CSM 204 Chapter 14 LectureOutline of Previous LectureI. Establishing Investment GoalsII. Performing a Financial CheckupIII. Managing a Financial CrisisIV. Getting Money to InvestV. Factors Affecting Your Investment ChoiceVI. Components of RiskVII. More Factors Affecting Investment ChoicesVIII. Asset CategoriesIX. A Personal Plan for InvestingX. Your Role in the Investment ProcessXI. Sources of Investment InformationXII. Investor Services and NewslettersXIII. Quiz 3-1Outline of Current LectureI. Why Corporations Issue Common StockII. Making Investment DecisionsIII. Why Investors Purchase StocksIV. Preferred StockV. Classification of StocksVI. Evaluating a StockVII. Numerical Measures for StocksVIII. Investment TheoriesIX. Buying and Selling StockX. Brokerage FirmsXI. Stock TransactionsXII. Investment StrategiesXIII. Advantage of Investing in Common StockXIV. Disadvantages of Investing in Common StockXV. Quiz 3-2These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Current LectureChapter 14: Investing in StocksWhy Corporations Issue Common StockA form of equityTo raise money for start-up, on-going activities or expansionNo repayment requiredDividends are not mandatoryBut, they lose some control of the company through voting rightsMaking Investment DecisionsEvaluate each investmentAnalyze the firm’s financesTrack the firm’s product linesMonitor economic developmentsBe patientWhy Investors Purchase StocksIncome from dividendsAppreciation of stock valuePotential stock splitPreferred StockReceive dividends before common stock holdersSpecified dividendSafer than common stockCan be cumulativeMay be convertibleClassification of StocksBlue ChipA safe investment that generally attracts conservative investorsCoca ColaCyclicalA stocks that follows the business cycle of advances and declines in the economyCar CompaniesLeisure Travel CompaniesDefensive StockA stock that provides consistent dividends and stable earnings during declines in the economyBeer CompaniesGrowthA stock issued by a corporation that has the potential of earning profits above the average profits of all firms in the economyIncomeAn investment that pays higher-than-average dividendsConservativeLarge capA stock issued by a corporation that has a large market capitalization, in excess of $10 billionMidcapA stock issued by a corporation that has market capitalization of between $2 - $10 billionSmall CapA stock issued by a company that has a market capitalization of between $300 million - $2 billionMicro CapA stock issued by a company that has a market capitalization $300 million or lessSome companies are never micro capsFacebookNote that “Cap” = CapitalizationHow big is the company?How much is it worth?How many shares do they have outstanding?In general, the larger the cap, the less the stock is worthPenny StockA penny stock is often defined as a stock that sells for $1 or less per share or in some cases, less than $5 per shareEvaluating a StockInternetStock Advisory ServicesNews coverage and corporate newsBrokerage house informationNumerical Measures for StocksCorporate earningsProjected earningsEarnings per sharePrice earnings ratio (PE)2.00 earnings per share36.00 per share price36.00/2.00 = 18.00 PEYou want PE to be lower than the average and look like it is heading up in valueDividend payoutThe percentage of a firm’s earnings paid to stockholders in cashAnnual dividend amount/Earnings per shareDividend yieldAnnual dividend amount/Price per shareTotal returnA calculation that includes the annual dollar amount of dividends as well as any increase or decrease in the original purchase price of the investmentDividends + Capital GainBetaMeasure of volatility compared to the marketA stock that is exactly as volatile as the market has a beta of 1.0If a stock is more conservative than the market, it has a beta of less than 1.0If a stock is more aggressive than the market, it has a beta of more than 1.0Investment TheoriesFundamental AnalysisAn investment practice based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earningsTechnical AnalysisAn investment practice based on the assumption that a stock’s market value is determined by the forces of supply and demand in the stock market as a wholeEfficient Market TheoryAn investment theory based on the assumption that stock price movements are purely randomBuying and Selling StockPrimary marketInitial public offerings (IPO’s)Investment banksSecondary marketSecurities exchangesOver-the-counter marketTermsRound lot stocks100 sharesStock SplitA procedure in which the shares of stock owned by existing stockholders are divided into a larger number of sharesThis occurs when the price of stock has gotten too highReverse stock splitThis occurs when the stock has gotten too low in priceBrokerage FirmsAccount executive = stock brokerBrokerage firmsFull ServiceAdvice on stocks bonds and mutual fundsFully equipped to help you in anywayMore expensiveDiscount BrokersAdvice on bonds and mutual funds based off of ratings systemsWill trade buy and sell stocks for youOnlinePretty much need to know what you’re doingNo advice whatsoeverCommission chargesThere will always be commission chargesOrder SettlementStock TransactionsMarket orderOrder to buy or sell right now at the market priceLimitAn order to buy or sell but at a specific priceLooking for a bargainStop-loss (stop) orderOnly an order to sellPlace on your account for a specific account to sell if it dips down to a certain levelInvestment StrategiesLong-termBuy and holdHold for as long as it makes sense to hold this stockDollar cost averagingBuying the same dollar amount of stock in the same company every month- buying more when the price is low and less when the price is highDirect investment and DRIPsDividend Re Investment PlanBuying more stock with your dividendsShort-tem (high risk)Day tradingMargin buyingSelling shortOption tradingAdvantage of investing in common stockCash dividendsPrice appreciationHedge against inflationLow minimum investmentLimited liabilityLiquidityDisadvantages of Investing in Common StockCompany could failMarket volatilityUncertain yieldManagement time requiredRiskQuiz 3-21. True2. Secondary3. Cyclical4. enables management to bring a stock’s price into an “ideal” price range5.