12 07 2013 Chapter 11 Common Stocks What stocks have to offer other investors Residual owners stockholders claim is subordinate to the claims of o No gurantee that they will receive any return Putting Stock Price Behavior in Perspective o 1982 2000 Longest bull market From Stock Prices to Stock Returns o S P500 Measures overall stock market 500 companies o Big returns come from capital gains o Rate of return over time generally positive o Many risks o 13 14 is good returns 16 18 amazing but probably high risks 6 8 too low A Real Estate Bubble goes Bust and so Does the Market o Standard and Poor s Case Shiller Home Price index measures average value of a single family home May 2006 Peaked at 206 170 2009 decreased 32 Pro and Cons of Stock Ownership o Advantages Large Returns Protection from inflation Liquidity Low transaction costs Information Affordable Less than 50 a share Risk Hard to measure value stocks Sacrifice in current income o Disadvantages Basic Characteristics of Common Stock Equity capital title for stocks because they represent an equity position Common stock doesn t mature Common Stocks as a Corporate security small or family owned o 2009 Total traded stocks 12 trillion o Issuing New Shares o Most corporations issue stock but do not trade because too Public offering company offers public certain amount of Existing shareholders that sell shares of a company get stocks at certain price the money to themselves Rights offering existing shareholders given first opportunity to purchase new shares Proportional so if stockholder owns 1 curenntly when 10 000 new shares are made they have right to 1 100 shares o Stock Spin offs When company gets rid off one of its divisions Builds division as separate company and sells off to stockholders instead of another firm Why Too diversified No longer good fit o Stock splits Firm announces that it will increase the number of shares by exchange a specific number of new shares for each existing Ex 2 for 1 2 new for 1 old Why Enhance stocks trading appeal by lowering market price o Treasury Stock Reduce stocks by repurchasing them Do it when stocks are undervalued Purchase on open market like everyone else Treasury stock stocks purchased by issuing firm Later use for mergers and acquisitions paying stock dividends o Classified common stock Give owners different benefits Ford Motor Company Class A Class B Publicly owned 1 vote per share Owned by Ford Family trusts or corporations 40 absolute voting rights Buying and Selling Stocks o Reading the Quotes Vital to information system Wall Street Journal lots of info o Transaction Costs Round lot 100 Odd lot ex 75 150 1 round and odd lot Transaction cost Transfer fees and taxes paid by seller Brokerage fee Higher fees for odd lot dealer Odd lot differential 10 25 cents per share Common Stock Values o Par value stated face value of a stock Useless Stocks today are no par or low par 1 penny o Book value amount of stockholders equity capital in the firm Preferred stock is not an asset Market prices are normally greater than book values o Market value prevailing market price of an issue Market capitalization Is the market value of firm is market price x of shares issued o Investment value worth investors place on stocks Most important Determining price of stock requires analysis of returns Common Stock Dividends and risks 2008 trillion in dividends paid by US corporations Dividends more popular now Certain cash flow Federal tax laws have aided in improving dividends compared to capital gains o Both at maximum 15 rate The Dividend decision o Quarterly basis o Corporate vs Market Factors Corporate factors on paying dividends Analyze Firm earnings Earnings per share report of annual earnings of a firm EPS Net profit after taxes Preferred dividends of shares of common stocks Growth prospects Market effects and responses If firm keeps money it better use it well Dividend expectations o Some Important Dates Date of record date on which investor must be registered shareholder of firm to be entitled to dividend Holders of record shareholders receiving dividends Payment date Week or two after date of record and is date company will mail checks to holders of record Ex dividend date dictate whether you are official shareholder and eligible to receive dividend 3 days before and including date of record Jan 16 to Jan 18 If you sell stock after ex dividend date you still receive dividend Types of Dividends o Cash dividend Most common Increase over time 3 5 Dividend yield assesses amount of dividends received DY annual dividends received per share Current market price Dividend payout ratio portion of earnings per share paid out as dividends DPR Dividends per share 60 70 DPR not good Earnings per share 2003 dividends no longer taxed as normal income 15 or less now o Stock dividend Paid in additional shares of stock No real value 10 stock dividend will only result in decline of 10 of stocks share price Not taxed Dividend Reinvestment Plans o DRIP corporate sponsored programs where shareholders can have cash dividends reinvested automatically into additional shares of company common stock o No brokerage commission o Partial participation available o Discounted stocks o Pay taxes Types and Uses of Common stock Types of Stocks o Blue chips issued by large well established firms that have o Income stocks long and sustained records of higher than impeccable financial credentials Cream of the crop Really good Low risk Decent growth and dividends average dividends Increases regularly Good dividends Disadvantage limited growth IR risk o Growth stocks experience or expected to experience high levels of growth 15 18 per year Average is 6 8 Little dividends Market risks People who get these want capital gains o Tech stocks technology sector of the market Popular now Traded on NASDAQ Growth speculative class High risks o Speculative stocks shares that lack sustained records of success but still offer potential price appreciation Uncertain and unstable earnings Little dividends High Risks o Cyclical stocks issued by companies whose earnings are linked to general level of business activity Move up and down with economy Companies related to business spending or big ticket consumer spending aka homes cars Must watch the economy o Defensive stocks stocks that remain stable or increase during low economic activity Public utilities staple companies Walmart o Mid cap stocks Small cap 2 billion Mid Cap 2 billion 10 billion Baby blue
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