Investing in Common Stocks

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Investing in Common Stocks
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Features of Common Stock

• Each share represents equity or part ownership in
  the company.
• Stock ownership allows the investor to
  participate in the profits of the firm.
• Stock ownership is a residual other obligations
  of company must be paid first.

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Issuers of Common Stock

• Any business can issue common stock.
• Publicly traded issuesthe stock is available to
  the general public and can be purchased on the
  open market.
• Public offeringprocedure where a company makes
  an issue of stock available to the public. Also
  known as the primary market.

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Features of Common Stock

• Voting Rights
• usually one share one vote.
• most small shareholders assign their votes to a
  proxy, another party who will vote for them.
• voting rights are not particularly important to
  small shareholders.

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• Taxation of Stock
• Cash dividends and short-term capital gains (sale
  of stock held less than one year) are taxed at
  regular income tax rates which go up to 39.6.
• Long-term capital gains (sale of stock held
  longer than one year) are taxed at a maximum rate
  of 20.

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• Dividends
• Usually paid quarterly.
• Can be paid even when company shows a loss.
• Paid either in cash or in additional shares of
  stock.

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• Cash dividends are most common and most
  desirable.
• Stock dividends are paid in new shares given to
  current shareholders. Does not represent an
  increase of ownership because all stockholders
  receive same percentage.

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• Assessing Dividends
• Dividend Yield measures dividends received
  relative to market price of stock.
• Compare stocks based on dividend yield rather
  than dollars received if you are investing for
  current income.

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• Dividend Yield
• Annual dividends per share
• Market price per share

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Key Measures of Performance

• Book Value
• Net Profit Margin
• Return on Equity

• Earnings per Share
• Price/Earnings Ratio
• Beta

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Book Value

• Amount of stockholder funds used to finance the
  company.
• Subtract liabilities and preferred stock from
  total assets.
• Good if book value steadily increases.
• Good if market value exceeds book value.

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Net Profit Margin

• One of the most widely used measures of
  performance.
• Relates net profit to sales.
• The higher the net profit, the more the company
  earns.
• Stable or increasing net profit margins are good
  signs.

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Return on Equity

• a.k.a. ROE
• Reflects the companys management of its assets,
  operations, and debt.
• The better the ROE, the better the financial
  condition and competitive position of the co.

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Beta

• Indicates the price volatility of the stock.
• Measures how the price responds to market forces.
• The market has a beta of 1.
• Stocks with betas lt 1 are relatively less
  volatile in price swings.
• Stocks with betas gt 1 are relatively more
  volatile in price swings.

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Types of Common Stock

• Blue-Chip Stocks
• issued by large, well-established companies.
• usually pay dividends, which lends price
  stability.
• returns considered more dependable and less
  risky.

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• Growth Stocks
• issued by companies which are expected to have
  above average rates of growth in operations and
  earnings.
• usually pay low or no dividends.
• typically experience more price volatility.

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• Income Stocks
• issued by companies which have a fairly stable
  stream of earnings.
• usually have relatively high dividend yields.
• attractive to people who seek current income.

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• Speculative Stocks
• issued by companies which are considered to have
  higher risk.
• the company, its products, or its industry may be
  new or unproven.
• stock prices may be highly volatile.

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• Cyclical Stocks
• issued by companies whose stock prices move in
  same direction as the business cycle.
• most are found in basic industries.
• always have a positive beta.

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• Defensive Stocks
• issued by companies whose stock prices remain
  stable during economic down times.
• companies usually provide basic needs, such as
  consumer goods.
• betas are usually low or even negative.

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• Mid-Cap Stocks
• issued by companies whose market capitalization
  is between 500 million and 34 billion.
• usually offer greater returns than larger
  companies.
• stock prices tend to be less volatile than small
  caps.

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• Small Cap Stocks
• issued by companies whose market capitalization
  is less than 750 million.
• offer the possibility of high returns.
• prices can be very volatile due to high risk
  exposure.