INVESTING IN STOCKS

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INVESTING IN STOCKS

• Money Management
• Chapter 12 Notes

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NEWS IMPACTING STOCK PRICES
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BUYING STOCKS

• According to our book, over 50,000 Americans own
  stock in more than 34,000 different publicly
  traded companies!
• A public corporation is a company whose stock is
  traded openly on stock markets like the NYSE or
  NASDAQ
• Stocks are traded in round lots or odd lots.
• A round lot is 100 shares or multiples of 100.
• An odd lot is less than a 100 shares.
• Brokerage Firms sometimes charge more for odd lot
  purchases. This is because the firm will have to
  combine odd lot purchases to make a round lot
  purchase before they can submit the order!

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COMMON STOCK

• Common stock is a class of stock in which the
  owner of the stock shares directly in the success
  or failure of a business.
• As a shareholder you stand to profit when the
  company profits. You also have some say in policy
  decisions like whether to issue more stock to
  outside buyers, changes on the board of directors
  etc
• The more shares you own, the more say you have
  and the greater your power is.
• When the company does well, they will often pay
  Dividends which are a portion of the profits
  that are redistributed to the shareholders of a
  corporation. Dividends are usually declared once
  a year.
• Common stockholders can lose all of their
  investment in a business if the stock bottoms
  out!
• Common stockholders are entitled to vote for the
  board of directors that runs the corporation.
• When you assign your right to vote to someone
  else that is known as a proxy.

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PREFERRED STOCK

• In addition to common stock, investors can
  purchase preferred stock.
• Dividends are fixed, regardless of how the
  company does, making it less risky than common
  stock.
• In the event the company fails, preferred
  stockholders are paid first.
• The investor can only lose as much as they put
  in, no more!
• Preferred stockholders do not have voting
  privileges.
• How to Buy Preferred Stock http//www.forbes.com/
  columnists/forbes/2003/0303/108.html

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CLASSIFICATION OF STOCK INVESTMENTS

• How do you decide what type of stock to buy?
• To make analysis a bit more organized, analysts
  use a few classifications

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INCOME VS. GROWTH STOCKS

• Stocks that have a consistent history of paying
  high dividends are known as income stocks.
• Preferred stocks are usually the investors choice
  if they are after income stocks.
• Growth stocks are companies that REINVEST their
  profits into the business so that they can grow
  and expand.
• In the long run, ten or twenty years, these types
  of companies may be worth substantially more than
  their purchase price today.
• Growth stocks usually pay little or no dividend.

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PENNY VS. BLUE CHIP STOCKS

• When a stock sells for less than 5 per share it
  is classified as a penny stock.
• Although inexpensive, penny stocks are considered
  highly speculative.
• In other words, they can grow substantially or
  lose all their value.
• Frequently these stocks are issued by companies
  with a hot new product that may be an enormous
  long-term success or merely a fad!
• Blue Chip Stocks are stocks of large
  well-established, and usually profitable
  businesses.
• Most people have heard of these companies because
  their products have been around for decades.
• Companies like McDonalds, Coca-Cola, Microsoft,
  and Ford Motor Company are examples.

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Defensive vs. Cyclical Stocks

• A defensive stock is one that remains stable and
  pays dividends during an economic decline.
• Generally, companies in this category have a
  history of stable earnings.
• A defensive stock is not as subject to the ups
  and downs of business cycles.
• The demand for their products is consistent
  regardless of economic conditions.
• Examples include Food, Utilities, and Health
  Care industries
• Cyclical stocks do well when the economy is
  stable or growing, but do very poorly during
  recessions.
• Examples are airline companies and other
  industries based on traveling people may feel
  like they cant afford an expensive vacation.

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Stock Values and Return on Investment

• When you buy a stock you will pay its market
  value.
• Market Value reflects the price investors are
  willing to pay for a share at that moment.
• How a company is doing, its track record, and how
  well it is expected to do in the future will
  determine market value.
• Stocks can be considered overvalued or
  undervalued if they are selling for a price
  that is not justified by their earnings
  potential.
• You can use ratios such as Earnings per Share
  (EPS) and the Price/Earnings Ratio (P/E) to
  determine if a stock is under or overvalued.

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How do you make money buying stock?

• There are two major ways
• Stock can increase in value through market
  activity.
• Dividends can be paid usually in the form of
  cash or extra shares.
• The return on investment is how much money you
  make from the investment. It is the difference
  between what you paid for the stock and what you
  sold it for, plus any dividends you earned!
• ROI is computed as follows
• Current Price Dividends
• Purchase Price Commission

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Securities Market

• A securities market is where you buy and sell
  securities which are stocks and bonds.
• A securities exchange is a marketplace where
  brokers who are representing investors meet to
  buy and sell securities.
• The largest organized exchange in the U.S. is the
  New York Stock Exchange (NYSE)
• Watching it at work is truly an experience!

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HOW THE NYSE WORKS

• The trading floor is almost as big as a football
  field
• Floor brokers buy and sell stocks on the floor.
  Only brokers who are members of the exchange may
  trade there.
• Trading posts are spread out about every 100
  feet. All buying and selling is done at these
  trading posts.
• About ninety stocks are assigned to each post.
• Orders received at a brokerage firm are sent by
  computers to that firms booth at the exchange.
• A message is printed out given to the floor
  broker
• When the trade is complete, the floor broker
  reports back to their brokerage firms.
• The buyer and seller can be notified that the
  transaction has been concluded.
• Stock trading is done auction style meaning for
  every transaction, the highest bidder meets the
  lowest seller.
• The NYSE is open from 930 am - 400 pm each day.

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Over-the-Counter-Market

• When securities are bought and sold through
  brokers, but not through a stock exchange, the
  transaction is over-the-counter (OTC).
• The OTC market is a network of brokers who buy
  and sell securities of corporations who are not
  listed on the exchanges.
• Brokers in the OTC market DO NOT deal
  face-to-face. Trades are done via phone or
  computer only.
• NASDAQ is the largest OTC Market.
• To be listed with them the company must have at
  least 100,000 shares of stock worth at least 1
  million.

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INVESTMENT STRATEGIES

• Once stock has been acquired, your investment may
  be either short or long term.
• Generally, if you buy and sell stock within a
  short period of time, you are considered a
  speculator, or trader.
• If you hold your investments for a long period of
  time (a year or more), you are considered an
  investor.

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Short-Term Strategy

• Selling short strategy used if you feel like a
  stock price is going to drop!
• To sell short, you borrow a certain number of
  shares from a broker.
• You then sell them at the current price and hold
  on to the cash.
• Once the price has dropped, you buy back the
  correct number of shares at the lower price. This
  is called covering your short position.
• You then return the correct number of shares to
  the broker and keep the extra money!

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Long-Term Techniques

• As you may have already learned, investing in the
  stock market for the short-term is highly
  speculative and extremely risky.
• Most advisors recommend long-term investment
  strategies instead. Thats how to make the stock
  market work for you! ?
• The most popular long-term investment strategy is
  the Buy and Hold.
• Pick solid companies with great growth and
  earnings potential and HOLD on to the stock!
  Collect your dividends and watch your portfolio
  grow!

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Stock Splits

• Stock splits can also add to your investment.
• A stock split occurs when a company increases the
  number of shares it has outstanding, but lowers
  the selling price in direct proportion.
• For example Lets say Google believes that its
  stock is getting too expensive. They want the
  price to be cut in half. So they execute a two to
  one (21) stock split.
• If you owned 100 shares of Google worth 400 per
  share for a total of 40,000 you would now own
  200 shares worth 200 per share for a total of
  40,000. Looks the same right?
• This stock split lowers the cost of the stock and
  will hopefully encourage more people to buy the
  stock! But now if the price goes back up to 400
  again you own twice as many shares! Thats a
  pretty great deal!