Title: STOCKS
1STOCKS
- Presented by Adam Vitarello, Kyle Eudailey, and
Ashfia Rahman
2Overview
- 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.
3What 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
4Why 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)
5What Are The Types of Stocks?
- Categorization of Stock
- Preferred
- Common
- Profit Allocation
- Dividend
- Non-Dividend
6Where And How Does An Investor Trade Stock?
7Public Exchanges
- Listed Exchanges
- NYSE
- AMEX
- London Stock Exchange
- Over-the-Counter Market
- Nasdaq
8Brokerage 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
9Areas 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
10(No Transcript)
11How To Read a Stock Table
12Techniques for Investing
- How to Increase Both Yield and Risk
13Short 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
14Margin 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)
15Options
- 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
16Day 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
17Investing in the Stock Market Where and How
- Fundamental vs. Technical Analysis
18Fundamental Analysis
- Qualitative
- Corporate Culture (Management)
- Product and Services
- Industry and Competition
- Strength of a Brand Name
19Fundamental 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.
20Fundamental Investing
- Growth vs. Value Investments
21Growth 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!!
22Characteristics 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
23Value 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
24Characteristics 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
25Growth vs. Value Over Time
Growth vs. ValueWhich Way From Here? By Dr.
Eileen Fitzpatrick
26Technical 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
27Candle Stick Charting
28Moving Average
29Relative 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)
30Outside 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
31Diversifying Your Investments
- Mutual Funds and Index Funds
32Equity-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
33Mutual 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
34What 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)
35Differences 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
36Historical PerformanceSP 500, 1960 - Present
37Historical Comparison Russell 2000, DJIA, SP
500, Nasdaq 1987 - Present
38Index 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
39Four 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