1) Rates of Return time to double (225)a. From 1950-2000 the average total return on the S&P500 was 13.7% per year. At that rate investors could double their money in 5-6 years.2) Dividend Yield compared to other investments (238)a. The Dividend Yield for stocks is significantly lower than the payout of a coupon from a bond. In recent years the gap has gotten smaller but with the coupon yield 2% higher than the Dividend yield.3) Common-Place Aspects to stocksa. A market where listed securities are traded regularly. These securities may be issued by corporations, governments, and other entities.b. Includes both a primary and a secondary market for securities.c. The securities trading is regulated, and the exchange does not trade in the securities but only regulates and facilitates this trading.d. The stock exchange has a specific location, whether this is a physical location or an online marketplace.e. Government recognition is needed for a stock exchange to operate, because this type of market is organized and plays a role in the economy of a country.f. A stock exchange is an indicator of economic development for a country, and this market acts as a financial barometer4) Rights offering (229)a. In a rights offering existing stockholders are given the first opportunity to buy the new issue. The rights offering gives them the right, but not the obligation to purchase more shares. b. Compared to public offering in which the entire public can purchase new shares of a company.5) Round Lot (Retail) (233)a. A round lot is 100 shares of stock or multiples of 100. Ex: 600 sharesb. An odd lot is a transaction involving fewer than 100 shares of stock. Ex: 60 sharesc. Selling 450 shares of stock is a combination on a round and an odd lot. d. Related to transaction costs, odd lots cost more than round lots. Coming to an odd-lot differential of 10-25 cents per share. 6) Par, book, market value (234)a. Par Value – refers to the stated or face value off the stock. This term is mainly used in accounting and means little to nothing about the value about the stock price.b. Book Value – Also does not have much value. Calculated by subtracting the firms liabilities and preferred stock from it’s assets. Our professor said it is what the stock value is worth to you. So it doesn’t mean anything c. Market Value – the prevailing market price of an issue. This is the only value Doug Smith said was important. It indicates how the market participants as a whole have assessed the value of the stock.7) Calculate dividend yield (238)a. Dividend Yield = Annual Dividends Received per Share Current Market Price of the StockDividend Payout Ratio = Dividends per shareEarnings Per Share8) Processes of Securities Analysis (255)a. The process of determining what the stock ought to be worth. b. Efficient market hypothesis - the market trades very close if not exact to its assumed value.i. No Security analysis is capable of identifying mispriced securities with a frequency greater than random chancec. See Top Down Analysis economic Analysis #189) Fundamental/Technical Analysis (256)a. Fundamental Analysis – looks at the financial condition and operating results off a specific company (liquidity of assets, its use of debt, earnings growth)b. Provides the basis for projecting a stocks future cash flows 10) Stock ownership definition/Average Return (226)a. Pros of stock Ownership i. Substantial return opportunities ii. They are easy to buy and sell and transaction costs are modestiii. Unit cost per share is usually within reach of most investors ($50-$60) b. Cons of Stock Ownershipi. Risk is the most significant, especially business and financial risk, purchasing power risk, market risk and event risk.ii. Which leads to another risk of wide swings on earnings and general performanceiii. Stocks sacrifice current income. Even though the dividend yield gap has caught up in the recent years it is still not on par with current income levels with bonds. 11) Time Value of Money Concepts (??) a. Basically this is based on the concept that a dollar that you have today is worth more than the expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. For instance, you can invest your dollar for one year at a 6% annual interest rate and accumulate $1.06 at the end of the year. You can say that the future value of the dollar is $1.06 given a 6% interest rate and a one-year period. It follows that the present value of the $1.06 you expect to receive in one year is only $1.b. This relates to stocks and dividends through reinvestment plans and the time value of money inquired with bond payouts. We will touch more on this later.12) Cash flows from stocks (238)a. Most firms pay cash dividends. A nice factor with dividends is that they tend to increase over time as the company grows (3%-5%) The way of assessing the amount off dividends received is through the dividend yield which we explained above. 13) Calculate Share Split (231)a. Market Price/ratio of the splitb. Ex: Market Price $50 ratio 3-for-2 spliti. 50/(3/2) = $33.3314) Repurchased Stock/Types of stock classifications (239-246)a. Dividend Reinvestment plans – shareholders can have their cash dividends automatically reinvested into additional shares off the company’s common stock. (if a company is good enough to invest in, it is good enough to invest in again.b. This only differs from Stock dividends, which automatically turn your dividends into additional shares, by giving you the choice whether or not you would like to reinvest.c. Blue Chip Stocks – large established firmsd. Income Stocks – have a record off paying high dividendse. Growth Stocks – stocks that are expected to keep growing in amount and earningsf. Tech stocks – any stock in a technology based company (apple, Google)g. Speculative Stocks – lack the records of success but have the potential for a substantial price appreciation. (risky)h. Cyclical Stocks – stocks whose earnings are closely linked the general level of business activity (does well when economy is in recovery, does poorly when economy falling)i. Defensive Stocks- stocks whose prices remain stable through recession and boomsj. Mid-Cap Stocks – 2 billion – 10 billion – safety of big stable companies with prices of smaller companiesk. Small Cap stocks – less than 2 billion – can have solid financials but are just
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