Transcript Stocks - Ceh It Out

Stocks
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When you buy
stock, you own a
slice of the
company
Ownership in a company
When investors buy shares of stock in a
company, the company uses that money to
start up their business and/or help pay for its
ongoing activities.
As an owner, shareholders share in the profit
and losses of the company.
Stocks
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Classes of Stock
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Companies may issue different classes of stock,
label them differently and list them separately on a
stock market.
Sometimes a class indicates ownership in a specific
division or subsidiary of the company.
Other times it indicates shares that sell at different
market prices, have different dividend policies, or
impose voting or sales restrictions (or privileges) on
ownership.
Stocks
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Stocks are equity investments
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Corporations don’t have to repay the money a
stockholder pays for stock.
If you don’t want to be part-owner in the company
anymore, you have to find someone else to buy
your “piece of the pie”.
There are two types of stock:
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2.
Common Stock
Preferred Stock
Common Stock – Why Investors Purchase It
1.
Income from Dividends –
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Dividends are the portion of the company’s profit
paid out to its shareholders.
Dividends are not mandatory; the board of
directors decides how large a dividend the
company will pay, or whether it will pay one at all.
Typically large, mature companies pay dividends,
while smaller ones reinvest their profits to continue
growing.
Common Stock – Why Investors Purchase It
1.
Income from Dividends (cont.) –
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When dividends are paid, every stockholder
receives an equal amount of dividends per share.
Most dividends are paid quarterly; every 3 months.
Common Stock – Why Investors Purchase It
2.
Dollar Appreciation of Stock Value –
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You make money with stocks by selling your
shares for more than you paid for them.
The market value of a stock depends on the
demand for the stock.
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If the demand increases, the price goes up.
If the demand decreases, the price goes down.
Investors buy stock they think will increase in
value!
Common Stock – Why Investors Purchase it
3.
Possibility of Increased Value From Stock Splits
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When the price of a stock is high, investors are often
reluctant to buy, either because they think the price
has hit a peak or because it costs too much.
Corporations can split the stock to lower the price,
which they expect will stimulate trading.
Stockholders like when this happens because often
(not always) the stock price goes up after a stock split,
increasing the value of their portfolio.
Common Stock – Why Investors Purchase It
3.
Possibility of Increased Value From Stock Splits
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When a stock is split, there are more shares
available, but the total market value is the same.
Example: A company’s stock is trading at
$100/share. If the company declares a 2 for1 stock
split, it gives you two shares for each one you own.
At the same time the price drops to $50/share. If you
owned 300 shares selling at $100, you now have 600
selling at $50 – but the value is still $30,000.
Common Stock – Why Corporations Issue It
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Dividends Not Mandatory –
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The corporate board of directors, a group of
people elected to make decisions for the
corporation, decide whether or not profits will be
paid to stockholders as dividends.
Common Stock – Why Corporations Issue It
2.
Voting Rights/Control of the Company –
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Publicly held corporations are required by law to
hold a meeting every year. Stockholders vote on
company business, getting one vote for each share
they own.
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Exception: a class of stock with different voting
privileges; when stocks carry extra votes, a small group of
people can control the company’s direction while owning
fewer than 50% of the shares. Yikes!
Common Stock – Why Corporations Issue It
2.
Voting Rights/Control of the Company (cont.)
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Generally, investors vote in person at the annual
meeting, or by proxy.
If you don’t vote in person, or return your proxy,
your votes aren’t counted.
Note: some companies allow voting by telephone,
or online using an electronic ballot.
Preferred Stock – Why Investors Purchase It
1.
Steady Source of Income –
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The amount of dividend is specific, stated on the
stock certificate, and doesn’t change.
Preferred stockholders receive cash dividends before
common stockholders, and are more likely to recover
some of their investment if the company fails.
Unfortunately, since the dividend is specific, preferred
stocks lack the potential for growth that common
stocks offer.
Preferred Stock – Why Corporations Issue It
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Used less often than common stock as a way
of raising money, and only by a few
corporations.
Attract more conservative investors - who
would otherwise not buy common stock.
Limited voting rights - usually voting only in
the case of financial trouble.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
1.
Blue Chip Stock
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Blue Chip stocks are considered safe investments
and attract conservative investors.
Issued by the strongest and most respected
companies, who are leaders in their industry, have
a history of stable earnings, and consistency in the
payment of dividends.
AT&T; General Electric; Kellogg
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
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Income Stock
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Pay higher than average dividends compared to
other stocks.
Buyers of preferred stock are also attracted to this
type of common stock because the dividends are
predictable.
Stable and well-established industries, including
utilities (gas and electric companies) and financial
institutions are typically income stocks.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
3.
Growth Stock
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Issued by corporations exhibiting fast growth in
earnings, which generally causes the stock price to
go up, compared to other companies of its kind.
Look for signs that the company is engaged in
activities that will produce higher earnings and
sales: building new facilities; introducing new
products; or conducting R&D.
Generally DO NOT pay dividends, but appeal to
investors looking for greater price appreciation
over time.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
4.
Cyclical Stock
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The market value of a cyclical stock tends to reflect
the state of the economy. This is because the
products and services of these companies are
linked directly to the activities of a strong economy.
When the economy is improving, the market value
of a cyclical stock usually goes up. During an
economic decline, the market value of a cyclical
stock generally decreases.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
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Cyclical Stock (cont.)
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Investors buy these stocks when they are
inexpensive, just before the economy starts to
improve. They sell them just before the economy
declines.
The stock of automobile/airline companies, hotels,
building/construction firms and retail stores is
considered cyclical.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
5.
Defensive Stock
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These stocks remain stable during declines in the
economy.
The company has steady earnings and can
continue to pay dividends even in periods of
economic decline.
The stock of companies that provide necessary
services and staples like food and consumer
goods are defensive (Kellogg’s/Procter & Gamble)
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
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Large-Cap Stock
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Small-Cap Stock
“Cap” refers to capitalization, which is the total
amount of stocks and bonds issued by a
corporation.
A large cap stock is the stock of a corporation that
has issued a large number of shares of stock
therefore has a large amount of capitalization.
Large cap stocks are typically issued by larger
companies. They are considered secure and
appeal to conservative investors.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
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Large-Cap Stock
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Small-Cap Stock (cont.)
A small cap stock is issued by a company with
capitalization of $500 million or less. Since these
companies are generally smaller, their stock is
considered to be a higher investment risk.
Stocks are often referred to by a combination of
the characteristics discussed in the previous
slides, such as shares of a “small-cap growth”
stock, or a “large-cap income” stock.
8 Categories of Stock
(Note: A particular stock can fall into more than one category)
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Penny Stock
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Penny stocks typically sell for less than $1 per
share (up to $5).
Issued by new companies whose sales are very
unsteady.
The prices of these stocks can go up or down
wildly.
Information about penny stocks is hard to find so it
is hard to track their performance.
Very Risky!
Remember Risk?
Some Stocks Are Riskier Than Others!
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Conservative Risk (Low): Blue Chip, Income, and Large Cap
stocks. The value/price of the stock does not change quickly.
LOW RISK = LOW POTENTIAL RETURN OR LOSS
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Moderate Risk: Growth stocks – stocks that grow faster and
higher in value/price than stocks of other companies with
similar sales and earnings. Young companies with great
potential!
Speculative Risk (High): Penny stocks. Stocks with
unpredictable results, but potential to earn very high returns.
HIGH RISK = HIGH POTENTIAL RETURN OR LOSS
Evaluating Stock – Two Approaches
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You can’t predict for certain the future return of a
stock, but you can make a reasonable estimate
by doing some analysis:
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Technical Analysis – chart the statistics of past market
performance to identify price trends of particular
stocks, industries, or the market as a whole.
Fundamental Analysis – study the company’s financial
condition, management and competitive position in its
industry. May also look at the economy at large.
Evaluating Stock – A Third
Approach? NO!
Fundamental Analysis
Annual Report
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Publicly traded companies are legally required to publish
an annual report, which typically includes:
– Outline of company’s philosophy of doing business
– Written reports on each segment of the company’s
operations
– Financial statements, including the Income
Statement, Balance Sheet and performance ratios
– Auditor’s letter reassuring investors that the
company’s financial statements are in order
Fundamental Analysis
Income Statement (Profit and Loss Statement)
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Looks at the sales, costs and earnings of the
corporation over the year.
Figures for 3 years are usually shown so investors
can measure performance over time.
Purpose  determine profitability
Sales – Costs = Income
Income – Taxes = Net Income
Fundamental Analysis
Income Statement (Profit and Loss Statement)
Sales:
– Investors want to see rising sales, which suggests the
company is producing popular goods/services.
Net Income:
– Investors want to see rising net income!
– Net income can be either distributed to shareholders
as dividends or reinvested back into the company.
– Net income / # shares outstanding = earnings per
share (EPS); gauges company profitability per unit of
shareholder ownership. Look for steady or rising EPS.
Fundamental Analysis
Performance Ratios
Price-Earnings Ratio (P/E Ratio):
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Measures how many times greater the stock price is than the
earnings per share.
Gauge for judging what you are getting for your money when
you buy a certain stock. In other words, how much investors
are willing to pay for a dollar of earnings.
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Low P/E  willing to pay less  poor growth prospects  possibly undervalued?
High P/E  willing to pay more  strong growth prospects  possibly overvalued?
Compare to others in the same industry to determine if the P/E
is high or low.
Investors are looking for the P/E to be stable or increase over
time.
Fundamental Analysis
Performance Ratios
Current Yield (Yield %):
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Indicates the rate of return to common stockholders in terms of
cash dividend distributions.
Important to investors whose investment objective is income
instead of price appreciation.
An increase in yield is generally good: an increased yield %
means dividends have increased… increased dividends mean
profits have increased  that is good!
Be careful…the yield can also increase if the market value of
the stock goes down. Make sure an increase in current yield
goes along with a stable or increasing market price!
Other Sources for Evaluating Stock
Internet
 There is a huge number of web sites that deal
with personal finance and investments.
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thestreet.com; finance.yahoo.com; fool.com;
money.cnn.com; marketwatch.com;
moneycentral.msn.com
In addition, most corporations have their own
home pages, which are often more up-to-date
than their printed publications.
Other Sources for Evaluating Stock
Stock Advisory Services
 Advisory services that are widely used to
evaluate potential stock investments include…
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Standard & Poor’s
Value Line
Moody’s Investors Service
Mergent’s Financial Investors Service
Most charge fees for their information
Other Sources for Evaluating Stock
Business Periodicals
 Financial publications/magazines include…
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Barron’s, BusinessWeek*, Fortune, Kiplinger’s
Personal Finance, Money*, and Smart Money
News Programs
 Specific show channels like…
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Jim Cramer’s Mad Money, CNN Financial
In addition to specific shows and channels,
financial and economic news is part of most
regular news programs
Other Sources for Evaluating Stock
Newspaper
 Most major newspapers contain information
about stocks listed on the major exchanges
and the over-the-counter market.
 Most newspapers provide the same basic
financial data.
Students: You must understand how to read a stock table.
Refer to Activity 1 – How to Read a Stock Table. Study it
when preparing for this chapter test.
Other Sources for Evaluating Stock
Indexes
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An index is a statistical average showing the general
direction of a particular type of investment.
Indexes are valuable for showing trends, but they can’t
pinpoint the value of a specific investment.
Stock Indexes
 NYSE Index
 AMEX Index
 NASDAQ Composite Stock Index
 Dow Jones Industrial Average (DJIA)
 Standard and Poor’s 500 Stock Index (S&P 500)
Other Indexes
 Lipper Mutual Funds Index
 Dow Jones Bond Average
Other Sources for Evaluating Stock
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BE SMART!
Annual Report
No one source for evaluating stocks is
Internet
fool-proof or consistently accurate! Do
your research and consider all the
Stock Advisory
information you
Services
have about a
Business Periodicals
company before
News Programs
making a
Newspapers
decision to
Indexes
invest!