Investing: Risks and Rewards

Transcription

1 Investing: Risks and Rewards

2 Key Terms Stock Dividends Capital Gain Common Stock Preferred Stock

3 A stock is an investment in the ownership of a corporation, represented by shares of the business

4 Things To Know About Stocks 1. Stocks aren't just pieces of paper. When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings. 2. There are many different kinds of stocks. The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example. 3. Stock prices track earnings. Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down or sideways. 4. Stocks are your best shot for getting a return over and above the pace of inflation. Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year -- well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement. 5. Individual stocks are not the market. A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

5 Things To Know About Stocks 6. A great track record does not guarantee strong performance in the future. Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip. 7. You can't tell how expensive a stock is by looking only at its price. Because a stock's value depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim. 8. Investors compare stock prices to other factors to assess value. To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust. 9. A smart portfolio positioned for long-term growth includes strong stocks from different industries. As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on. 10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading. The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere. And it's especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wrac

6 How do you make Money from Stocks Dividends- Payment of the invested company s profits. Profits can be shared with stockholders or reinvested in the company Capital Gain- If a company s value goes up, the value of its stock goes up as well. If you sell your stock at a higher price, the amount of profit is capital gain. You may have to pay taxes on this gain when you sell If you sell your stock at a lower price, the differences is called a capital loss

7 Basic Types of Stock Common Stock- receive dividends based on the company s earnings (think- what is the difference between profit and earnings) Have voting rights in electing the company s board of directors Board of directors work with the company to help run it. Each share = one vote

8 Basic Types of Stock Preferred Stock Receives a fixed dividend; receives the same amount no matter how much profit (or not) the company is making Paid before common stock holders No voting rights

9 Stock Markets Stocks are bought and sold on the stock markets (also called the stock exchanges) There are three major stock markets in the United States New York Stock Exchange NASDAQ American Stock Exchange (AMEX)

10 New York Stock Exchange (NYSE) Largest exchange in terms of dollar volume traded Began trading in the 1790 s Some trading takes place online but it still has an active trading floor Open from 9:00 am to 4:00 pm Eastern Time Closed most holidays There are 1,366 members with trading privileges on the NYSE floor About 3,00 US and foreign companies are listed on the NYSE

11 NASDAQ Founded in 1971 Has the largest number of listings (3,200 companies) and trades the most shares daily NASDAQ stands for National Association of Securities Dealers Automated Quotations system. Trading is done only virtually

12 Reading a stock listing When you invest in stocks, you will want to keep track of how its doing. You can look in a newspaper or online. You will want to find out how the stock has done in the last year or so and how many shares are being traded. The following page is a listing of the words you will see and their definitions

13 YTD % CHG stands for year-to-date percentage of change. In other words, how much has the stock risen or fallen compared to where it was a year ago on today's date? 52-Wk High shows the highest selling price of the stock in the last 52 weeks. 52-Wk Low shows the lowest selling price of the stock in the last 52 weeks. Stock column gives the full name of the company. Sym is the symbol used by the company on the ticker reports generated by the stock exchanges that track the trading of each stock. Yield shows - The dividend amount column shows the current cash amount that will be paid over one year to the owner of one share of stock. Some companies pay very little or no dividends. The percentage yield is the amount of dividends received per share of stock compared to the price of a share of the stock. The yield is calculated by dividing the dividend per share of stock by the last (closing) price and then multiplying by 100 to obtain a percentage. PE (price/earnings) ratio: the price of a share of stock divided by the company's earnings (profits) per share for the last 12-month period. Some investors use this ratio to gauge the relative value of a stock in light of current market conditions. To find the ratio, you divide the market price by earnings per-share. (Earnings per-share is the amount of new profit produced by each share of outstanding common stock.) Owning stock in a company gives stockholders a claim to part of the firm's future profits. Clearly, therefore, the price of the stock compared to current profits per-share is an important ratio for investors to consider. Volume lists the number of shares sold (in hundreds). Last shows the stock's price at close of business yesterday. NET CHG shows how the price has risen or fallen compared to yesterday's closing price.

14 Graphic Illustration of a Newspaper Stock Listing

15 Terms for Evaluating Stocks Blue-chip stocks- safe investments in the ownership of large, respected, and wellestablished companies Dow Jones Industrial Average- daily average of the stock prices of thirty of the largest and richest blue-chip companies in the United States, used to measure stock market activity

16 Terms for Evaluating Stocks Bull market- condition of the markets when investors are optimistic about the economy and the market goes up Bear market- condition of the markets when investors are pessimistic about the economy and the market goes down

17 Terms for Evaluating Stocks S&P 500 index- an indicator of overall stock market performance based on the average stock prices of 500 top US companies. Fortune 500- a list of the 500 companies with highest earnings. Published yearly by Fortune magazine

18 Higher Risk Investments Offer a higher possibility of a high return Futures- contracts to buy or sell a specific commodity or financial instrument at a set price on a set date in the future Commodities- bulk items such as grains, metals, and food that are bought and sold on a commodities exchange Options- contracts that give the owner the right, but not the obligation, to buy or sell a stock or commodity at a set price on or before a specified date

19 Higher Risk Investments Penny Stocks- high risk stocks that typically sell for less than a $1 a share when they are first offered Often issued by start up companies Also companies that haven t established reliable growth patterns Difficult to find as they are not traded on the major markets or published Bond- A promise to pay a certain amount on a certain date, issued by a corporation or government for the purpose of borrowing money Often used to fund a particular project

20 Mutual Fund An investment in which people pool their money to by stocks, bonds, real estate, or other assets selected by professional managers Collection of assets is called a portfolio Allows a person to diversify.spreading money out among different types of investments Helps protect investor from major losses

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22 Load Vs. No Load Funds Load Funds- mutual funds that charge a commission every time shares are bought or sold With many stocks in a portfolio this could add up No-load Funds- mutual funds that do not require an up-front fee Buy directly from the fund company and not a broker

23 Other Types of Investments

24 Other Types of Investments Real Estate- Land and any houses or building that are on in Cabin, condo, ranch, land, house, etc. Collectables- items that appeal to collectors and investors Stamps, art, antiques, sports memorabilia

25 Company Sponsored Retirement Plans Pension- A retirement plan that is funded at least in part by an employer Vested- being eligible to receive a pension or other employer-contributed benefits, usually after working at a company for a certain number of years Profit-sharing plan- is an employer-funded program that allows employees to share in the company profits. The employer makes contributions to each employee s account base on the company s earnings

26 Company Sponsored Retirement Plans Stock-bonus plan- type of profit-sharing plan in which the employer rewards the employee with company stock instead of cash. At retirement, the employee can either sell the stock or keep it and use the dividends as income 401(k) plan- tax-deferred retirement plan funded by regular contributions from the employee Sometimes an employer will contribute matching funds up to a certain percent

27 Other types of retirement plans Individual Retirement Account (IRA) A personal retirement plan that permits individuals to set aside money; with the contributions and earnings not taxed until the funds are withdrawn. Roth IRA A personal retirement plan in which original contributions are not tax-deductable, but the earnings are tax-free

28 Who to turn to for advice? Broker- A person who works for a brokerage firm and who buys and sells stocks, and bonds for clients Full-service broker- will also provide clients with information and advice on how to invest Discount broker- works mainly with investors who need little advice. Financial Advisor- a person with knowledge to give financial advice based on the clients goals, income, debts and assets, stage in life, and other factors

29 Websites and Publications Annual Report- a detailed report about the financial condition of a company, published each year. Some can be found online at the Security and Exchange Commission (SEC) Other online resources (just examples it is suggested that you research and find a resource you are comfortable with)

30 Do your research Invest wisely Good Luck!!