Chapter 14

Investing in Stocks

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 14
Learning Objectives
Identify the most important ____________ of
common and preferred stocks
Explain how you can ___________ stock
investments
Analyze the ________ measures that cause
a stock to increase or decrease in value
Describe how stocks are bought and sold
Explain the trading techniques used by longterm investors and short-term speculators
14-3

Common and Preferred Stocks

Objective 1: Identify the most important
features of common and preferred stocks
Good investors know something about the company
before they invest in the company s stock
Gather information to evaluate a potential investment
in a stock
Learn what the information you gather means
Are sales increasing?
Is net income increasing over time?
Are earnings per share increasing over time?
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Common and Preferred Stocks

Objective 1: Identify the most important
features of common and preferred stocks
(Continued)

There are periods where stocks ___________ in value

The key to success is to allow investments to work for
you over the long-term

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Why Corporations Issue Common Stock

To raise money for start-up costs and help pay for
expansion and their ongoing business activities
They don t have to repay the money a
stockholder pays for stock
The investor can ____________ a share of stock to
another investor

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Why Corporations Issue Common Stock

Dividends are not ________________.

Most corporations distribute _______% of their earnings
to stockholders
In return for investing in the company, stockholders
have voting rights

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Why Investors Purchase

Common Stock
They can make money in three ways
_______________________ in the form of cash or
additional stock
Dollar ____________________ of stock value
Possible increased value from ________________

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Why Investors Purchase

Common Stock (Continued)
WHAT HAPPENS WHEN A CORPORATION SPLITS
ITS STOCK?
A stock split happens when the shares owned by
existing stockholders are divided into a _________
number of shares

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Preferred Stock
PREFERRED STOCK
A middle investment and represents an
ownership position
Investors in preferred stocks receive cash
dividends __________ common stock holders are
paid any cash dividends
Investors that need a more __________ source of
income will chose preferred rather than common
stock
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Evaluating a Stock Issue

Objective 2: Explain how you can evaluate
stock investments
CLASSIFICATION OF STOCKS
____________ stock
Cyclical
Defensive
Growth
Income

Large cap
Mid cap
Small cap
Micro cap
Penny stock

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Evaluating a Stock Issue

(continued)

THE INTERNET
Most corporations have a Website, and the
information is useful in the following ways
The ________________ is easily accessible
More up to date ___________ than the printed
material
Websites like Yahoo and other search engines
can also be used to obtain information about
stock investments

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Evaluating a Stock Issue

(continued)

THE INTERNET

The Internet can also be used to

access professional advisory
services like
____________________________
____________________________
http://www.standardandpoors.com/
http://www.valueline.com/
http://www.morningstar.com/

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Evaluating a Stock Issue (continued)

STOCK ADVISORY SERVICES
Prepare printed materials that are more detailed
than information in newspapers
___________________________
Hundreds to choose from
Standard and Poor s reports
Value Line
Mergent s Investor Service
Morningstar
As an investor, your job is to _______________ the
information provided
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Evaluating a Stock Issue (continued)

HOW TO READ THE FINANCIAL SECTION OF THE
NEWSPAPER
Stock quotes are still available in most metropolitan
newspapers such and The Wall Street Journal
Basic information is provided
__________________
__________________
__________________

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Evaluating a Stock Issue (continued)

Corporate News
The Federal government requires companies to
disclose information to the public
http://www.sec.gov/ is a website to access much of
the information
Hong Kong: Hong Kong Stock Exchange
____________________
Use of annual report

learn about the _______________

learn about __________________
learn about __________________
learn about _________________
footnotes have important information
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Numerical Measures That Influence

Investment Decisions
Objective 3: Analyze the numerical
measures that cause a stock to increase
or decrease in value
WHY CORPORATE EARNINGS ARE IMPORTANT
Corporate earnings play a large part in the increase
or decrease in the price of a stock
_______________________ are the corporation s
after-tax earnings divided by the number of
outstanding shares of a common stock.
An increase in earnings is generally a healthy sign

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Numerical Measures That Influence

Investment Decisions
Objective 3: Analyze the numerical
measures that cause a stock to increase
or decrease in value (Continued)
_____________________________
Price of one share of stock divided by the earnings
per share of stock over the last 12 months

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Numerical Measures That Influence

Investment Decisions (continued)
OTHER FACTORS THAT INFLUENCE THE
PRICE OF A STOCK
Dividend payout =
Dividend yield =

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Numerical Measures That Influence

Investment Decisions (continued)
OTHER FACTORS THAT INFLUENCE THE
PRICE OF A STOCK (continued)
Total return = _______________ + _____________
___________________________
=____
Total return___ X __1__
Original investment
N
N=______________________________ is held

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Numeric Measures That Influence

Investment Decisions (continued)
_________
A measure of _________ compared to the S&P 500.

______________________
Assets-Liabilities
Shares Outstanding
If a share costs more than the book value the
company may be overextended or it may have a
lot of money in research and development
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Numeric Measures That Influence

Investment Decisions (continued)
____________________
Market value per share
Book value per share
A low market to book may indicate an
undervalued stock
A high market to book may indicate an
overvalued stock
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Numeric Measures That Influence

Investment Decisions (continued)
INVESTMENT THEORIES
_________________________
Based on the assumption that a stock s ______
or real value is determined by the company s
future earnings
Fundamentalists consider the
_______________________ of the company
Type of industry company is in
New-product development
__________________ of the overall economy
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Numeric Measures That Influence

Investment Decisions (continued)
______________________
Based on the assumption that a stock s value
is determined by the forces of _________ and
__________ in the stock market as a whole
Not based on expected ____________ or the
intrinsic value of a stock but rather on factors
found in the market as a whole
________ plot past price movements and
other market averages to observe trends they
use to predict a stock s future value
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Numeric Measures That Influence

Investment Decisions (continued)
_______________________________
Based on the assumption that stock price
movements are purely _____________
A stock s current market price reflects its ______
value
It is impossible for an investor to _____________
the average for the stock market as a whole over
a period of time

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Buying and Selling Stocks

Objective 4: Describe how stocks are bought
and sold
_________________ market
A market in which an investor purchases financial
securities through an investment bank, or other
representative, from the issuer of those securities
An investment bank is a financial firm that assists
corporations in raising funds, usually by helping to sell
new security issues
An ______ occurs when a corporation sells stock to the
general public for the first time

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Buying and Selling Stocks

Objective 4: Describe how stocks are bought
and sold (Continued)
_____________________ market
A market for ____________ financial securities that are
currently traded among investors through brokers

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Buying and Selling Stocks (continued)

_____________________

A marketplace where member brokers who

represent investors meet to buy and sell securities
The securities sold at an exchange must be ____,
or accepted for trading, at the exchange
New York Stock Exchange, Regional Exchanges,
or Foreign Security Exchanges
HK:
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Buying and Selling Stocks (continued)

SECURITY EXCHANGES (continued)
Most OTC securities are traded over the
NASDAQ which is an electronic marketplace for
approximately 3,200 stocks
Network of dealers who buy and sell the stocks of
companies not listed on a securities exchange

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Buying and Selling Stocks (continued)

BROKERAGE FIRMS AND ACCOUNT EXECUTIVES
An account executive, or stockbroker, is a licensed
individual who buys and sells securities for his or her
clients
___________________ should be communicated to the
account executives, and the investor must be actively
involved in the investment decisions

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Buying and Selling Stocks (continued)

BROKERAGE FIRMS AND ACCOUNT EXECUTIVES
(continued)

__________________ versus __________________

How much advice do you want?
Nearest office and toll-free phone number?
Online and phone trading services and costs?
Fees, charges and commissions?

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Buying and Selling Stocks (continued)

STOCK TRANSACTIONS
M_____________: Request to buy or sell stock at
the current market value
L______________: Request to buy or sell a stock
at a specified price
S______________: Request to sell a stock at the
next available opportunity after its market price
reaches a specified amount
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Long-Term and Short-Term

Investment Strategies
Objective 5: Explain the trading techniques used
by long-term investors and short-term
speculators

Long-term techniques
Buy and hold
____________________
Direct investment
and __________________________________

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Long-Term and Short-Term

Investment Strategies
Objective 5: Explain the trading techniques used
by long-term investors and short-term
speculators

Short-term techniques
____________ trading
Buying stock on _____________ (borrowing money)
__________________________ (borrowing stock)
Trading in ________________ (predetermined price)
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End of Lecture

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