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Rule of 72 Divide the number 72 by your investment’s expected rate of return. Since the crash of the stock market, it has shown a return of 10%. So if you divide 72 by the 10% return, your investment should double every 7 years. Illustration Using Pizza If you bought a slice of pizza @ $2.00 a slice every week for 50 years it would cost you $5,200. If you gave up that slice and invested money instead, earning 8% interest, you’ll have over $64,678.87. ROI (Return on Investment) ROI= (Gain from Investment – Cost of Investment)/ Cost of Investment If you invest $5,000 in Coca Cola shares and the value after 10 years is now $12,500, what is your ROI? (12,500 – 5000)/5000 =1.5x 100% 150% ROI Savings account = 1% ROI CD = 3% Stock Market = 8 – 12% What is the Stock Market The stock market plays an enormous role in the national and global economy. It is a way for people to invest in a company by purchasing small shares that represent a small piece of company ownership known as stock. The success of each stock is usually dependent upon the success of the company. What is a stock? A stock is a unit of ownership in a corporation The owner of a stock is called a stockholder or shareholder Stockholders receive stock certificates which is evidence of ownership Stockholders share in a corporation’s profits – paid out in dividends. Capital Gain - If a company does well the value of the stock you own will increase in value How are Stocks Traded? Stocks are traded in Round Lots or Odd Lots Round Lots – 100 Shares or multiples of a 100 shares of a particular stock Odd Lots – fewer than 100 shares of a particular stock Common Stock Common Stock – a type of stock that pays a variable dividend and gives the holder voting rights The Board of Directors (elected by stockholders) decides the amount of the dividend each year. Preferred Stock Preferred Stock – a type of stock that pays a fixed dividend and carries no voting rights. Preferred stockholders earn the stated dividend, regardless of how the company is doing, making preferred stock less risky than common stock. If the company fails, preferred stockholders are paid ahead of common stockholders What is a Penny Stock Penny stocks are low-priced stocks of small companies that have no track record The stock usually sells for under a dollar per share These companies usually have low revenues and few assets to assure future growth Typical of dot-com (Internet) companies Occasionally a penny stock will be successful Considered high-risk Income Stocks Income stocks – Stocks that have a consistent history of paying high dividends. Investors choose income stocks in order to receive current income in the form of dividends. Preferred stocks pay the mast certain and predictable dividends Growth Stocks Growth Stocks – Stocks in a corporation that reinvest their profits into the business so that it can grow. These corporations pay little or no dividends. Investors buy growth stocks for future capital gain. Growth stocks are long-term investments Blue Chip Stocks Blue Chips Stocks – stocks of large, well established corporations with a solid record of profitability. Most people have heard of these companies because their products and services have been around for decades. Example: IBM & Coca-Cola Blue Chip stocks are a conservative investment. Investors choose them for relatively safe, stable, but moderate returns Defensive Stocks Defensive Stocks – a stock that remains stable and pays dividends during an economic decline. Companies in this category have a history of stable earnings. Not effected as much by the ups and downs of business cycles. Examples: utilities, drugs, food, and heath care Cyclical Stocks Cyclical Stocks – do well when the economy is stable or growing but often do poorly during recessions when the economy slows down. Examples: travel-related companies (airlines, resorts), manufacturing companies, agriculture. Determining a Stocks Worth When you buy stock you expect to hold it for a period of time and then sell it, hopefully for a profit. Whether or not you make a profit on the sale of your stock depends on how much someone else is willing to pay for it when you are ready to sell Stock Value When you purchase s tock you may receive a stock certificate or have it help electronically The certificate states the number of shares you own, name of the company, the type of stock (common or preferred), and the par value Par value – an assigned (and often arbitrary dollar value) Market Value of a Stock Market value – the price for which the stock is bought and sold in the market place Reflects the price investors are willing to pay for the stock How a company currently is doing, its track record, and how well it is expected to perform in the future determine market value. Stock Price Several Factors affect the price you will pay for a share of stock The Company’s financial situation Current interest rates The Market for the Company’s Products and Services Earnings per Share Stock Price – The Company When a company performs well (making a profit) the stock is attractive. Investor’s consider the company’s earning power as well as its debt obligations. If the company seems to be in a good financial position, the stock price will continue rising Stock Price – Interest Rate When interest rates are low, people who would normally put money into savings accounts and certificates of deposit look elsewhere. As interest rates rise, people tend to move their money to safer investments When interest rates fall below the current rate of inflation, people buy more stock and stock prices rise. Stock Price – The Market The marketplace determines a company’s ability to sell its product or service now and in the future. If a company is in a popular industry and its products or services are selling well, its stock price will rise If the demand for a particular product or service declines, the price of the stock will decrease Stock Price – Earnings per Share Earnings per share – a corporation’s after-tax earning divided by the number of common stock shares outstanding, that is, shares in the hands of investors. Stockholders use earnings per share as a measure of a company’s profitability.