Chapter 12 INVESTING IN STOCKS

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1 Chapter 12 INVESTING IN STOCKS

2 CHAPTER 12 WHAT WE WILL LEARN Characteristics of Stock Classifications of Stock Investments Determining a Stock s Worth Calculating Stock Return on Investment (ROI) The Securities Market Bull versus Bear Markets Stock Indexes in the U.S.

3 CHARACTERISTICS OF STOCK Terms Stockholders Owners of the corporation Anyone can buy stock in a publically traded company Dividends Part of corporation s profits paid out to stockholders Capital Gains Increase in value of stock above the initial purchase price Example: Buy a stock for $20/share and its value increases to $30/share (capital gain is $10/share) Common vs. Preferred Common Stock May pay a dividend (not all do) Stockholders have voting rights Preferred Stock Pays a fixed dividend Carries no voting rights Less risky than common stock (paid before common stockholders)

4 CLASSIFYING STOCK INVESTMENTS Income vs. Growth Income Stocks: consistently pay high dividends Growth Stocks: reinvest profits to grow company (don t pay dividends) Less-established vs. Blue Chip Less-established stocks: young, smaller companies Blue Chip stocks: large, established corporations with solid record of profitability Defensive vs. Cyclical Defensive: stock remains stable and pays dividends even during down economic cycles Cyclical: do well during stable or growing conditions, but decline during down cycles (recessions)

5 DETERMINING A STOCK S WORTH Par Value Stock Value Assigned value on stock certificate Market Value Current price for which stock is bought and sold Can go up or down (changes constantly) Stock Price Factors Affecting Price 1. The Company (reputation) 2. Interest Rates (if low, people invest more in stocks) 3. The Market (general conditions affecting company s products or services) 4. Earnings Per Share (measure of company s profitability)

6 DETERMINING A STOCK S WORTH Return on Investment (ROI) Profit earned as a % of total cost of buying stock Profit earned = dividends + increase in stock value Total cost = (# of shares purchased *purchase price) + commissions paid to stockbroker to buy stock Profit earned / Total cost = ROI State ROI as a % (so convert decimal to %)

7 DETERMINING A STOCK S WORTH Computing a Stock s ROI Example Current stock price: $24/share Dividends received during year: $1/share Purchase price of stock: $22/share Commission/fee paid: $19 Number of shares owned/purchased: 100 Profit Earned: Computation $24-$22 = $2/share * 100 = $200 + Dividends (100 shares * $1) = $100 Profit Earned = $300 Total Cost: (100 shares * $22) + $19 = Total Cost = $2,219 ROI $300 / $2,219 = ROI = 13.5%

8 DETERMINING A STOCK S WORTH Joe Jab purchased 300 shares of ABC Co. stock for $20 per share. If the stock is worth $22 at the end of the year, how much has Joe Jab s investment increased? 300 shares * ($22-20) = 300 * $2 = $600 Based on the above information, if Joe Jab sells his shares of ABC Co. stock for $22, what was his return on investment (ROI)? $600/(300 * $20) = $600/$6,000 = 0.1 = 10%

9 THE SECURITIES MARKET Securities Exchange Place where brokers meet to buy and sell securities Largest in U.S. is the New York Stock Exchange (NYSE) Over-the-Counter Market Securities bought and sold through brokers, but not through a stock exchange Brokers use a system called NASDAQ

10 BULL MARKET BEAR MARKET Characteristics: Long period of rising stock prices General feeling of investor optimism High level of confidence in the economy Last longer than Bear Market Characteristics: Prolonged period of falling stock prices General feeling of investor pessimism Investors negative about the overall economy Much shorter than Bull Market BULL VS. BEAR MARKET

11 STOCK INDEXES Dow Jones Industrial Average (Dow) Tracks 30 major stocks on New York Stock Exchange Examples: AT&T, Caterpillar, Coca Cola, Home Depot, Disney, Wal-Mart, Microsoft Standard and Poor s 500 (S & P 500) Tracks 500 stocks from various industries NASDAQ Composite Index (NASDAQ)