Investing In Stocks Chapter 12

Personal FinanceFIN 235Investing In Stocks & BondsChapter 14Stocks (Common & Preferred)Common StockBasic form of corporate ownershipCommon stockholders have voting powerAmend the corporate charterApprove mergers and acquisitionsElect directorsRaise ne capital (debt and equity)Residual claim on income and assetsMotives for Purchasing Common StockReceive dividends (if paid)Participate in capital growthStocks (Common & Preferred)Preferred StockPreferred claim on dividendsMay have one of several features;CumulativeParticipatingConvertibleTypically non-voting except if several dividend payments in a row are unpaid.Evaluating Stock InvestmentsWhat makes a particular stock an attractive investment?Good growth opportunitiesGood dividend yieldsMarket leaderGood managementHow do we find out about these stocks?Research reports: Barrons, Investors Business DailyBrokerage recommendations (in-house research)Investment websites: Zacks, Motley Fool, The Street.ComIndividual Company websitesStock Advisory Services: Value Line, Standard & Poors, Mergent Magazines: Forbes, Business Week, Fortune, Money, Inc.Important Decision FactorsEarnings and Earnings GrowthEarnings Per Share: trailing vs. forecastP/E ratioPEG ratioDividendsDividend growth ratesCoverageIndustry CharacteristicsGrowthMatureDecliningStock MarketsPrimaryWhere new issues are sold: e.g. IPOInvestment Bankers dominate this marketSecondary MarketsWhere seasoned issues are traded.Examples; New York Stock Exchange, Nasdaq (OTC)Securities ExchangesSpecialists (provide liquidity)Floor Traders (execute public trades)Brokerage ServicesFull Service (Retail)Best place to start for individual new to investingMore expensive to tradeResearch reports availableDiscount BrokersBest for experienced tradersDo your own researchLess expensiveOnlineSame as above, but typically higher incidence of tradesInvestors totally comfortable with online trainingLeast expensive way to trade.Details of Stock TransactionsTypes of OrdersMarket: willing to buy at ASK, sell at BIDImmediate executionLimit: will trade at specified priceDeferred executionStop: order becomes active when stop price is hitStop [Sell] Loss: sell position when price gets too low.Stop Buy: add to position if prices start to move up.Day Order: if no execution, automatically cancelledGood till Cancel (GTC): stays active until executedFill or Kill: get it now or cancel orderAll or Nothing: for large ordersCommission SchedulesRetail BrokersBy the size of the orderOnline / DiscountFlat fee for trades up to 1000 shares.More expensive if broker assisted.Bid-Ask SpreadCost of liquidityBid = highest price of unexecuted orders to buyAsk = lowest price of unexecuted orders to sellInvestment StrategiesShort-TermAttempting to time the marketExpensive and riskyLong-TermBuy and HoldOccasional trading to rebalance portfolio or take profitsDollar Cost AverageBuying [small] dollar amounts of an issue over time.Most popular technique with mutual funds and retirement plansInvestment StrategiesLong versus Short PositionsLong: expect prices to go upShort: expect Prices to go downBuying on MarginBorrow money from broker to finance purchaseMaximum margin = 50%Margin requirement controlled by Federal ReserveSelling ShortMargin AccountBorrow stock and sell itBuy stock back and return: trick is to buy back at a lower price.Example: Sell ABC short at $50, then buy back later at $40Short sellers always expect stock price to decline.Options and FuturesOptionsRight but not obligation to buy (call) or sell (put) a stockContracts are for round lots (100 shares)Price of an option is called a premium.Options have relatively short lives (6 7 months)Exception: LEAPS run up to two years.Options can be used to Speculate or to HedgeSpeculate: bet on market move in one directionHedge: protect an underlying stock positionOptions and FuturesB. FuturesUsed to speculate or hedge commodity positionsCommodities:Financial (bills and bonds)Industrial (lumber, copper, gold)Agricultural (wheat, corn, cocoa)Exchange (Euro, Swiss Franc, UK Pounds)Require greater net worth than stocksMany hazards associated with futures tradingHOMEWORKDo the Math: 1, 2, 4Be Your Own Personal Financial Planner2 Compare different stocks as Investment (w/s 54)5 Current Yield (w/s 58)