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Stock Market 101

Stock Market 101. Chapter 9. Common and Preferred Stocks. Securities – all of the investments (stocks , bonds, mutual funds, options, and commodities) that are bought and sold on the stock market. Why Corporations Issue Common Stock- r aise money to start up their business.

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Stock Market 101

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  1. Stock Market 101 Chapter 9

  2. Common and Preferred Stocks • Securities – all of the investments (stocks, bonds, mutual funds, options, and commodities) that are bought and sold on the stock market. • Why Corporations Issue Common Stock- raise money to start up their business. • Private Corporation – Company that issues stock to a small group of people. • Public Corp – Company that sells shares openly on the stock market, where anyone can buy them. • AT&T, Procter & Gamble, General Electric

  3. A Form of Equity • Corporations do not have to repay the money a stockholder pays for stock • For a stockholder to make money on the stock, he or she sells to another investor • Price of stock is set by how much buyer is willing to pay • As demand for a company’s stock increases or decreases, the price goes up and down • News on expected sales revenues, earnings, company expansions, or mergers with other companies can make demand go up or down

  4. Why Investors Purchase Common Stock • Income from Dividends- with a cash dividend, each common stockholder receives an equal share. • Appreciation of Stock Value • Increased value from Stock Splits – A stock split occurs when the shares of a stock owned by existing stockholders are divided into a larger number of shares. • Voting rights and control of the company– one vote for each share they own

  5. Best Buy Stock Split • 3-for-2 Stock Split on August 3, 2005 • one additional share for every two owned • August 3 - $51.88 • September 21 - $41.00 • April 6 - $58.72 msn.com

  6. Preferred Stock • Par Value – an assigned dollar value that is printed on a stock certificate • Why Corps. Issue Preferred Stock • Used as a way to attract more conservative investors • Why Investors purchase Preferred Stock • Safer investment than the common stock

  7. Preferred Stock • Cumulative Preferred Stock – A stock whose unpaid dividends builds up and must be paid before any payment to common shareholders. • Convertible Preferred Stock – Stock that can be exchanged for a specific number of shares of common stock. • Participation Feature – Allows stockholders to share in the corporation’s earnings with common stockholders.

  8. Types of Stock Investments • Blue-Chip Stock – Generally considered a safe investment that attracts conservative investors • Examples: General Electric, AT&T, Kelloggs • Income Stocks – pays higher than average dividends compared to other stock issues. • Examples: Dow Chemical, Stock issued by Gas and Electric Companies • Growth Stock – issued by a corporation whose potential earnings may be higher than the average earnings predicted for all the corporations in the country. Generally, no dividends. • Example: Google in 2004 $100 per share

  9. Types of Stock Investments (cont.) • Cyclical Stock – has a market value that tends to reflect the state of the economy. • Examples: Ford Motor, Centex Homes • Defensive Stock – A stock that remains stable during declines in the economy. • Example: P&G; IBM, Smuckers • Large-cap Stock – is a stock from a corporation that has issued a large amount of Capitalization • Capitalization – the total amount of stocks and bonds issued by a corp.

  10. Type of Stock Investments (cont.) • Small-cap Stock – A stock issued by a company with a capitalization of $500mm or less. • Penny Stock- Are issued by new companies whose sales are very unsteady. Risky stocks.

  11. Sources for Evaluating Stocks • Internet • Yahoo - http://finance.yahoo.com/q?s=AXP • NewsPaper • Wall Street Journal

  12. Key Information on WSJ • YTD % Change – Reflects the stock price change for the calendar year to date. • 52wk (high/low) – Highest and lowest price during past 52 weeks. • Stock – name of company • Div- Projected annual dividend for next year based on last dividend. • YLD % - Percentage of return based on the dividend and current price of the stock. • PE Ratio- Price earnings ratio

  13. Factors that Influence the Price of Stock • Bull Market - A market condition that occurs when investors are optimistic about the economy to buy stocks. • Bear Market – A market condition that occurs when investors are pessimistic about the economy. • Current Yield – The annual dividend of an investment divided by the current market value. • Current Yield = Annual Dividend/Current Market Value

  14. Numerical Measures of a Company • Total Return – Includes the annual dividend plus any increase or decrease in the original purchase price of the investment. • Current Return + Capital Gain = Total Return • Earnings Per Share – A corporations net, or after-tax earnings divided by the number of outstanding shares of common stock • EPS = Net Earnings/Common outstdg st

  15. Numerical Measures (cont.) • Price-Earnings Ratio (PE) – The price of one share of stock divided by the corporations earnings over the last 12 months. • This is a key factor used by both seasoned and beginning investors. • Price-Earnings = Market Price Per Share/Earnings per share

  16. Dividend Rate • The total expected dividend payments from an investment. • Expressed on an annualized basis plus any additional non-recurring dividends that may be received during that period.   • Calculated by multiplying the most recent periodic dividend payments by the number of periods in one year. • Example - an investment pays a dividend of $0.50 on a quarterly basis and pays an extra dividend of $0.12 per share because of a non-recurring event from which the company benefited. • The dividend rate is $2.12 ($0.50 x 4 + $0.12) per year.

  17. How the Stock Market Works • You open an account with E*Trade.  You send E*Trade a check for $1,000.  • E*Trade deposits the check into a trading account that is listed under your name.  You log onto E*Trade and place an order to buy 100 shares of a stock in Company A, which is currently trading at $5.  • E*Trade uses it's network to tell the Nasdaq and all of it's related networks that there is demand for 100 shares of Company A's stock.  • The Nasdaq finds someone who is willing to sell 100 shares of Company A and, instantaneously, they execute the trading of stock between you and the person selling the shares.  • The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you.  Basically, the clearinghouse will designate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares as yours. 

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