Transcript Chapter 15

Chapter 15
Investing in
Stocks
Chapter Objectives
• Identify the functions of stock exchanges
• Describe how to interpret stock quotations
• Explain how to execute the purchase
or sale of stocks
• Explain how to analyze a stock
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Stock Exchanges
• Stock exchanges: facilities that
allow investors to purchase or sell existing
stocks
• New York Stock Exchange
– Most popular organized exchange in U.S.
– Floor traders: traders at a stock exchange who
execute trades to fulfill orders placed by other
investors
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Stock Exchanges (cont’d)
– Specialists: traders who help to make
a market in one or more stocks by taking the
position opposite of orders placed by clients
– A typical stock transaction on the NYSE
• Other stock exchanges
– American Stock Exchange
– Other regional exchanges in large U.S. cities
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Stock Exchanges (cont’d)
• Over-the-counter (OTC) market: an
electronic communications network that
allows investors to buy or sell securities
– Market-makers: traders who execute trades on
the OTC market and earn commissions in the
form of a bid-ask spread
– Less stringent listing requirements than
for NYSE
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Stock Exchanges (cont’d)
– Electronic Communication Networks (ECN):
computer systems that match up desired
purchases and sales of stocks
• Allow for after-hours trading
• No person needed to perform the exchange
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Stock Quotations
• Price quotations readily available from the
Internet, stock brokers or financial
newspapers
• Provide information about the price of each
stock over the previous day or a recent
period
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Stock Quotations (cont’d)
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Purchasing and Selling Stocks
• Selecting a broker
– Analyst recommendations
• May be overly optimistic
• Must disclose ownership of stocks they recommend
– Individual broker skills
• Information available on the Internet
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Purchasing or Selling Stocks
(cont’d)
– Brokerage commissions
•Discount brokerage firm: a brokerage
firm that executes your desired
transactions but does not offer
investment advice
•Full-service brokerage firm: a
brokerage firm that offers investment
advice and executes transactions
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15-10
Financial Planning Online
• Go to finance.yahoo.com/?u
• Click “Get Quotes” after typing the symbol
of a stock in which you are interested.
• This site gives analyst recommendations
about a stock that you specify.
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Purchasing and Selling Stocks
(cont’d)
• Placing an order
– Name of the stock
• Ticker symbol: the abbreviated term that is used to
identify a stock for trading purposes
– Buy or Sell—specify what you want to do
– Number of shares
• Round lot: shares bought or sold in
multiples of 100
• Odd lot: less than 100 shares of stock
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Purchasing and Selling Stocks
(cont’d)
– Market order or limit order
• Market order: an order to buy or sell a stock at its
prevailing market price
• Limit order: an order to buy or sell a stock only if the
price is within the limits that you specify
– Stop orders
• Stop order: an order to execute a transaction when the
stock price reaches a specified level; a special form of
limit order
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Purchasing and Selling Stocks
(cont’d)
– Stop orders
• Buy stop order: an order for a brokerage firm
to buy a stock when the price rises to a specified level
• Sell stop order: an order for a brokerage firm
to sell a stock when the price falls to a specified level
• Placing on order online
– Low commission
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Financial Planning Online
• Go to www.etrade.com/
• This Web site provides information that you
can use when making investment decisions.
It also illustrates how you can trade stocks
online, which typically reduces your
transaction costs.
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Purchasing and Selling Stocks
(cont’d)
• Buying stock on margin
– On margin: purchasing a stock with a portion of
the funds borrowed from a brokerage firm
– Federal Reserve limits margin to 50 percent
– Margin call: a request from a brokerage
firm for the investor to increase the cash
in the account in order to bring the margin
back up to the minimum level
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Purchasing and Selling Stocks
(cont’d)
• Short selling stock
– Short selling (shorting): a process by which
investors sell a stock that they do not own
– Borrow stock from another investor and will have
to return it
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Analyzing Stocks
• Technical analysis: the valuation of stocks
based on historical price patterns
• Fundamental analysis: the valuation of
stocks based on an examination of
fundamental characteristics such as revenue
or earnings, or the sensitivity of the firm’s
performance to economic conditions
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Analyzing Stocks (cont’d)
• Analyzing a firm’s financial condition
– Balance sheet: a financial statement that
indicates a firm’s sources of funds and how it has
invested its funds as of a particular point in time
– Income statement: a financial statement that
measures a firm’s revenues, expenses, and
earnings over a particular period of time
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Analyzing Stocks (cont’d)
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Analyzing Stocks (cont’d)
– Accounting fraud
• Many firms recently used fraudulent financial
statements
• Motivation for fraud
– Manager compensation
• Analyzing economic conditions
– Economic growth: a measure of growth in a
country’s economy over a particular period
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Analyzing Stocks (cont’d)
– Gross domestic product (GDP): the total market
value of all products and services produced in a
country
– Fiscal policy: the means by which the
U.S. government imposes taxes on individuals
and corporations and by which it spends its
money
– Impact of international economies
• One country’s strong economy can improve another’s
and the opposite is also true
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Analyzing Stocks (cont’d)
–Interest rates
•Stocks perform better when interest
rates are low
•Some stocks are more sensitive to
interest rates than others
•The Federal Reserve uses monetary
policy to influence interest rates
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Analyzing Stocks (cont’d)
– Inflation: the increase in the general level of
prices of products and services over a specified
period
• Consumer price index (CPI): a measure of inflation that
represents prices of consumer products such as
groceries, household products, housing and gasoline
• Producer price index (PPI): a measure of inflation that
represents prices of products used to produce other
products, such as coal, lumber, and metals
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Financial Planning Online
• Go to www.oecd.org
• Click on: OECD Economic Outlook
• This Web site provides information about
economic conditions that can affect the
values of investments.
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Analyzing Stocks (cont’d)
• Industry conditions
– Stock prices susceptible to industry conditions
• Industry indicators
• Integrating your analyses
– Analyzing the firm, the economy and the
industry allows assessment of future
performance
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Analyzing Stocks (cont’d)
• Limitations of stock analysis
– Difficulty in forecasting future conditions
– Favorable attributes are reflected in the stock
price
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Financial Planning Online
• Go to www.bloomberg.com
• Click on: Market Data
• This Web site provides a summary of recent
stock performance.
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Financial Planning Online
• Go to finance.yahoo.com/indices?u
• This Web site provides recent quotations of
indexes that can be used as benchmarks
when assessing your investment portfolio’s
performance. Click on “Charts” to review
historical movements in any specific index.
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How Stock Investment Methods
Fit Within Your Financial Plan
• Key decisions about investing in common
stock for your financial plan are:
– Should you consider buying stock?
– What methods should you use for investing in
stocks?
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