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Chapter 31 Investing in Stocks

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Introduction to Business, Investing in Stocks Slide 2 of 52

Why It’s ImportantWhy It’s Important

Making good investment decisions helps you reach your financial goals.

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Investing in StocksInvesting in Stocks Investing is putting your money to use in order to make money on it.

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Investing in StocksInvesting in Stocks Stock is a share of ownership in a business.

One way a corporation raises money to start or to enlarge its business is by selling stock.

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Introduction to Business, Investing in Stocks Slide 5 of 52

Investing in StocksInvesting in Stocks When you buy stock, you receive a stock certificate indicating that you are now part owner of the company.

Sole proprietorships and partnerships don’t sell stock.

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Return on StocksReturn on Stocks The return on an investment, or yield, is the amount of money the investment earns.

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Types of ReturnTypes of Return One type of return is through the payment of dividends, which is a share of profits.

Dividends are usually paid quarterly.

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Types of ReturnTypes of Return Stockholders can also earn income on their stocks by selling their stock shares for more than they paid for them.

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Types of ReturnTypes of Return Selling stock for more than you paid for it is called a capital gain.

Selling stock for less than you paid for it is called a capital loss.

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Types of ReturnTypes of Return The government taxes the amount you make in dividends or in capital gains.

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Rate of ReturnRate of Return The rate of return on stocks is always expressed as a percent of the original investment and figured on an annual basis.

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Rate of ReturnRate of Return A single share of stock whose value increases from $50 to $55 in a year and pays a $5 dividend during the year has a 20 percent rate of return.

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Introduction to Business, Investing in Stocks Slide 13 of 52

Types of StocksTypes of Stocks Common stock is the primary form of ownership in a corporation.

For each share of common stock that you own, you get a vote in how to run the corporation.

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Types of StocksTypes of Stocks The Board of Directors is responsible for representing the interests of the stockholders in the running of the corporation.

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Types of StocksTypes of Stocks Preferred stock gives its holders certain privileges that common stockholders don’t have.

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Types of StocksTypes of Stocks If the company pays dividends, dividends on preferred stocks are paid before dividends on common stocks.

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Types of StocksTypes of Stocks If a company fails, preferred stockholders get a share of whatever assets are left after the company’s debts are paid before the common stockholders do.

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Types of StocksTypes of Stocks Preferred stockholders have limited voting privileges and so they play a smaller role in the company’s affairs.

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Graphic OrganizerTypes of StockTypes of Stock

Graphic OrganizerGraphic Organizer

• Dividend rate not fixed

Common StockCommon Stock Preferred StockPreferred StockBothBoth

• Voting rights

• Fixed dividend rate

• Dividends and claims paid first

• Limited voting rights

• Represent ownership

• No maturity date

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Introduction to Business, Investing in Stocks Slide 20 of 52

StockbrokersStockbrokers A broker is a person who acts as a go-between for buyers and sellers.

Brokers charge either a percent of the value of the stock or a set amount for each transaction as a fee for their services.

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Stock ExchangesStock Exchanges Most stocks are bought and sold through a trading market known as a stock exchange.

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Stock ExchangesStock Exchanges When people sell stocks through their stockbrokers, their wishes are sent to the broker’s representative on the stock exchange floor.

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Stock ExchangesStock Exchanges Only the stocks listed on an exchange can be traded.

To be listed on an exchange, a corporation must prove to the exchange that it meets the rules.

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Introduction to Business, Investing in Stocks Slide 24 of 52

Over-the-Counter MarketsOver-the-Counter Markets Many stocks not listed on a major exchange can be bought and sold through the National Association of Securities Dealers Automated Quotations (NASDAQ) market.

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Over-the-Counter MarketsOver-the-Counter Markets The NASDAQ is a system that quotes over-the-counter securities—that is, all investments bought and sold.

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Mutual FundsMutual Funds A mutual fund is a fund created by an investment company that raises money from many shareholders and invests it in a variety of stocks.

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Mutual FundsMutual Funds A mutual fund has much greater buying power because it has a greater amount of money available to invest.

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Mutual FundsMutual Funds Mutual funds are a way to limit your risk of investing in the stock market.

The risk is spread out because a mutual fund consists of stocks in many companies.

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Mutual FundsMutual Funds Many people prefer mutual funds because the professional managers of the mutual funds have more experience in selecting stocks than they do.

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Stock IndexesStock Indexes An index is a measuring system that tracks stock prices over the long run.

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Stock IndexesStock Indexes The two most common indexes are:

• The Dow Jones Industrial Average (DJIA)

• Standard & Poor’s (S&P)

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Levels of RiskLevels of Risk The two basic categories of stocks that offer different levels of risk are:

• Blue-chip• Speculative

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Blue-Chip StocksBlue-Chip Stocks Blue-chip stocks are stocks in large, well-established companies that have a good track record of profitability and success.

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Speculative StocksSpeculative Stocks Speculative stocks are stocks in relatively new firms that don’t have an established track record of success.

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Day TradingDay Trading Day trading means buying and selling stock, usually on the Internet, based on minute-by-minute changes in the price of the stock.

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Day TradingDay Trading Because online trading is so easy, it’s easy to buy too much stock and go quickly into debt.

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LiquidityLiquidity Liquidity refers to how easily an investment can be turned into cash.

Stocks are very liquid because they can be turned into cash quickly by selling them.

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Introduction to Business, Investing in Stocks Slide 38 of 52

Inflation RiskInflation Risk Inflation risk is whether the rate of return on an investment keeps up with the rate of inflation.

Your stock needs to go up in value to earn a return on your investment.