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Stocks Chapter 9. Section 9.1 – Common and Preferred Stocks Explain reasons for investing in...

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  • Slide 1
  • Stocks Chapter 9
  • Slide 2
  • Section 9.1 Common and Preferred Stocks Explain reasons for investing in common stock Explain reasons for investing in common stock Explain reasons for investing in preferred stock Explain reasons for investing in preferred stock
  • Slide 3
  • Common Stock Why do companies sell stock? Why do companies sell stock? Make new products Sell products Fund its operations Expand Why do people buy stocks? Why do people buy stocks? To make money More money than conservative investments
  • Slide 4
  • Why Corporations Issue Common Stock Private corporations Private corporations Issue to small amount of people Are not traded openly in stock markets Public corporations Public corporations Anyone can buy/sell openly in stock markets Form of equity money that doesnt have to be repaid Form of equity money that doesnt have to be repaid Demand for stock affected by Expected sales revenue Expected sales revenue Earnings Earnings Expansions or mergers Expansions or mergers Dividends not mandatory, may be reinvested back into business Dividends not mandatory, may be reinvested back into business
  • Slide 5
  • Why Investors Purchase Common Stock Income from dividends Income from dividends Board of directors often votes to pay dividends to keep stockholders happy Appreciation of stock value Appreciation of stock value Can sell at a higher price for profit Increased value from stock splits Increased value from stock splitsstock splitsstock splits Decreased price attracts more investors, then price starts to rise again Voting rights and control of the company Voting rights and control of the company
  • Slide 6
  • BeforeAfter Shares Issued 10,00020,000 Value5025 Your shares 200400 Your value $10,000$10,000
  • Slide 7
  • Preferred Stock What is preferred stock? What is preferred stock? Mix between regular common stock and a bond Each share of preferred stock is normally paid a relatively high dividend and has first dibs over common stock at the company's assets in the event of bankruptcy Stockholders know exactly what they will receive from par value on stick certificate In exchange for the higher income and safety, preferred shareholders miss out on large potential capital gains [or losses] Owners of preferred stock generally do not have voting privileges Why do corporations issue preferred stock? Why do corporations issue preferred stock? Attract those conservative investors who do not want to purchase common stock Why do investors purchase preferred stock? Why do investors purchase preferred stock? Safe and steady source of income, lower return than corporate bonds but better than common stock
  • Slide 8
  • Types of Preferred Stock Cumulative Preferred Stock Cumulative Preferred Stock Pays dividends saved up, even if company omits some payments to other preferred stock holders Convertible Preferred Stock Convertible Preferred Stock Can be exchanged for a specific number of common stock spreads risk and return Participation Feature Participation Feature Rare feature that allows retained earnings to go back to these stockholders after dividends are paid to be
  • Slide 9
  • Tracking Your Stock Investments Monitor Monitor Graph $ value on daily or weekly basis Watch the financials Watch the financials Evaluate current sales, profits, and projected Track the products Track the products Poor-quality or lack of new up-to-date can affect value of stock Watch the economy Watch the economy Inflation rate, overall economy Be patient Be patient Wait it out if the company is good
  • Slide 10
  • Section 9.2 Evaluating Stocks Types of stock investments Types of stock investments Sources of information to evaluate stock investments Sources of information to evaluate stock investments Factors that affect stock prices Factors that affect stock prices
  • Slide 11
  • How are stocks classified? Blue-chip stocks Blue-chip stocks Income stocks Income stocks Growth stocks Growth stocks Cyclical stocks Cyclical stocks Defensive stocks Defensive stocks Large and small cap stocks Large and small cap stocks Penny Stocks Penny Stocks
  • Slide 12
  • Blue Chip Stocks Safe investment, attracts conservative investors Safe investment, attracts conservative investors Issued by strongest, most respected companies Issued by strongest, most respected companies At & T, General Electric, Kellogg At & T, General Electric, Kellogg
  • Slide 13
  • Income Stocks Pays higher-than-average dividends Pays higher-than-average dividends Dividends are predictable, often choice of retired people Dividends are predictable, often choice of retired people Bristol-Myers Squibb, Dow Chemical Bristol-Myers Squibb, Dow Chemical
  • Slide 14
  • Growth Stocks Issued by a corporation whose potential earnings may be higher than average earnings predicted for all the corporations in the country Issued by a corporation whose potential earnings may be higher than average earnings predicted for all the corporations in the country Do not pay dividends, but buy for potential increase in value (long-term investment) Do not pay dividends, but buy for potential increase in value (long-term investment) Indicators: building new facilities, introducing new, high-quality products, or conducting recognized research and development Indicators: building new facilities, introducing new, high-quality products, or conducting recognized research and development Home Depot, Southwest Airlines Home Depot, Southwest Airlines
  • Slide 15
  • Cyclical Stocks Do well when economy is good, but poorly during recessions Do well when economy is good, but poorly during recessions Ford and Centrex Ford and Centrex Airlines, manufacturing, industries based on travel Airlines, manufacturing, industries based on travel
  • Slide 16
  • Defensive Stocks Not subject to ups and downs of business cycle Not subject to ups and downs of business cycle Many blue-chip stocks, income stocks, and Procter & Gamble Many blue-chip stocks, income stocks, and Procter & Gamble Utilities, drug companies, food and health care Utilities, drug companies, food and health care
  • Slide 17
  • Large-Cap and Small-Cap Stocks Large-cap comes from company that issued a large number of shares of stock Large-cap comes from company that issued a large number of shares of stock Small-cap comes from company with less than $500,000 capitalization Small-cap comes from company with less than $500,000 capitalization Capitalization total amount of stocks and bonds issued by company Capitalization total amount of stocks and bonds issued by company Large-cap is conservative and secure and small-cap is a higher risk Large-cap is conservative and secure and small-cap is a higher risk
  • Slide 18
  • Penny Stocks Cheap (less than $1 per share typically), but highly speculative Cheap (less than $1 per share typically), but highly speculative Those of hot new product Those of hot new product Beanie Babies, Rubics Cube, Cabbage Patch Kids, Furbys
  • Slide 19
  • What's the Problem with These Stocks? What makes penny stocks risky? Four major issues arise when you decide to buy these securities: What makes penny stocks risky? Four major issues arise when you decide to buy these securities: Lack of Information Available to the Public No Minimum Standards Lack of History Liquidity
  • Slide 20
  • What company is this? After just a few years in the public markets, it began paying a dividend and never stopped -- amazing for such a tiny company. After just a few years in the public markets, it began paying a dividend and never stopped -- amazing for such a tiny company. Related to that point, its dividend started in the teeth of a bear market in the early 1970s -- a telling sign of the strength of its financials, given the trying times. Related to that point, its dividend started in the teeth of a bear market in the early 1970s -- a telling sign of the strength of its financials, given the trying times. Wall Street treated the company like it was a bunch of hillbillies in Arkansas. For years, no analysts followed it. Wall Street treated the company like it was a bunch of hillbillies in Arkansas. For years, no analysts followed it. Institutional ownership was well below 50% for years and years. As we said, hardly anyone cared. Institutional ownership was well below 50% for years and years. As we said, hardly anyone cared. Sam Walton owned the majority of the stock. Here was a founder with a stake in the organization's enduring success. Sam Walton owned the majority of the stock. Here was a founder with a stake in the organization's enduring success. Its concept was new and innovative, yet proven. This store had been in business for eight years before going public, with more than 30 stores and more than $32 million in sales on the day of its IPO. Its concept was new and innovative, yet proven. This store had been in business for eight years before going public, with more than 30 stores and more than $32 million in sales on the day of its IPO.
  • Slide 21
  • What is Pump and Dump? Ever received one of those emails that pretends to be TO someone else, passing on some hot stock tip they've learned? Referred to as 'pump and dump' scams, the intent of the email is to get lots of people to take advantage of this unexpected windfall of information and buy the stock. This inflates the price, at which time the scammers sell their shares fo

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