INVESTING IN STOCKS PART II

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INVESTING IN STOCKS PART II

• SSG HENRY
• 64TH BSB, CFN
• PHONE [phone] PG 279-3951

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READING THE WALL STREET JOURNAL
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Why Companies issue Stocks?

• A Form of Equity- Corporations do not have to
  repay equity
• Dividends are not mandatory- many companies pay
  dividends but they are not required to.
• Voting rights and Control- once you buy a share
  of stock you are considered part owner of the
  Company

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WHY PURCHASE STOCKS?

• INCOME FROM DIVIDENDS- SOME COMPANY PAYS
  QUARTERLY DIVIDENDS
• PRICE APPRECIATION- PROFIT FROM GROWTH OVER TIME
• STOCK SPLITS- SHORT TERM GAIN BECAUSE OF STOCK
  SPLIT

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PREFERRED STOCKS

• DIVIDEND IS KNOWN BEFORE PURCHASE
• CUMMULATIVE- DIVIDENDS ARE PAID BEFORE COMMON
  STOCKHOLDER
• CAN BE CONVERTED INTO A SET NUMBER OF COMMON
  SHARES

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INVESTMENT SOURCES

• INTERNET SEARCH ENGINES
• YAHOO FINANCE
• MSN MONEY CENTRAL
• STOCK ADVISORY SERVICES
• A) MORNINGSTAR
• B) STANDARDS AND POOR
• C) VALUE LINE
• D) NEWSPAPER

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COMMON STOCK CLASSIFICATION

• BLUE CHIP STOCKS
• INCOME STOCKS
• GROWTH STOCKS
• CYCLICAL STOCKS
• DEFENSIVE STOCKS

• LARGE CAP STOCKS
• MEDIUM CAP STOCKS
• SMALL CAP STOCKS
• PENNY STOCKS
• SPECULATIVE STOCKS

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BLUE CHIP STOCKS

• TYPE OF STOCK THAT ATTRACTS CONSERVATIVE
  INVESTORS. LESS SPECULATIVE THAN OTHER TYPE OF
  STOCKS

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INCOME STOCKS

• PAYS HIGH DIVIDEND, GOOD SOURCE OF INCOME FOR
  INVESTORS
• HIGH DIVIDENDS AS MUCH AS 5 SUCH AS UTILITY
  COMPANIES REITS

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GROWTH STOCKS

• HIGHER THAN AVERAGE EARNINGS POTENTIALS. THEY ARE
  MOSTLY COMPANIES WITH QUALITY PRODUCTS, EXPANDING
  PRODUCT LINE, AND GOOD RESEARCH AND DEVELOPMENT.
• OFTEN PAYS LITTLE OR NO DIVIDENDS

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CYCLICAL STOCKS

• FOLLOWS THE BUSINESS CYCLE
• WHEN THE ECONOMY IS GROWING THESE STOCKS GROW,
  WHEN ITS DECLINING THESE STOCKS DECLINE AS WELL

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DEFENSIVE STOCKS

• PAYS STRONG DIVIDENDS AND MAINTAIN VALUE EVEN
  WHEN THE ECONOMY DECLINES.

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CAPITALIZATION

• LARGE CAP- MARKET CAP IN EXCESS OF 5 BILLION
  DOLLARS
• MED CAP- BETWEEN 1 BILLION AND 5 BILLION IN
  TOTAL CAPITALIZATION
• SMALL CAP- TOTAL CAPITALIZATION LESS THAN 500
  MILLION

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PENNY STOCKS

• STOCKS THAT TYPICALLY COST LESS THAN 1.00 PER
  SHARE HOWEVER SOME INVESTOR CONSIDERS STOCKS
  UNDER 10.00 AS PENNY STOCKS

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SPECULATIVE STOCKS

• COMMON OR PREFERRED STOCKS THAT OFFERS EXTREME
  DEGREES OF UNREALIZED APPRECIATED VALUATION AND
  DEPRECIATED EVALUATION. TYPICALLY START UP
  COMPANYS AND EMERGENT TECHNOLOGY COMPANIES

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HOW TO EVALUATE STOCKS NUMERICALLY

• EARNINGS PER SHARE
• PRICE/EARNING
• CURRENT YIELD
• PEG RATIO

• DIVIDENDS PAYOUT RATIO
• TOTAL RETURN
• ANNUALIZED HOLDING PERIOD RETURN
• BETA

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EARNINGS PER SHARE
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Price Earning or PE Ratio
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Current Yield
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Price/Earning to Growth Ratio
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Dividend Payout Ratio
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Total Return

• Total Return Dividend Income Price
  appreciation
• 100 (1.00) 100 (50 - 40)
• 100 1000
• 1100

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Annualized Holding Period Return
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BETA

• BETA IS A NUMBER EPORTED IN MANY PUBLICATIONS
  THAT GIVES AN INDICATION OF HOW VOLATILE THE
  STOCK IS, RELATIVE TO THE VOLATILITY OF THE
  MARKET AS A WHOLE

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INVESTMENT THEORIES

• FUNDAMENTAL ANALYSIS Based on the idea that the
  Stock Price is determine by future earnings.
• TECHNICAL ANALYSIS Stock Price is based on
  supply and demand
• EFFICIENT MARKET HYPOTHESIS Stock Market moves
  in a random order, so the Market is totally
  efficient

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Buying and Selling Stocks

• PRIMARY MARKET
• Initial Public Offering (IPO)
• Syndicated through Investment Banker
• Directly to the Public
• SECONDARY MARKET
• Securities Exchange
• Over the Counter Market

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Securities Exchange

• A Market Place where member Broker who represent
  Investors, meet to buy and sell securities
• Physical Place
• Companies must meet certain listing qualities

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OVER THE COUNTER MARKET

• A communication network of dealers, each of whom
  maintains an inventory of certain securities and
  stand ready to buy and sell those securities

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ACCOUNT EXECUTIVES

• Full Service Broker
• Higher commission
• More research information available at little or
  no cost
• Give more advice to client
• Other services available

• Discount Broker
• Lower commission
• Less research or have to pay extra for it
• Do not give much advice to clients
• Often no other services available

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TYPES OF ORDERS

• MARKET ORDER Buy or Sell a stock at current
  price uring market hours
• LIMIT ORDERS Buy or Sell a Stock at a specific
  price
• DISCRETIONARY ORDER Empowers the account
  executives to buy and sell at their discretion.

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BUYING ON MARGIN

• Borrowing part of the money to buy the stock for
  a fee
• Federal Reserves regulate how much can be
  borrowed, normally 50

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SHORT SALES/OPTIONS

• Investor borrow stocks from Brokerage House and
  sells it in the Market
• The money is kept by the Broker at the end the
  investor
• If he Investor can buy the stock back at a lower
  price, they keep the extra money