Transcript LO#3
LO#3 Learning Objective # 3 Explain how you can evaluate stock investments. LO#3 Stock Valuation Important to understand different approaches used by experts to analyze stocks Fundamental Analysis Technical Analysis A way to value stocks by looking at micro and macro factors that might influence the economic value of stocks The idea that changes in investor sentiment are responsible for changes in trends, and that the value of a stock can be predicted by extrapolating price from historical patterns Efficient Market Hypothesis States that future prices cannot be predicted from past trends and patterns LO#3 Classification of Stock Investments Blue chip stock Income stock Safe investment in strong and respected companies Attracts conservative investors ex. Bell Canada, Royal Bank Pays higher than average dividends, ex. utility stock Growth stock Earns above average profits of all firms in the economy. Less than 30% of earnings are paid out as dividends, with rest reinvested in research & development ex. Southwest Airlines, Home Depot LO#3 Classification of Stock Investments Cyclical stock Follows the business cycle of advances and declines in the economy ex. automobiles, timber, and steel Defensive stock Remains stable during declines in the economy ex. Kellogg, Procter & Gamble and utility stocks LO#3 Classification of Stock Investments Large cap stocks Issued by a large corporation that has a large amount of stock outstanding & a large amount of capitalization Capitalization The total amount of securities--stocks and bonds-issued by a corporation Small cap stocks Issued by a company that has a capitalization of $150 million or less Penny Stocks Typically sell for less than $1 per share LO#3 Sources of Information on Stocks Newspapers The Internet Stock Advisory Services Charge a fee Hundreds to choose from Corporate News Disclose information about corporate earnings, assets and liabilities, products or services LO#3 Factors that Influence the Price of Stocks Bull market Investors are optimistic about nation’s economy More investors are buying stock and the stock market increases Bear market Investors are pessimistic about economy More investors are selling stock so and the stock market declines LO#3 Measures of Corporate Risk, Performance and Shareholder’s Return Annual Shareholder’s Return A stock’s annual dividend and increase in value divided by its beginning-of-year stock price Annual Shareholder = Annual Dividend + Appreciation in Value Return Initial Stock Investment LO#3 Measures of Corporate Risk, Performance and Shareholder’s Return Dividend Yield A stock’s annual dividend divided by its beginning-ofyear stock price If the dividend is divided by the end-of-year stock price, it is referred to as its trailing dividend yield Annual Dividend Yield = Annual Dividend Initial Stock Investment LO#3 Measures of Corporate Risk, Performance and Shareholder’s Returns Capital Gains Yield A stock’s increase in value divided by its beginning-ofyear stock price Capital Gains Yield = Appreciation in Value Initial Stock Investment LO#3 Measures of Corporate Risk, Performance and Shareholder’s Returns Earnings Per Share Are the corporation’s after tax-earnings divided by the number of outstanding shares of common stock Earnings Per Share = After-Tax Earnings Number of outstanding shares of common stock LO#3 Measures of Corporate Risk, Performance and Shareholder’s Returns Price-Earnings (PE) Ratio Price of one share of stock divided by the earnings per share of stock over the past 12 months A low price-earnings ratio means a stock could be a good investment Price-Earnings Ratio = Price Per Share Earnings per share of stock Outstanding over the last 12 months LO#3 Measures of Corporate Risk, Performance and Shareholder’s Returns Beta Is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general