Chapter 12 Buying and Selling Investments

1. Chapter 12 Buying and Selling Investments

2. What Are Sources of Investing Information? • Magazines • Newspapers • Investor newsletters • Annual reports • Company’s report to investors about the financial position of the company. • Prospectus • Legal document that offers securities or mutual fund shares for sale and includes detailed description of the securities. • Internet 12-1 Researching Investments and Markets Slide 2

3. Key Figures for Comparing Firms • Stock Price: The amount investors are willing to pay for a share of ownership in the company • Number of Employees: Increases or decreases in number of employees can reflect growth or downsizing • Market Cap: Total value of a company in the stock market (total shares outstanding times price per share). This figure, along with revenue, indicates size of company. • Revenue: The amount of money received from business activities. • Net Income: The amount of money after deducting all the business expenses. • Profit Margin: The net income divided by revenue for the same period. “%” Slide 3

4. Key Figures for Comparing Firms • P/E Ratio: the price-earnings ratio compares the selling price of a company's common stock to the annual profits per share. Fast-growing or high risk companies may have higher P/E ratios than slow growing or low risk companies. This ratio is an important measure of the stocks value. • Current Ratio: measure of the company's ability to pay its current debts from current assets. It indicates a company's liquidity and financial strength. The current ratio is calculated by dividing the total assets by the total current liabilities. Slide 4

5. What Professional Advice Is Available? • A stockbroker buys and sells securities on behalf of others. • Full-service brokers: qualified stockbroker who provides advice about what securities to buy and sell • Edward Jones • Discount Broker: qualified stockbroker who buys and sells securities at a reduced commission but offers no advice. • Fidelity and E*Trade • Online Brokers: Online services offered by brokerage firms. • TD Ameritrade 12-1 Researching Investments and Markets Slide 5

6. What Professional Advice Is Available? • A financial planner helps people make investment decisions to meet goals. • Certified Financial Planner (CFP): has taken coursework and has passed an exam, indicating an expertise in developing financial plans for individuals. • Banks and credit unions sell securities that they endorse. 12-1 Researching Investments and Markets Slide 6

7. How Are Financial Markets Designed? • Securities can be traded in the primary or secondary markets. • The primary market is where new issues of securities are sold. • IPO Offerings • Visa holds the record for the highest IPO after raising $18 billion in its debut in 2008. • The secondary market is where previously issued securities are sold. 12-1 Researching Investments and Markets Slide 7

8. How Are Financial Markets Designed? • Securities exchanges are places for brokers to buy and sell securities for their clients. • NYSE is one of the largest security exchanges in the world • In an auction market, a stock is sold to the highest bidder. Both buyers and sellers compete with others for the best price. • Over-the-counter market is a network of dealers and brokers who buy and sell securities not listed on an exchange. • NASDAQ is an electronic marketplace for over-the counter stocks. • This system allows investors to buy and sell stock through their brokers. 12-1 Researching Investments and Markets Slide 8

9. How Are Financial Markets Designed? • Direct investing involves buying securities directly from a corporation. • No broker necessary • Buying US government savings bonds is a form of direct investing • Reinvesting involves getting stock dividends instead of cash dividends. • Stock dividend: dividend paid in the form of new shares of stock. • A 10% stock dividend issues 10 new shares of stock for every 100 shares held. • By acquiring more shares, investors can continue to grow their wealth • Stock split: occurs when a company issues more stock to current shareholders in some proportion to the stock they already own. • Helps keep share prices low for investors. 12-1 Researching Investments and Markets Slide 9

10. Focus On . . . Full Service or Discount Brokers? • Discount brokers: • Charge a smaller fee • May charge extra for information • Full service brokers: • Give sound investment advice for a higher fee • When making a choice, consider: services, fees, location of nearest brokerage office, minimum deposits, etc. 12-1 Researching Investments and Markets Slide 10

11. How Are Stocks Bought and Sold? 1. Set up an account. • Choose your venue (full-service broker, discount broker, bank, etc.) • Provide identification. • Access your account online. • Make minimum or regular monthly deposit. 12-2 Buying and Selling Securities Slide 11

12. How Are Stocks Bought and Sold? 2. Place transactions. • A market order is a request to buy or sell a stock at the current market price. • A limit order is a request to buy or sell a stock at a specific price. • A stop order is a request to sell a stock when it reaches a certain price. • A discretionary order allows the broker to buy or sell a stock to get the best price. 12-2 Buying and Selling Securities Slide 12

13. How Do You Know When to Buy or Sell? • Set aside cash so you can buy and sell stock when you need to. • If you don’t have cash, you can use credit. • Selling short involves selling stock that has been borrowed from a broker and replacing it later. • Buying on margin involves borrowing money from your broker to buy stock. 12-2 Buying and Selling Securities Slide 13

14. Buying Patterns • Buy and hold is a plan to purchase and keep stock for the long term. • Stock turning is making regular and systematic changes in stock ownership based on trends in the economy. • Watch-and-wait investing involves making a comparative analysis of securities periodically. 12-2 Buying and Selling Securities Slide 14

15. Managing Costs • Type of Transaction • On the trading floor, stocks are traded in round lots or odd lots • Round lots: exactly 100 shares or multiples of 100 shares • Odd lots: fewer than 100 shares of stock • Thus, you can manage your costs of buying and selling by purchasing in round lots and avoiding the odd lot additional fee. • Using Discount Brokers • Using discount brokers will help reduce costs • However, buying in odd lots or trading an amount less than $1,000 usually increases the fees.

16. Success Skills Reading the Stock Listings To make wise investment choices, track the progress of your investments in stock listings. 12-2 Buying and Selling Securities Slide 16

17. What Regulatory Agencies Help Consumers? • Banks, brokerage companies, and other financial businesses are controlled by agencies created by Congress. • Agencies provide oversight to ensure that investors’ rights are protected. 12-3 Regulatory Agencies and Laws Slide 17

18. What Regulatory Agencies Help Consumers? • Federal Deposit Insurance Corporation: created in 1933 as a response to the stock market crash of 1929. • Promotes public confidence in the banking system • Supervises banks and other financial institutions to maintain stable and sound banking system • National Credit Union Administration • Similar to FDIC but for credit unions • Commodity Futures Trading Commission: government agency that regulates commodity, futures, and options markets in the U.S. • Protects investors against manipulation, abusive trade actions, and fraud 12-3 Regulatory Agencies and Laws Slide 18

19. What Regulatory Agencies Help Consumers? • Securities and Exchange Commission: primary overseer and regulator of the U.S. securities markets. • Maintains fair and orderly markets and promote business growth. • Department of the Treasury: government agency responsible for economic growth of the United States. • Maintains strong economy that creates growth and job opportunities • Internal Revenue Service: helps taxpayers understand and meet their tax responsibilities. • Seeks to ensure that those who owe taxes pay them • The Fed: central bank of the United States • Sets monetary policy • Provides financial services to the U.S. government, financial institutions, and the public • Supervising and regulating the banking system • Keeps the country’s financial systems and markets stable 12-3 Regulatory Agencies and Laws Slide 19

20. What Are Financial Reform Laws? • Sarbanes-Oxley (SOX) sets standards for public companies and accounting firms for the reporting of finances. • Created in response to financial scandals at large companies. • Requires improved financial reporting, audits, and accounting services. 12-3 Regulatory Agencies and Laws Slide 20

21. Dodd-Frank Wall Street Reform • Wall Street Reform Act aims tocreate and maintain a stable financial system. • New consumer agency: agency sets rules to prevent unfair practices related to consumer loans and credit cards • Credit scores: allows consumers to get one free credit report a year. • Interchange fees: cracks down on debit card “swipe fees” that retailers pay to banks when their customers buy products and services using debit cards • Liar loans: lenders are now required to document borrowers income • Part of the collapse was due to mortgages being made to those who could not afford the payments • Income was undocumented 12-3 Regulatory Agencies and Laws Slide 21

22. Dodd-Frank Wall Street Reform • Mortgage help: allows unemployed homeowners with good credit to take out low-interest loans to help them avoid foreclosure. • New oversight: new ten-member oversight council consisting of financial regulators that will monitor financial firms and the financial system for problems • FDIC takeovers: FDIC new power to take over and liquidate giant financial firms in the same way it takes over banks whose failure would jeopardize the financial system. 12-3 Regulatory Agencies and Laws Slide 22