1 Rates of Return Time to Double a Compound interest is an amazing thing and the Rule of 72 is a simple way to quickly estimate how long it will take your investment to double The only piece of information you need for this calculation is the annual rate of return While most investments don t have a fixed rate of return over a long period of time you can use an average estimate to get a pretty good idea b How to Use the Rule of 72 c To estimate how long it takes for your money to double simply divide 72 by the interest rate The result is how many years it will take for your money to double at that rate For example let s assume you can earn a 6 rate of return How long will it take 1 000 to grow into 2 000 d 72 6 percent 12 years e In this example if you invested 1 000 into an account that earned a flat 6 annual rate of return after 12 years your investment would be worth around 2 000 From 1950 2000 the average total return on the S P500 was 13 7 per year i At that rate investors could double their money in 5 6 years f 2 Dividend Yield Compared to Other Investments a Dividends are periodic payments to shareholders i By paying out dividends typically on a quarterly basis companies share with their stock holders some of the profits they ve earned b Capital gains Provide more a much bigger source of return than dividends at least over the long haul c Cash flow from dividends are far more certain than profits from capital gains d Dividends provide a nice cushion when the market stumbles e Recent changes in federal tax laws put dividends on the same plane as capital gains Both now are taxed at the same minimum 15 tax rate although this is sure to change soon f Usually firms pay dividends in the form of cash Occasionally they pay dividends by i issuing additional shares of stock called a stock dividend g More firms pay cash dividends than any other type of dividends h A nice by product of cash dividends is that they tend to increase over time as companies earnings grow i Average annual increase in dividends is around 3 5 ii Steadily increasing stream of dividends tend to shore up stock returns in soft markets stock i Method to assets the amount of dividends received is the Dividend Yield i Dividend Yield Annual Dividends Received per share Current Market price of the ii EX company that annually pays 2 per share in dividends to its stockholders and whose stock is trading at 40 has a dividends yield of 5 j The Dividend Yield for stocks is significantly lower than the payout of a coupon from a bond k Coupon yield 2 higher than the Dividend yield 3 Common Place Aspects to Stocks a Advantages to owning stock Stocks generally provide attractive highly competitive returns over the long haul i ii Stocks typically outperform bonds iii Stocks also provide investors protection from inflation because over time their returns exceed the inflation rate 1 By purchasing stocks investors gradually increase their purchasing power of iv Easy to buy and sell and the transaction costs are modest v Price and market information is widely disseminated in the news of financial media vi Unit cost of a share of stock is usually within reach of most investors money b Disadvantages Risk is most significant i ii All stocks possess elements of risk iii Earnings and general performance of stocks are subject to wide swings so it is difficult to value commons stocks and consistently select top performers iv Sacrifice current income c A market where listed securities are traded regularly These securities may be issued by corporations governments and other entities Includes both a primary and a secondary market for securities d e The securities trading is regulated and the exchange does not trade in the securities but f only regulates and facilitates this trading The stock exchange has a specific location whether this is a physical location or an online marketplace g 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 h A stock exchange is an indicator of economic development for a country and this market acts as a financial barometer 4 Rights Offering a A way for companies to issue new shares of stock b Rights Offering Existing stockholders are given the first opportunity to buy the new c issue In essence a stock right gives a share holder the right but not the obligation to purchase new shares of the company s stock in proportion to his or her current ownership position e d EX If a stockholder currently owns 1 of a firm s stock and the firm issues 10 000 additional shares the rights offering will give that shareholder the opportunity to purchase 1 100 shares of the new issue If the investor does not want to use the rights he or she can sell them to someone who does The net result of a rights offering is the same as that of a public offering The firm ends up with more equity in its capital structure and the number of shares outstanding increases f a Round Lot 100 shares of stock or multiples thereof b EX the sale of 400 shares of stock would be a round lot transaction c Odd Lot transaction involving fewer than 100 shares d EX trading of 250 shares would involve a combination of two round lots and one odd lot e An investor incurs certain transaction costs when buying or selling stock 5 Round Lot Retail f Higher fees are connected with the purchase or sale of odd lots which requires a specialist known as an odd lot dealer g This usually results in an odd lot differential of 10 to 25 cents per share which is tacked on to the normal commission charge driving up the costs of these small trades h The relatively high cost of an odd lot trade makes it better to deal in ROUND lots whenever possible 6 Par Book and Market Values a Par value refers to the stated or face value of a stock Except for accounting purposes it is relatively useless Type of Accounting Values for Firms i ii Par value is a throwback to the early days of corporate law when it was used as a basis for assessing the extent of a stockholders legal ability iii Because the term has little or no significance for investors many stockholders are issued as no par or low par stocks That is they may only have a value of a penny or two b Book value another accounting measure represents the amount of stock holders Commonly used in stock valuation equity in the firm i ii Book value indicates the amount of stockholder funds used to finance the firm iii Calculated by subtracting
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