competition
• Strength of a Brand Name

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Fundamental Analysis

• Quantitative
• Ratio Analysis of Financial Statements
• EPS (Net Income - Dividends on Preferred Stock)
  / (Average outstanding shares)
• P/E Ratio (Market Value per share) / (Earnings
  per share)
• P/B (market value per share) / Book Value per
  share)
• PEG (P/E) / Annual EPS Growth
• ROE Net Income / Shareholders Equity
• D/E Total Liabilities / Total Assets
• Current Ratio Current Assets / Current
  Liabilities
• Beta (calculated using regression analysis)
• A measurement of the stocks volatility in
  relation to the rest of the Market.

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Fundamental Investing

• Growth vs. Value Investments

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Growth Investments

• Focus on the future potential of the company
  (earnings and revenues)
• Stock trades higher than intrinsic worth
• Generally younger companies
• Relies heavily on forecasting!!

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Characteristics of Growth Stocks

• Strong Historical Earnings
• Projected 5-yr earnings increase of about 10-12
• Increasing ROE
• Watch Profit Margins Carefully
• Compare to industry standards

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Value Investments

• Value Investing Pioneered by Graham and Dodd
• Investing based upon the Intrinsic value of the
  company
• Looking for Undervalued Stocks
• Generally more established companies
• Ex. Microsoft and General Electric

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Characteristics of Value Stocks

• Share price no more than 2/3 of Intrinsic worth
• P/E ratio in lowest 10 tier of all equity
  securities
• PEG lt 1
• D/E lt 1
• Current Assets 2 times greater than Current
  Liabilities
• Dividend Yield 2/3 of long term AAA bond yield.
• Earnings 7 per annum compounded over last 10
  yrs.
• Compare to industry standards

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Growth vs. Value Over Time
Growth vs. ValueWhich Way From Here? By Dr.
Eileen Fitzpatrick
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Technical Analysis

• Analyze Historical Trends to Predict Future
  Performance
• Based on Indicators Generated by Market Activity,
  Past Prices, and Volume
• Candle Stick Charting
• Moving Average
• Relative Strength Index
• Money Flow Index
• Outside Variables

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Candle Stick Charting
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Moving Average
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Relative Strength Index

• RSI 100 - 100/(1 RS)
• RS (Avg. of n-day up closes)/(Avg. of n-day
  down closes)
• n days (most analysts use 9 - 15 day RSI)

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Outside Variable The Presidential Election

• Political Cycles Effect Market
• Market grows 10 under Democratic Presidents
  compared to 2 under Republicans
• 2nd and 3rd year of Presidency Tend to Have
  Market grow at more favorable rate than in years
  1 and 4
• Growth mostly due to Unexpected policy moves -gt
  Hard to Predict Future Effects

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Diversifying Your Investments

• Mutual Funds and Index Funds

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Equity-Based Mutual Funds

• Largest Type of Mutual Fund
• Many types of equity-based mutual funds (see
  right)
• Varying degrees of risk
• Specialty Funds
• Industry-Based
• Regionally-Based
• Socially-Responsible
• Index Funds

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Mutual Funds Pros and Cons

• Cons
• Professional Management?
• Costs
• Dilution
• Taxes
• Higher commissions (1.5) without higher returns

• Pros
• Professional Management
• Diversification without requiring large
  investment
• Economies of Scale
• Liquidity
• Simplicity

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What are Stock Indices?

• The Market
• Portfolio of Stocks Representing Portion of
  Overall Market
• Kinds of Indices
• Select Large Cap Indices (Dow Jones Industrial,
  1884)
• Broad Large Cap Indices (SP 500, 1923)
• Small Cap Indices (Russell 2000)
• Composite Indices (Nasdaq, Wilshire 5000)

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Differences In Indices

• Selected vs. Composite
• Purpose Representative of Market, Industry?
• Volatility
• Overly Optimistic?
• Price-based Weighting vs Market Capitalization
  Weighting
• Stock Splits
• Share in Market
• Small Cap vs Large Cap

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Historical PerformanceSP 500, 1960 - Present
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Historical Comparison Russell 2000, DJIA, SP
500, Nasdaq 1987 - Present
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Index Investing

• Index Committee, not Mutual Fund Managers,
  Provides Companies for Investment

• Pros
• Index Funds Outperform Normal Mutual Funds
• Ex. Only 4 of Mutual Funds have outperformed
  SP over last 10 years
• Smaller Brokerage Fees (.2) compared to mutual
  funds
• Higher long-term returns

• Cons
• More Susceptible to Macroeconomic Downturns (i.e.
  Presidential Elections, wars)
• Little Creativity In Choosing Up-and-Coming
  Companies

marketbeaters.com
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Four Points to Remember

• Stocks are equity financing
• Stock prices reflect markets expectation of the
  company
• Two Major ways to Analyze Stocks Fundamental and
  Technical
• Various ways to invest in stocks, with higher and
  lower risk and reward