Transcript Section 9.3 Buying and Selling Stocks

Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.1
Common and Preferred Stocks
securities
all of the
investments—
stocks, bonds,
mutual funds,
options, and
commodities—
that are bought
and sold on the
stock market
Common Stock
Investors have a choice of securities.
When investors buy shares of stock in a
company, the company uses that money to:
 Make and sell its products
 Fund its operations
 Expand
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.1
Common and Preferred Stocks
private
corporation
a company that
issues stock to a
small group of
people
public
corporation
a company that
sells its shares
openly in stock
markets, where
anyone can buy
them
Why Corporations Issue Common Stock
Stock is available from:
 Private corporations
 Not traded on open market
 Public corporations
 Anyone can buy them on open market
Companies issue common stock to:
 Raise money to start up their businesses
 Help pay for ongoing activities
 May pay dividends
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.1
Common and Preferred Stocks
Why Investors Purchase Common Stock
Most investors purchase common stock to make
money in three different way.
 They receive dividends
 Equal amount per share
 The dollar value of their stock appreciates
(increases)
 The stock splits and increases in dollar
value
 To increase investors if price too high
 Have same amount of money, just more shares
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Section 9.1
Common and Preferred Stocks
Voting Rights and Control of the Company
Stockholders are also given certain rights in
return for the money they invest.
These rights include:
 Voting rights at annual meetings
 Usually one vote per share
 Preemptive rights
 Gives current stockholders the right to buy any
new stock a corporation issues before its stock
is offered to the public
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Section 9.1
Common and Preferred Stocks
par value
an assigned dollar
value that is
printed on a stock
certificate
Preferred Stock
Get paid dividends before common stockholders
Preferred stockholders should know the amount
of the dividend they will receive. It is either:
 A specific amount of money
 A percentage of the par value of the stock
 Does not change
 Take percent and multiply by par value
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Section 9.1
Common and Preferred Stocks
Why Corporations Issue Preferred Stock
For some companies, preferred stock is another
method of financing which may attract more
conservative investors who do not want to buy
common stock.
Preferred stockholders:
 Receive limited voting rights
 Usually vote only if the corporation
issuing the stock is in financial trouble
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.1
Common and Preferred Stocks
Why Investors Purchase Preferred Stock
Preferred stock is considered a safer investment than
common stock, but not as safe as bonds. Preferred stocks
lack the potential for growth that common stocks offer.
To make preferred stocks more attractive to investors, some
corporations may offer:
 Cumulative preferred stock
 Unpaid dividends build up and paid at later date
 Convertible preferred stock
 Exchanged for specific number of common
stock
 A participation feature
 Rare
 Remaining money split after everyone is paid
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
blue-chip stocks
stocks issued by
the strongest and
most respected
companies, such
as AT&T, General
Electric, and
Kellogg
Blue-Chip Stocks





Attracts conservative investors
Safe investment
Leadership in an industry
A history of stable earnings
Consistency in the payment of dividends
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Section 9.2
Evaluating Stocks
income stock
a type of stock
with predictable
and higher-thanaverage dividends
Income Stocks
 Gas and electric companies
 Companies such as Bristol-Myers Squibb
and Dow Chemical
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Section 9.2
Evaluating Stocks
growth stock
stock issued by a
corporation whose
potential earnings
may be higher
than the average
earnings
predicted for all
the corporations
in the country
Growth Stocks
Look for signs that the company is engaged in
activities that produce higher earnings and sales
revenues, such as:
 Building new facilities
 Introducing new, high-quality products
 Conducting recognized research and
development
Stocks issued by these corporations generally
do not pay dividends.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
cyclical stocks
a stock that has a
market value that
tends to reflect
the state of the
economy
Cyclical Stocks
Follows economic trends
Products and services are linked directly to the
activities of the economy
Stocks issued by Ford and Centex (a
construction firm) are considered cyclical stocks.
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Section 9.2
Evaluating Stocks
defensive stock
a stock that
remains stable
during declines in
the economy
Defensive Stocks
 Have steady earnings
 Can continue dividend payments even in
periods of economic decline
Many blue-chip stocks and income stocks, such
as those issued by Procter & Gamble, are
defensive stocks.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
large-cap stock
stock from a
corporation that
has issued a large
number of shares
of stock and has a
large amount of
capitalization
capitalization
the total amount of
stocks and bonds
issued by a
corporation
Large-Cap and Small-Cap Stocks
Large-cap stocks
 Large amount of capitalization
 Considered secure
Small-cap stocks
 Smaller, less established
 Considered higher risk
small-cap stock
a stock issued by a
company with a
capitalization of
$500 million or less
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
penny stock
stocks that are
issued by new
companies or
companies whose
sales are very
unsteady
Penny Stocks
A penny stock typically sells for less than $1 a
share, although it can sell for as much as $10 a
share.
It is difficult to keep track of a penny stock’s
performance because information about them is
hard to find.
Penny stocks should be purchased only by
investors who understand the risks.
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Section 9.2
Evaluating Stocks
Sources for Evaluating Stocks
There are many sources where you can find
information about stocks before making
investment decisions. Some sources include:
 Newspapers
 NYSE, AMEX (American Stock Exchange)
 The Internet
 Stock advisory services
 Standard & Poor’s Stock and Bond Guide,
Value Line Investment Survey, and Mergents
Handbook of Common Stocks
 Corporate news publications
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Section 9.2
Evaluating Stocks
Mergent’s Handbook of Common Stocks
Other sections in Mergent’s Handbook of
Common Stocks:
 Describe the company’s outlook, or
prospects for the future
 Provide important statistics on the
company for a specific length of time
 List information such as important officers
in the corporation and the location of its
headquarters
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Section 9.2
Evaluating Stocks
Corporate News Publications
Annual and quarterly reports offer:
 A summary of a corporation’s activities
 Detailed financial information
You do not have to be a stockholder to get an
annual report. You can also get information
about specific companies from financial
publications such as:
 Barron’s
 BusinessWeek
 Fortune
 Smart Money
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
bull market
a market condition
that occurs when
investors are
optimistic about
the economy and
buy stocks
bear market
a market condition
that occurs when
investors are
pessimistic about
the economy and
sell stocks
Factors that Influence the Price of
Stock
Consider overall condition 1st
 Bull market
 Bear market
Next you should consider
 The company’s profits and losses
 Other numerical measures of the
company’s financial situation
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
current yield
the annual
dividend of an
investment
divided by the
current market
value
total return
a calculation that
includes the
annual dividend
as well as any
increase or
decrease in the
original purchase
price of the
investment
Numerical Measures for a Corporation
To find out about the health of a corporation,
you can use numerical measures such as:
 Current yield
 Total return
 Current return + capital gain = total return
 Pg 287 in book
 Earnings per share
 Price-earnings ratio
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
earnings per
share
a corporation’s
net, or after-tax,
earnings divided
by the number of
outstanding
shares of
common stock
Earnings Per Share
Earnings per share:
 Measures the amount of corporate profit
assigned to each share of common stock
 Gives a stockholder an idea of a
company’s profitability
 EPS = Net earnings/Common stock
outstanding
 Pg 288
Increase in earnings per share is a good sign for
any corporation and its stockholders
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
priceearnings (PE)
ratio
the price of one
share of stock
over the last 12
months
Price-Earnings Ratio
The price-earnings (PE) ratio is commonly used
to compare the corporate earnings to the market
price of a corporation’s stock.
 PE ratio = Market price per share/Earnings per
share
 Low PE ratio indicates possible good investment

High earnings compared to stock price
 High PE

Low earnings compared to stock price
 Range between 5 and 35 usually, but does vary
over that.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.2
Evaluating Stocks
The Fundamental Theory
The fundamental theory assumes that a stock’s
real value is determined by looking at the
company’s future earnings.
People who believe in the fundamental theory
also look at:
 The financial strength of the company
 The type of industry the company is in
 Its new products
 The state of the economy
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Section 9.2
Evaluating Stocks
The Technical Theory
The technical theory is based on the idea that a
stock’s value is really determined by forces in
the stock market itself.
Technical theorists look at factors such as:
 The number of stocks bought or sold over
a certain period
 The total number of shares traded
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Section 9.2
Evaluating Stocks
The Efficient Market Theory
In the efficient market theory, the argument is
that stock price movements are purely random.
This theory declares that:
 All investors have considered all of the
available information on a stock as they
make their decisions.
 It is impossible for an investor to
outperform the stock market average over
a long period of time.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.3
Buying and Selling Stocks
Primary Markets
To buy, go through brokerage firm
Investors purchase new security issues from a
corporation
 An investment bank
 Helps corporations raise funds
 Selling new stock
 Some other representative of the
corporation
 Current stockholders and avoiding fees of
investment banks
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.3
Buying and Selling Stocks
• Initial public offering (IPO) occurs
when a company sells stock to the
general public for the first time. IPOs
are considered a high-risk investment.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.3
Buying and Selling Stocks
Secondary Markets
Existing financial securities currently traded
among investors
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Section 9.3
Buying and Selling Stocks
securities
exchange
a marketplace
where brokers
who represent
investors meet to
buy and sell
securities
Securities Exchanges
National corporations traded at security
exchanges
 The New York Stock Exchange
 The American Stock Exchange
There are also regional exchanges in:
 San Francisco
 Boston
 Chicago
 Overseas: London, Paris, Tokyo
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Section 9.3
Buying and Selling Stocks
over-thecounter (OTC)
market
a network of
dealers who buy
and sell the
stocks of
corporations that
are not listed on a
securities
exchange
Over-the-Counter Market
Not all stocks are traded on organized
exchanges
Several thousand companies trade their stock in
the over-the-counter market.
Most over-the-counter stocks are traded through
NASDAQ, an electronic marketplace for more
than 4,000 different stocks.
usually smaller companies or can’t meet
NYSE requirements
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Section 9.3
Buying and Selling Stocks
Brokerage Firms
Today, you can choose:
 A full-service brokerage firm
 Higher commission
 A lot of research, but not a lot of personalized
time
 Person advises you
 A discount brokerage firm
 Less commission, but less research and you
decide
 To trade stocks online
 Least commission, but you alone are in charge
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Section 9.3
Buying and Selling Stocks
portfolio
a collection of all
the securities held
by an investor
Account Executives
Stockbroker
Licensed individual who buys or sells
securities
 Deal with all types of securities
 Handle your entire portfolio
Account executives can make errors
Stay actively involved in decisions
concerning your investments
Not responsible for financial loss
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Section 9.3
Buying and Selling Stocks
Types of Orders
When you are ready to trade a stock, you will
execute an order to buy or sell. You can do this:
 Over the telephone
 On the Internet
 By going to a brokerage firm and placing
your order in person
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Section 9.3
Buying and Selling Stocks
Market Orders
Request to buy or sell a stock at the current market
value
 Get the best price possible
 Make the transaction as soon as possible
Every stock listed on the NYSE is traded at a
computer-equipped trading post on the floor of the
exchange.
Uses SuperDot system
Handle 2 billion shares or more
Payment to buy required in three business days
Many brokerage firms hold stock to sell later
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Section 9.3
Buying and Selling Stocks
Limit Orders
Request to buy or sell a stock at a specified
price
 Buy the stock at the best price up to a
certain dollar amount
 Sell at the best price and not below a
certain price
No guarantee purchase or sale made when
desired price reached
Filled in order which received
May miss opportunity to buy or sell
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Section 9.3
Buying and Selling Stocks
Stop Orders
Type of limit order to sell a particular stock at
the next available opportunity when market price
reaches a specified amount
A stop order:
 Does not guarantee that your stock will
be sold at the price you want
 Does guarantee that it will be sold at the
next available opportunity
 Good until you cancel them
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Section 9.3
Buying and Selling Stocks
Computerized Transactions
You can use a software package or the
brokerage’s Web site to help you:
 Evaluate stocks
 Track your portfolio
 Monitor your portfolio’s value
 Buy and sell securities online
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.3
Buying and Selling Stocks
Investment Strategies
Once you purchase stock, the investment may
be categorized as:
 Long term (held for ten years or more)
 Short term (held for one year or less)
If you hold investments for at least a year, you
are an investor
If you buy and sell investments within short
periods of time, you are a speculator or a trader
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Section 9.3
Buying and Selling Stocks
Long-Term Techniques
To avoid loss in your investments
 The buy-and-hold technique
 Often ten or more years
 May get dividends
 May split
 Dollar cost averaging
 Using same amount to buy shares not matter cost
 Direct investment
 Companies selling stock directly to investors
 Buy stock without using brokerage firm
 Dividend reinvestment
 Automatically reinvests dividends by buying more
shares
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Section 9.3
Buying and Selling Stocks
Short-Term Techniques
More risky
 Buying on margin
 Borrows money from firm to buy shares
 Limits to borrow up to 50% if have $2000 in
brokerage account
 Selling short
These methods should be used only by
investors who fully understand the risks.
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Section 9.3
Buying and Selling Stocks
Selling Short
When you sell short, you:
 Arrange to borrow a certain number of
shares of a particular stock from a
brokerage firm
 Sell the borrowed stock, assuming that it
will drop in value in a reasonably short
period of time
 Buy the stock at a lower price than it sold
for in Step 2
 Use the stock you purchased in Step 3 to
replace the stock that you borrowed from
the brokerage firm in Step 1
If the stock value increases, you will lose
money.
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Chapter 9
Stocks
Reviewing Key Concepts
1.
Explain why corporations prefer to issue common stock to
raise funds for their operations.
Companies issue common stock to:

Raise money to start up their businesses

Help pay for ongoing activities
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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Chapter 9
Stocks
Reviewing Key Concepts
2.
Explain how cumulative preferred and convertible preferred
stock offer advantages to users.
Investors choose preferred stocks because they:

Are less risky than common stocks

Provide a steady income in the form of dividends
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Chapter 9
Stocks
Reviewing Key Concepts
3.
Describe why a small-cap stock is more likely to be a growth
stock rather than an income stock.
Since small-cap stocks are issued by smaller, less-established
companies, they are considered to be a higher investment risk.
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Chapter 9
Stocks
Reviewing Key Concepts
4.
Identify the advantages and disadvantages of a stock
advisory service to evaluate a stock.
You can use stock advisory services to evaluate potential stock
investments. Many stock advisory services charge fees for their
information.
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Chapter 9
Stocks
Reviewing Key Concepts
5.
Describe why the price-earnings ratio is a good measure of
a stock investment.
The price-earnings (PE) ratio is commonly used to compare the
corporate earnings to the market price of a corporation’s stock.
A low PE ratio indicates that a stock may be a good investment. A
high PE ratio tells you that it might be a poor investment.
Generally, you should study the price-earnings ratio for a
corporation over a period of time so that you can see a range.
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Chapter 9
Stocks
Reviewing Key Concepts
6.
List the differences among market order, limit order, and
stop order.
A market order is a request to buy or sell a stock at the current
market value.
A limit order is a request to buy or sell a stock at a specified price.
A stop order is a type of limit order to sell a particular stock at the
next available opportunity when the market price reaches a
specified amount.
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Chapter 9
Stocks
Reviewing Key Concepts
7.
Identify the tax advantages of long-term investment
strategies.
To avoid loss in your investments, you will want to use long-term
techniques such as:

The buy-and-hold technique

Dollar cost averaging

Direct investment

Dividend reinvestment
Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill
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