Smart InvestingEmmet O’Neal LibraryMountain Brook, AL

Stocks and Bonds

Disclaimer• Andreas Rauterkus is not a registered

investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Andreas Rauterkus does not purport to tell or suggest which investment securities attendants should buy or sell for themselves. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision.

Objectives

• What are stocks and bonds

• How to pick stocks and bonds

• What are the risks?

Stocks• Stocks represent a partial ownership of a company• Common stocks versus preferred stocks

– Common stock carries a voting right– Preferred stock does not carry a voting right, but normally

receives a fixed dividend– Preferred shareholders need to be paid before common

shareholders

• Stock price– Amount paid for one share of stock

• Dividends– Distribution of a company’s profit– Generally paid quarterly

Different Kinds of Stocks

• Growth stocks• Blue-chip stocks• Income stocks• Cyclical stocks• Defensive stocks• Value stocks• Speculative stocks

What Do You Need to Know• Have the right information and know how to interpret it• Invest for growth and value• Things to look at:

– Earnings per share– Price-earnings ratio– Dividend yield– Book value– Return on equity– Debt equity ratio– Price volatility

Where to Get InformationSOURCE WHAT’S IN IT AND WHERE TO GET IT COMPANY’S ANNUAL REPORT

Basic information about the company, including audited financial data for the most recent year and summaries of prior years is available from brokers and the investor relations office of the company.

FORM 10-K Extensive financial data, required to be filed annually with the Securities and Exchange Commission. Includes two years‘ worth of detailed, audited financial balance sheets, plus a five-year history of the stock price, earnings, dividends and other data. You can view the forms online (www.sec.gov ) or order copies by contacting the Public Reference Branch at: U.S. Securities and Exchange Commission, 450 5th St., N.W., Room 1300, Washington, DC 20549-0102; phone 202-551-8090;. email publicinfo@sec.gov.

ANALYSTS’ REPORT Commentaries by brokerage firms‘ research departments, containing varying amounts of hard data to accompany the analysts‘ recommendations to buy, sell or hold stocks followed by the firm. Available from brokers.

VALUE LINE INVESTMENT SURVEY

A vast collection of data, including prices, earnings and dividends, stretching back many years, along with analysis and several unique features, such as a ―timeliness‖ rating for each stock. Follows approximately 1,700 stocks. Available from libraries, or from Value Line ($598 a year, 13-week trial subscriptions are $75 for the print version; 800-634-3583; www.valueline.com.)

STANDARD & POOR’S S&P Stock Reports offer a wealth of current and historical data covering the three major exchanges (NYSE, AMEX and Nasdaq) in three volumes that are updated every six weeks. The monthly S&P Stock Guide is a compendium of similar data on more than 7,500 stocks, but with no analysts‘ commentary. The guide provides most of the hard data you need to check out a company. Available from libraries, brokers or by subscription from S&P (55 Water Street, New York, NY 10041; 800-221-5277; www.standardandpoors.com ).

MERGENT PUBLICATIONS (formerly Moody’s Investors Service)

Mergent publishes eight Mergent‘s Manuals containing current and historical data on thousands of companies. The Handbook of Common Stocks covers approximately 900 stocks, and the Dividend Record keeps track of current dividend payments of 30,000 U.S., Canadian and significant global securities. The Dividend Achievers guide is widely used by individual investors. Available from Mergent Inc. (Customer Care Center-Consumer Accounts, 10475 Crosspoint Blvd., Indianapolis, IN 46256; phone: 877-762-2974; fax: 800-597-3299; www.mergent.com ).

FINANCIAL NEWSPAPERS

The stock listings of the Wall Street Journal, Barron‘s and Investor‘s Business Daily contain current information on prices, dividends, yields and price-earnings ratios, as do the stock listings of most daily newspapers. What sets these three apart is the accompanying depth of coverage of the investment markets. Available from libraries, at newsstands, online or by subscription.

COMPUTER ONLINE DATA BASES

America Online , CompuServe, MSN, Yahoo finance (finance.yahoo.com) and other dot-com portals offer plenty of stock and investment information, as do countless Internet sites, including www.kiplinger.com.

When To Sell Stocks

• Fundamentals change

• The dividend is cut

• You reach your target price

• Return on your stock investment includes increases in the price and any dividend payments

Avoid Common Mistakes

• Acting on tips• Getting sentimental• Forgetting taxes and commissions• Failing to diversify• Losing patience• Buying a penny or microcap stock

Bonds• A bond is basically a traded loan• Bonds are debt securities that provide a predictable

stream of income• Some interest income is tax exempt• Bonds can have maturities of up to 30 years• Face values typically range between $1,000 and

$5,000• Bonds are traded “over-the-counter”

Types of Bonds• Secured bonds• Debentures

– Unsecured• Zero-coupon bonds• Corporate bonds• Municipal bonds• U.S. Treasury bonds• Agency securities• U.S. savings bonds• Callable bonds• Convertible bonds

Bond Yield• The yield is the actual return on your bond

investment• Bond prices and yields move in opposite directions• Coupon yield

– Yield expressed as % of face value

• Current yield– Yield expressed as % of current price

• Yield to maturity– Yield if you hold the bond until maturity

Risks of Bond Investments• Interest rate risk

– Impact of changes in market interest rates on the value of a bond

• Default risk• Bond ratings

• Anything rated below BBB or Baa is considered “junk”

S&P

Moody’s

What it Means

AAA

Aaa

The highest possible rating, indicating the agencies‘ highest degree of confidencein the issuer‘s ability to pay interest and repay the principal.

AA Aa A very high rating, only marginally weaker than the highest. A

A

High capacity to repay debt but slightly more vulnerability to adverse economic developments.

BBB Baa The lowest investment-grade rating, indicating ―adequate capacity to pay principal and interest but more vulnerability to adverse economic developments.

How to minimize interest rate risk• Don’t buy bonds when interest rates are low or

rising

• Avoid long term issues

• Acquire multiple maturities

• Bond mutual funds best choice for individual investor

What Can Bond Do For You?

• Means to diversify your portfolio

• Relative safety of bonds

• Income component

• Large variety of bonds offers array of risk choices