Slide 1Investing in SecuritiesBeginning to Invest in StocksSlide 4Why Do Investors Purchase Common Stock?When Should You Sell a Stock?Preferred StockFeatures of Preferred StockClassification of Stock InvestmentsSlide 10Slide 11Slide 12Internet Stock InformationStock Advisory ServicesHow to Read the Newspaper Financial SectionNumeric Measures That Influence InvestmentNumeric Values That Influence InvestmentSlide 18Slide 19Investment TheoriesSlide 21Slide 22Buying and Selling StocksSecurities ExchangesBrokerage Firms and Account ExecutivesStock TransactionsSlide 27Who Regulates the Securities Markets?Online ActivityLong-Term and Short-Term Investment StrategiesChapter 14Investing in StocksInvesting in StocksMcGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.Investing in Securities•Securities include a broad range of investments.Stocks.Bonds.Mutual funds.Options.Commodities.•The focus in this chapter is on investing in stocks.14-2Beginning to Invest in Stocks•Good investors know something about the company before they invest in the company’s stock.•Gather information to evaluate a potential investment in a stock.•Learn what the information you gather means.Are sales increasing?Are revenues increasing over time?Are earnings per share increasing over time?•There are periods where stocks decline in value.•The key to success is to allow investments to work for you over the long-term.14-3•To raise money to expand a business.•They don’t have to repay the money a stockholder pays for stock. •Dividends are not mandatory. Most corporations distribute 30-70% of their earnings to stockholders.•In return for investing in the company, stockholders have voting rights. Why Corporations Issue Common Stock14-4Why Do Investors Purchase Common Stock?•They can make money in three ways.Income from dividends in the form of cash or additional stock.Dollar appreciationof stock value.Possible increased value from stock splits.14-5When Should You Sell a Stock?•Follow the value of the stock. Do you have a certain price at which you will sell?•Watch the company’s financials - are profits going up or down? If their profits are well below the industry average it may be time to sell.•Track the firm’s product line. Are they state-of-the-art or becoming obsolete?•Monitor economic developments. For example, will people buy cars if interest rates or unemployment rates are high?•Be patient. Allow time for a good stock to increase in value before you sell.14-6Preferred Stock•Investors in preferred stock receive cash dividends before common stock holders are paid any cash dividends.•The dividend amount is either a stated amount of money for each share of preferred stock, or a percentage of the par value.•Par value is an assigned dollar value that is printed on a stock certificate.•You are an owner of the stock but have a known rate of return. Shares are safer than common stock because the dividends are more secure.14-7Features of Preferred Stock•Cumulative feature.Unpaid cash dividends accumulate and must be paid before any cash dividends are paid to the common stock holders.•Conversion feature.Can be traded for shares of common stock in the same company.14-8Classification of Stock Investments•Blue chip stock.Generally attracts conservative investors. Strongest and most respected companies, such as Kellogg or General Electric.•Income stock.Pays higher than average dividends from a steady source of income, such as a utility stock.14-9Classification of Stock Investments•Growth stocks.Earn profits above the average profits of all firms in the economy.Should have expanding product lines, research and development to develop new products.Are their facilities state-of-the-art, and are they expanding into international markets?Less than 30% of profits are paid out as dividends, with rest reinvested in the company. Stock value, and price, should go up.(continued)14-10Classification of Stock Investments•Cyclical stock.Follows the business cycle of advances and declines in the economy.ex. automobiles, heavy manufacturing, paper, and steel.•Defensive stock.Remains stable during declines in the economy, and have a history of stable earnings. Kellogg, Procter and Gamble, and utility stocks are examples.(continued)14-11Classification of Stock Investments•Large cap stocksIssued by a corporation that has a large amount of stock outstanding and a large amount of capitalization (5 billion +).•Mid cap stocksIssued by a corporation that has capitalization between $1 billion and $5 billion.•Small cap stocks.Company has capitalization of $500 million or less.•Penny stocksNew or erratic companies whose stock typically sells for less than $1 per share. Speculative.(continued)14-12Internet Stock Information•A Company’s home page has more up-to-date information than their printed materials.Annual report, earnings, and other financial factors.•http://finance.yahoo.com allows you to conduct research on a company, and provides a stock screener to help you choose investments.•www.standardpoor.com•www.morningstar.com•www.valueline.com14-13Stock Advisory Services•Prepare printed materials that are a good supplement to information in newspapers and the Internet.•Charge a fee.•Hundreds to choose from.Standard and Poor’s reports.Value Line.Mergent’s Handbook of Common Stock.•As an investor, your job is to interpret the information provided.14-14How to Read the Newspaper Financial Section•You will see stock quotes in newspapers such as The Wall Street Journal.•52 week high and low price.•The name of the company, and ticker symbol.•Projected annual dividend and yield percentage.•Price-earnings ratio.•Number of shares traded during the day.•The high and low price of the day.•The price paid in the close transaction of the day.•The net change from the day before.14-15Numeric Measures That Influence Investment•Corporate earnings play a large part in the increase or decrease in value of a stock.•Earnings per share are the corporation’s after-tax earnings divided by the number of outstanding shares of common stock. An increase in earnings is generally a healthy sign.•Price-earnings (PE) ratio.Price of one share of stock divided by the earnings per share of stock over the last 12