What is Stock Spin Off

1. Dhanashri Academy Common Stock Investments

2. Key Topics • Key topics include: • long-term perspective; • advantages and disadvantages; • characteristics, new issues, stock quotations and transaction costs; • measures of common stock value; • dividends; • different kinds of common stock; and • uses and strategies of common stock investing.

3. Common Stock • Represents ownership in a corporation and allows investors to participate in the profits • Stocks offer investors the opportunity to shape an investment program to their individual needs

4. Stock Returns • Stock returns come mainly from capital appreciation • Stock market returns have averaged about 12% per year over the past 50 years, but over 18% during the past decade

5. Advantages: Common Stock • Potential for high returns; no upper limits. • May provide current income return from dividends. • Shares are highly liquid and easily transferred. • Transaction costs are relatively low; on-line trades can be very cheap. • Low unit prices relative to other securities.

6. Disadvantages: Common Stock • Earnings and performance are subject to wide swings. • Selection of common stocks is complex. • Current income is relatively low, compared to bonds.

7. Publicly Traded Stocks • Public offering • an offering to sell to the investing public a set number of shares of a firm's stock at a specified price • Rights offering • an offering of a new issue of stock to existing shareholders, who may purchase new shares in proportion to their current ownership position

8. Publicly Traded Stocks • Stock spin-off • a conversion of one of a firm's subsidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders • Stock splits • a maneuver in which a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share

9. Publicly Traded Stocks • Treasury stock • stock that has been sold and subsequently repurchased by the issuing firm • Classified common stock • Stock issued by a company in different classes, each of which offers different privileges and benefits to its holders

10. Buying and Selling Stocks • The investor must be familiar with stock quotes • The investor must also consider transaction costs

11. Stock Quotes • NYSE – New York Stock Exchange • AMEX – American Stock Exchange • NASDAQ • Published in a twelve-column format

12. Column Titles • 52 weeks Hi • highest price within past year, adjusted for stock splits if any • 52 weeks Lo • lowest price w/n past year • Stock • name of company

13. Column Titles (2 of 5) • Sym • ticker symbol; 1-3 characters on NYSE and AMEX; 4-5 on NASDAQ. • Div • annual dividend

14. Column Titles • Yld % • dividend yield based on current annual dividend divided by market price PE - price-earnings ratio based on most recent four quarters of earnings • Vol 100s • number of shares traded yesterday (in 100s)

15. Column Titles • Hi • highest price at which stock traded yesterday • Lo • lowest price yesterday Close - closing price yesterday

16. Column Titles • Close • closing price yesterday • Net Chg • change in price from close of previous day

17. Transaction Costs • average 1-5% of value of transaction when using a full-service broker • Odd-lot trades (less than 100 shares) carry an added cost called odd-lot differential

18. Transaction Costs (continued) • Discount brokers can save an investor up to 70% on commission • On-line trades can now cost less than $ 10 per trade

19. Measures of Value • Par value • the stated or face value (meaningless for investment purposes) • Book value • the amount of shareholder equity in a company; equals the amount of the firm's assets minus liabilities and preferred stock

20. Measures of Value (continued) • Market value • the prevailing price of a security. • Investment value • the amount that investors believe a security should be trading for, or what they think it's worth.

21. Dividends and Earnings per Share (EPS) • The directors make the dividend decisions based on several factors. • Earnings per share (EPS) represents the amount that is earned per share EPS = (net profit after taxes - pfd dividends) # shares outstanding

22. Dividends and Earnings per Share (EPS) • Dividends are paid out of earnings, but do not have to be paid even when the firm is profitable • Generally, however, higher EPS lead to higher dividends

23. Dividends (Important dates) • Record date • date on which an investor must be a registered shareholder to be entitled to receive a dividend • Ex-dividend date • 3 business days prior to the date of record; determines if one is an official shareholder and thus eligible to receive a declared dividend • Payment date • the actual date on which the company pays the dividend

24. Cash Dividends and the Dividend Yield • Dividends are normally paid in cash, although stock dividends are also common. • Cash dividends are current income, which can be expressed as the dividend yield. • Dividend yield = annual dividend per share market price per share

25. Dividend Payout Ratio (DPR) • One measure of stability of the cash dividend is the dividend payout ratio (DPR). • DPR = dividend per share / current market price per share. • A high DPR could suggest difficulty in paying future dividends.

26. Dividend Reinvestment Plans and Stock Dividends • Dividend reinvestment plans (DRIPs) • plans in which shareholders have cash dividends automatically reinvested into additional shares. • Stock dividend • A dividend payment in the form of additional shares of stock.

27. Market Classifications of Common Stock • Blue chip stocks • financially strong, high quality stocks with long and stable records of earnings and dividends. • Income stocks • Have long and sustained records of paying higher-than-average dividends. • Growth stocks • experience high rates of growth in operations and earnings.

28. Market Classifications of Common Stock • Speculative stocks • offer the potential for substantial price appreciation, usually because of some special situation, such as new management or the introduction of a promising new product. • Cyclical stocks • Stocks whose earnings and overall market performance are closely linked to the general state of the economy.

29. Market Classifications of Common Stock • Defensive stocks • tend to hold their own, and even do well, when the economy starts to falter. • Mid-cap stocks • medium-sized stocks, generally with market value of less than $3-4 billion, but more than $750 million. • Small-cap stocks • have market value of less than $750 million, and may offer above-average returns.

30. Foreign Stocks • Foreign equity markets • outperform US markets in most years • Investors can buy foreign stocks directly • Has many logistical problems • American Depository Receipts (ADRs) • Backed by foreign securities held by US banks

31. Foreign Stocks • Both direct purchase and ADRs • have usual risks associated with common stocks, plus the currency exchange rate risk that drastically can affect total return. • Total return in US$ = dividends + cap gains (losses) + (or) - changes in FOREX rates.

32. Investment Strategies • Investment strategies can be employed to satisfy one of three basic investment needs: • warehouse of value • accumulation of capital • and/or as a source of income

33. Buy-and-Hold Strategy and The High-Income Approach • The most basic strategy is the buy-and-hold. • High-quality stocks are selected and held for extended periods; a strategy popular with value-oriented investors. • The high-income approach • uses common stocks for current income. Since dividends mostly increase through time, the level of current income increases as well.

34. Quality Long-Term Growth and Aggressive Stock Management • Quality long-term growth • a less conservative strategy. This strategy relies on capital gains as the primary source of return. • Aggressive stock management • uses quality issues to seek attractive rates of return in a fully managed portfolio. • has substantial risk and requires a substantial amount of investor time.

35. Speculation and Short-Term Trading • Speculation and short-term trading • the highest risk strategy. • investor seeks returns from capital gains while holding the stock only a short period of time.

36. Using Investment Strategies • The first three strategies go well with the objective to use stocks as a warehouse of value • All five could be used to accumulate capital • The high-income strategy fits best with the objective of using stocks as a source of income

37. Popular Investment Strategies • Some Popular Investment Strategies Include: • Growth Investing, which is investing in stocks with above average forecasts of earnings growth and high price/earnings ratios in expectation of higher returns. • Value Investing, which is investing in stock of companies that are out of favor with the market for some reason, as reflected by low price/earnings ratios and low prices compared to their fundamentals. • Sector Investing, which is an investing style based on the premise that certain industry sectors perform better during specific stages of the economic cycle. • Momentum Investing, which is an investing style that focuses on using relative stock price movement to determine when to buy and sell.

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