Stock Investing Basics

1
Stock Investing Basics

• Important Terminology Related to Stock Investing

2
Stock

• Stock represents ownership in a corporation.
• It also represents a proportional share in the
  assets and profits of the issuing corporation.

3
Corporations

• Corporations are legal entities owned by
  individual stockholders.
• 20 of all businesses in the United States are
  classified as corporations.
• 90 of all products sold and services provided in
  the United States come from corporations.
• The two types of corporations are publicly traded
  and privately held.

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Why do Corporations Issue Stock?

• To raise financial capital that the company can
  use to expand its business operations, update
  equipment, and conduct research and development.
• All of these efforts are designed to improve the
  corporations profitability.

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Public Corporations

• These are also referred to as publicly traded or
  publicly held corporations.
• These are companies that sell their stock to the
  general public.
• McDonalds, Wal-Mart, Home Depot, and Coca-Cola
  are all examples of publicly traded corporations.

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Private Corporations

• These are also referred to as privately held or
  closely held corporations.
• These are corporations that issue stock but do
  not sell it to the general public.
• Chick-fil-A is an example of such a company.

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Why do People Invest in Stocks?

• To make a profit! Historically, stocks have
  returned around 10.
• Profits are made from stock in two ways
• Dividends
• Appreciation in value from the time of purchase
  until the time of sale (capital gains).

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Common Stock

• Common Stock Characteristics
• The shareholder (person that owns the stock) has
  voting privileges on company matters.
• The shareholder may receive dividends (profits of
  the corporation that are distributed to
  shareholders).
• There is a greater potential for growth
  (appreciation in value) with common stock.

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Preferred Stock

• Preferred Stock Characteristics
• The shareholder is guaranteed to be paid a
  dividend before common stock shareholders.
• The shareholder has virtually no voting
  privileges in company matters.
• A preferred share of stock is assigned a dollar
  value that is printed on the stock certificate
  (par value).
• There is much less fluctuation in the price of
  preferred stocks compared to common stocks.
• Preferred stock is a much more conservative
  investment than common stock.

10
Market Capitalization

• This is the total number of stocks issued by a
  corporation multiplied by the current market
  price of the stock.
• We are going to discuss three types of market
  capitalization
• Large-Cap
• Mid-Cap
• Small-Cap

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Large-Cap Stocks

• These are the stocks of corporations that have
  market capitalizations in excess of 10 billion
  dollars.
• Some examples of large-cap stocks include
  Exxon-Mobil (426 Billion), Microsoft (227
  Billion), Wal-Mart (197 Billion), and General
  Electric (228 Billion).

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Mid-Cap Stocks

• These are the stocks of corporations that have
  market capitalizations of between 2 billion and
  10 billion dollars.
• Some examples of mid-cap stocks include Family
  Dollar (6 billion) and VeriSign (6 billion)

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Small-Cap Stocks

• These are the stocks of corporations that have
  market capitalizations of between 300 million and
  2 billion dollars.
• Some examples of small-cap stocks include The
  Cheesecake Factory (1.8 billion) and Ann Taylor
  Stores (1.4 billion).

14
Stock Exchanges

• A stock exchange is where shares of stock are
  bought and sold.
• Some examples of stock exchanges include the New
  York Stock Exchange (NYSE) and the NASDAQ.
• These are also sometimes referred to as
  securities exchanges.

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NYSE

• The New York Stock Exchange is one of the worlds
  largest and most well known exchanges.
• More than 3000 corporations are listed on the
  NYSE.
• The NYSE uses a combination of human floor
  traders and computerized trading.
• The NYSE is open between 930 A.M.-400 P.M.
  (EST)
• Some of the worlds largest and most well known
  companies are traded on the NYSE.
• Some examples include Coca-Cola, Wal-Mart,
  Exxon-Mobil, General Electric, and McDonalds.

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NASDAQ

• NASDAQ stands for the National Association of
  Securities Dealers Automated Quotation System.
• This is a completely computerized stock exchange.
• More than 4000 corporations are listed on the
  NASDAQ.
• The NASDAQ was started in 1971.
• Many high tech companies are listed and traded on
  the NASDAQ.
• Some examples include Microsoft, Intel, Dell,
  Amazon.com, Google, and Apple.

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Brokerage Firms

• A brokerage firm is a company that conducts
  securities trading (the buying and selling of
  stocks, bonds, mutual funds, etc), investment
  research, analysis, and advisory services for its
  clients.
• We are going to talk about the differences
  between full-service and discount brokerage firms.

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Full-Service Brokerage Firms

• Full-service brokerage firms provide the most
• personalized services (research, advice,
  retirement planning, tax tips, etc)
• They also charge the highest fees and
  commissions.
• Typically, full-service brokerages are best for
  individuals that do not have the time, level of
  comfort, or expertise to make their own
  investment decisions.
• Some examples of full-service brokerage firms
  include Merrill Lynch and Edward Jones.

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Discount Brokerage Firms

• Discount brokerage firms carry out buy and sell
  orders for their clients but provide little or no
  investment advice.
• The fees and commissions charged by discount
  brokerage firms are much lower than those charged
  by full-service firms.
• Discount brokerage firms are best for individuals
  that have the ability, level of comfort, and
  expertise to conduct their own research and make
  their own investment decisions.
• Some examples of discount brokerage firms
  include E-Trade and ShareBuilder.

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Brokerage Firms (Continued)

• Charles Schwab and TD Ameritrade are examples of
  brokerage firms that offer both full and discount
  services to their clients.
• Fidelity and Vanguard are two of the largest
  mutual fund companies that also provide brokerage
  services to their clients.

21
Stock Performance Indicators

• Some common indicators of stock market
  performance include the
• Dow Jones Industrial Average
• SP 500
• NASDAQ

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Dow Jones Industrial Average

• The Dow Jones Industrial Average tracks the
  stocks of 30 of the largest and most widely held
  companies in the United States.
• The DJIA is calculated by adding the sum stock
  values of the 30 companies listed in the index
  and dividing the sum by an established divisor.
• The current divisor is .0123051408
• Because the divisor is less than one it actually
  serves as a multiplier.

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SP 500

• This is a stock index that contains 500 large
  companies.
• Each of these companies trade on either the New
  York Stock Exchange (NYSE) or on the National
  Association of Securities Dealers Automated
  Quotation System (NASDAQ)
• It is the second most watched US index after the
  Dow Jones Industrial Average. However, many
  investors feel that the SP 500 is a better
  indicator of the overall stock market because it
  contains more companies.
• Each of the 30 companies listed in the Dow Jones
  Industrial Average are also listed in the SP 500
  Index.

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Types of Stock Investments

• We are going to examine the following types of
  stocks
• Blue-Chip Stocks
• Income Stocks
• Growth Stocks
• Cyclical Stocks
• Defensive Stocks
• The stocks of some companies can fit into several
  of these categories.

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Blue-Chip Stocks

• These are the stocks of the most well established
  and financially sound companies.
• All 30 of the stocks that make up the DJIA are
  blue-chips.

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Income Stocks

• These are the stocks of companies that pay
  regular and steadily increasing dividends.
• These are typically conservative stock
  investments that may not appreciate (or decline)
  as much in value as other types of stocks.
• Exxon-Mobil and Proctor Gamble are examples of
  income stocks.

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Growth Stocks

• These are the stocks of companies whose earnings
  are expected to grow at an above average rate.
• Growth stock companies often do not pay
  dividends. They instead invest the profits back
  into the company in the hopes of becoming more
  profitable.
• Google and Amazon.com are examples of growth
  stocks.

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Cyclical Stocks

• These are stocks that appreciate in value quickly
  when economic growth is strong and fall rapidly
  when economic growth is declining.
• Alcoa, Caterpillar, and Ford are examples of
  cyclical stocks.

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Defensive Stocks

• These are stocks that remain stable during
  declines in the economy.
• Blue-chip and income stocks like Exxon-Mobil and
  Proctor Gamble are examples of defensive
  stocks.