stocks: the nuts and bolts - making sense of investing · participant workbook stocks the nuts and...

Participant Workbook

THE NUTS AND BOLTSStocks

PAGE 1 OF 17

Your Name:

edwardjones.com Member SIPC

MKD-3358L-A-PW EXP 31 AUG 2021 © 2019 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.

Program SynopsisStocks may play a major role as you try to reach your long-term financial goals. You’ll learn basic information to help evaluate how stocks may fit into your overall strategy. Stocks: The Nuts and Bolts looks at common versus preferred stock, dividends, investment strategy and different ways to own stock.

ContentsKey Steps to Financial Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Stock Basics

Stock: Common vs. Preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

How Stocks Make Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Investment Strategy

Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Long-term Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

A Disciplined Approach to Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Other Ways to Own Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

My Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

TAKE STOCK IN THE MARKET

PAGE 2 OF 17MKD-3358L-A-PW EXP 31 AUG 2021 © 2019 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.

1WHERE

AM I TODAY?

2WHERE

WOULD I LIKE TO BE?

3CANI GET

THERE?

4HOW DO

I GET THERE?

5HOW CAN I STAY ON TRACK?

MY FINANCIAL

NEEDS

®

KEY STEPS TO FINANCIAL SUCCESS



STOCK: COMMON VS. PREFERRED

Circle True or False.

True False .......... The majority of stock sold is issued as common stock.

True False .......... Both common stock and preferred stock represent ownership in a company.

Fill in each table heading with either Common or Preferred Stock.

TYPES OF STOCK

____________________ Stock ____________________ Stock

Ownership stake in the company

Yes Yes

Dividend payments

Dividend amount may fluctuate. Dividends can be suspended or eliminated at any point without notice.

Dividend amount is fixed and is usually a percentage of the stock’s par value. Dividends can be suspended or eliminated at any point without notice.

Priority if the company goes bankrupt

Paid last in the event of bankruptcy or liquidation

Paid before common stockholders but after creditors in the event of bankruptcy or liquidation

Voting rights One vote per share Few or no voting rights

Par Value – Equal to the nominal or face value of the security.

*Dividends can be suspended or eliminated at any point without notice. Stock prices can also go down, which could result in a loss in principal.

Answers: True; True; Common (left column), Preferred (right column)

NOTES


CAPITAL APPRECIATION AND DIVIDENDS

Capital AppreciationThe difference between what you pay for a stock and what you receive when you sell it.

Example: If you pay $15 for a share of stock and sell it for $20, the capital appreciation is $5.

Dividends*Payments to shareholders out of a company’s earnings.

• Are usually paid quarterly

• Are usually paid in cash

• Can be paid in stock or other property

• Can be used to purchase more shares (reinvestment)

Complete the formula:

Dividend Yield = __________ divided by ____________

*Dividends can be increased, decreased or eliminated at any point without notice. Stock prices can also go down, which could result in a loss in principal.

Most people invest in the stock market to earn a return on their investment. Two common ways to do this are through dividends and capital appreciation.

Answer: Dividend Yield = Annual dividend per share divided by price per share

NOTES

HOW STOCKS MAKE MONEY


NOTES

Our Quality Identification ProcessThis process allows us to recommend what we believe are quality companies with attractive stock prices.

Quality

Diversification

Long-term Perspective

Stock Selection Process

Country

Longevity

Risk

Size

Analysis

Filter Stocks

65,000

18,000

9,000

8,000

750

INVESTMENT STRATEGY: QUALITY


INVESTMENT STRATEGY: DIVERSIFICATION

Diversification Owning different investments within an asset class, as well as across asset classes and investment categories

Asset AllocationThe act of putting your money into different investment categories throughout your portfolio

Fill in the levels of the Investment Pyramid with the appropriate investment type.

The higher you go on the pyramid, the greater possibility of investment losses. Along with the increased risk, however, comes the potential for greater returns.

Diversification and asset allocation do not guarantee a profit or protect against loss.

Aggressive

Growth

Growth & Income

Income

Cash

Answers: From bottom to top: cash – savings accounts, income – CDs and bonds, growth and income – dividend-paying stocks, growth – stocks, and aggressive – aggressive stocks.

Quality

Diversification


NOTES


INVESTMENT STRATEGY: DIVERSIFICATION BY SECTOR

NOTES

9%

4%

10%

9%

5%

16%15%

9%

3%

20%

Communication ServicesTelecom & Cable, Media, Internet

Consumer DiscretionaryConsumer Discretionary, Home & Auto, Retail & Apparel

Consumer StaplesFood & Beverages, Household &Personal, Staples Retail, Tobacco

EnergyExploration & Production, IntegratedEnergy, Refiners, Services & Drillers

Financial ServicesBanking, Capital Markets, ConsumerFinance, Insurance, Real EstateInvestment Trusts (REITs)

UtilitiesDiversified, Electric, Natural Gas, Water

TechnologyHardware, Semiconductors,Software & Services

Materials

IndustrialsAerospace & Defense,Infrastructure, Transportation

Health CareBiopharmaceuticals, Health CareServices, Medical Technology & Equipment

Diversification does not guarantee a profit or protect against loss.

INVESTMENT STRATEGY: DIVERSIFICATION BY SECTOR

When building a portfolio of stocks, we recommend maintaining a balance between offense and defense, with the goal of reaching our sector weightings guidance.

Offensive sectors: Communication Services, Consumer Discretion-ary, Energy, Financials, Industrials, Materials, and Technology

Defensive sectors: Health Care, Consumer Staples and Utilities

Quality

Diversification


Finding Sector Balance Defense

Communication Services Health Care

Consumer Discretionary Consumer Staples

Energy Utilities

Financials

Industrials

Materials

Technology


NOTES

Quality

Diversification


INVESTMENT STRATEGY: DIVERSIFICATION BY SIZE

Diversification by Company Size

Market Capitalization = Number of shares outstanding x current share price.

1. _____________ = Market capitalization of greater than $18 billion

2. _____________ = Market capitalization of $4 billion to $18 billion

3. _____________ = Market capitalization of $500 million to $4 billion

4. _____________ = Market capitalization of less than $500 million


NOTES

Answers: 1. Large cap 2. Mid cap 3. Small cap 4. Micro cap

RISING INCOME: COMBATING INFLATION

The inflation rate used to calculate 2044 prices is based on historical inflation rates from 1994-2019: Car = 1.3%; Gas = 3.2%; Groceries = 2.2%; Health care = 4.7%. Car: MSRP for automatic transmission Toyota Camry; Gas: National average for unleaded regular gasoline; Groceries: Family of two with moderate cost plan. Healthcare: 2017 data. Median household expenditure for married couple from Consumer Expenditure Survey.

Sources: Bureau of Labor Statistics; U.S. Department of Agriculture; AutoTrader.com.

1994 2019 2044 (est.)

Car $17,500 $24,100 $33,189

Tank of Gas (17 gallons) $18 $38 $85

Month of groceries $351 $612 $1,067

Annual health care expenses $2,376 $7,515 $23,769


NOTES


INVESTMENT STRATEGY: LONG-TERM PERSPECTIVE

Buy and HoldSelecting quality stocks and holding them for the long term

Timing the MarketBuying and selling stocks when you think the time is right

Although past performance is not a guarantee of future results, if you had missed only the 10 best days in the 30-year time span, you would have cut returns by more than half.

Since there is no way to accurately predict what is going to happen in the future, time in the market is better than timing the market.

Source: Ned Davis Research, Edward Jones calculations. 12/31/1979–12/31/2018. These calculations assume the best days, as defined as the top percentage gains for the S&P 500, including dividends, for the time period designated. These calculations do not include any commissions or transaction fees that an investor may have incurred. If these fees were included, it would have a negative impact on the return. The S&P 500 is an unmanaged index and is not available for direct investment. Past performance is not a guarantee of future results. Dividends can be increased, decreased or eliminated at any point without notice.

Copyright © 2019 Ned Davis Research, Inc. All rights reserved. Further distribution prohibited without prior permission.

Invested entire period

Missed 10 best days

Missed 20 best days

Missed 30 best days

Missed 40 best days

Missed 50 best days

Value of a $10,000 investment in the S&P 500

(12/31/1979–12/31/2018)

Val

ue

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0

$662,000

11.4%Average Annual Return $320,000

$195,000

9.3%

$84,000

5.6%$58,000

4.6%

$700,000

7.9%

$126,000

6.7%


A DISCIPLINED APPROACH TO INVESTING

__________________________ or __________________________ is the process of steadily growing the number of shares you own by investing a fixed dollar amount at regular intervals.

Answers: Systematic Investing or Dollar Cost Averaging

Systematically Investing vs. Lump-sum Investment

Source: Edward Jones. These charts are for illustrative purposes only and are not intended to represent the performance of any security. These illustrations do not include commissions or fees. Past performance does not guarantee future results.

Equity investments will fluctuate in value and, when sold, may be worth more or less than the original investment.

Systematic investing does not guarantee a profit or protect against loss. Such a strategy involves continual investment in securities regardless of fluctuating price levels of such securities. You should consider your financial ability to continue the purchases through periods of low price levels.

Lump Sum – $5,000

02468

1012141618

202224

$26

Jan Apr May Jun Jul Aug Sep Dec

Shar

e P

rice

Average Price: $20/share

Total Purchased: 250 Shares

NovMarFeb Oct

Dollar Cost Averaging – $417/Month

02468

1012141618

202224

$26

Jan Apr May Jun Jul Aug Sep Dec

Shar

e P

rice

26 28

35 32

26 28

2119

24

1921

Number of Shares Purchased

Average Price: $17/share

Total Purchased: 300 Shares

21

NovMarFeb Oct


OTHER WAYS TO OWN STOCKS

___ Mutual funds

___ Exchange-traded funds (ETFs)

1. An investment that is made up of a pool of funds collected from many investors with the purpose of investing in stocks, bonds, money market instruments or similar assets.

2. In general, this type of investment is passively managed and is designed to track the performance of a particular index. It often holds a variety of securities in one investment, but trades on an exchange, like a stock, and experiences price changes throughout the day.

Match the items on the left with the descriptions on the right.

Answers: 1. Mutual Funds 2. Exchange-traded funds (ETFs)

NOTES

Investments in mutual funds and ETFs involve risk. Principal and investment return will fluctuate in value, and the investment when redeemed may be worth more or less than the original cost.


MY ACTION PLAN

Now that you understand some basics about stock investing, put your knowledge into action. Does your portfolio have the quality and diversification it needs to stand the test of time? Don’t wait to find out. Get started NOW by completing an action plan.

Goal: ________________________________________________________________

What can I do in the next:

48 hours __________________________________________________________________

Week __________________________________________________________________

2 weeks __________________________________________________________________

1–11 months __________________________________________________________________

Year __________________________________________________________________

Action Plan Examples

48 hours Schedule a date with your spouse or significant other to review your household finances.

Week Gather all your financial accounts and statements.

2 weeks Schedule an appointment with a financial advisor to review your risk tolerance and investment goals. Check to see how your current portfolio compares to the recommended weightings across investment types and industries.

1–11 months Begin adding to and readjusting your portfolio to bring it closer to the recommendations, given your risk tolerance and investment goals.

Year Review your strategy to see if you are on target to reach your goals or if adjustments need to be made.

Asset allocation – A method to help reduce investment risk by putting funds in several investment categories such as growth, growth and income, and income.

Capital appreciation – The difference between what you pay for a stock and what you receive when you sell it.

Common stock – Shares of a public corporation. Owners are usually entitled to receive dividends and vote on important company matters. Should the company be forced to liquidate, assets are distributed to creditors, bondholders and preferred stockholders before common stock-holders. Common stocks are usually purchased for their appreciation potential and possible dividend income.

Diversification – Owning different investments within an asset class, as well as across asset classes and investment categories.

Dividend – Payments from a company to its shareholders, historically based on its earnings. Dividends are usually paid quarterly in the form of cash and sometimes stock. Payments are in proportion to the number of shares an investor owns.

Dividend yield – A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated by dividing annual dividends per share by the price per share.

Index – A reference investors and financial advisors use to compare an individual stock against a pool of stocks.

Par value – Equal to the nominal or face value of the security.

Portfolio – A collection of things you own, such as bank accounts, employer-offered retirement plans and individual investments.

Preferred Stock – A class of stock that pays dividends at a fixed, specified rate and has preference over common stocks in dividend payments and liquidation. Preferred stocks usually do not carry voting rights. If dividend payments are missed on a preferred stock, all missed dividends must be paid before any dividends can be paid on common stock. Preferred stocks are generally more attractive for corporations because of favorable tax treatments.

Risk Tolerance – An investor’s ability, need and desire to assume investment risk in exchange for the potential for greater return.

Shareholder – Someone who owns stock.


GLOSSARY

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