StocksStocks
Chapter 9Chapter 9
Section 9.1 – Common Section 9.1 – Common and Preferred Stocksand Preferred Stocks
Explain reasons for investing in Explain reasons for investing in common stockcommon stock
Explain reasons for investing in Explain reasons for investing in preferred stockpreferred stock
Common StockCommon Stock Why do companies sell stock?Why do companies sell stock?
– Make new productsMake new products– Sell productsSell products– Fund its operationsFund its operations– Expand Expand
Why do people buy stocks?Why do people buy stocks?– To make money To make money – More money than conservative More money than conservative
investmentsinvestments
Why Corporations Issue Why Corporations Issue Common StockCommon Stock Private corporations Private corporations
– Issue to small amount of people Issue to small amount of people – Are not traded openly in stock marketsAre not traded openly in stock markets
Public corporations Public corporations – Anyone can buy/sell openly in stock marketsAnyone can buy/sell openly in stock markets
Form of equity – money that doesn’t have Form of equity – money that doesn’t have to be repaid to be repaid – Demand for stock affected byDemand for stock affected by
Expected sales revenueExpected sales revenue EarningsEarnings Expansions or mergersExpansions or mergers
Dividends not mandatory, may be Dividends not mandatory, may be reinvested back into businessreinvested back into business
Why Investors Why Investors PurchasePurchaseCommon StockCommon Stock Income from dividendsIncome from dividends
– Board of directors often votes to pay dividends to Board of directors often votes to pay dividends to keep stockholders happykeep stockholders happy
Appreciation of stock valueAppreciation of stock value– Can sell at a higher price for profitCan sell at a higher price for profit
Increased value from Increased value from stock splitsstock splits– Decreased price attracts more investors, then Decreased price attracts more investors, then
price starts to rise againprice starts to rise again Voting rights and control of the companyVoting rights and control of the company
BeforeBefore AfterAfter
Shares Shares IssuedIssued 10,00010,000 20,00020,000
ValueValue 5050 2525
Your Your sharesshares 200200 400400
Your valueYour value $10,000$10,000 $10,000$10,000
Preferred StockPreferred Stock What is preferred stock?What is preferred stock?
– Mix between regular common stock and a bondMix between regular common stock and a bond– Each share of preferred stock is normally paid a relatively high Each share of preferred stock is normally paid a relatively high
dividend and has first dibs over common stock at the dividend and has first dibs over common stock at the company's assets in the event of bankruptcycompany's assets in the event of bankruptcy
– Stockholders know exactly what they will receive from par Stockholders know exactly what they will receive from par value on stick certificatevalue on stick certificate
– In exchange for the higher income and safety, preferred In exchange for the higher income and safety, preferred shareholders miss out on large potential capital gains [or shareholders miss out on large potential capital gains [or losses]losses]
– Owners of preferred stock generally do not have voting Owners of preferred stock generally do not have voting privilegesprivileges
Why do corporations issue preferred stock?Why do corporations issue preferred stock?– Attract those conservative investors who do not want to Attract those conservative investors who do not want to
purchase common stockpurchase common stock
Why do investors purchase preferred stock?Why do investors purchase preferred stock?– Safe and steady source of income, lower return than Safe and steady source of income, lower return than
corporate bonds but better than common stock corporate bonds but better than common stock
Types of Preferred Types of Preferred StockStock Cumulative Preferred StockCumulative Preferred Stock
– Pays dividends “saved” up, even if Pays dividends “saved” up, even if company omits some payments to other company omits some payments to other preferred stock holderspreferred stock holders
Convertible Preferred StockConvertible Preferred Stock– Can be exchanged for a specific number of Can be exchanged for a specific number of
common stock – spreads risk and returncommon stock – spreads risk and return Participation FeatureParticipation Feature
– Rare feature that allows retained earnings Rare feature that allows retained earnings to go back to these stockholders after to go back to these stockholders after dividends are paid to be dividends are paid to be
Tracking Your Stock InvestmentsTracking Your Stock Investments
MonitorMonitor– Graph $ value on daily or weekly basisGraph $ value on daily or weekly basis
Watch the financialsWatch the financials– Evaluate current sales, profits, and projectedEvaluate current sales, profits, and projected
Track the productsTrack the products– Poor-quality or lack of new up-to-date can affect Poor-quality or lack of new up-to-date can affect
value of stockvalue of stock Watch the economyWatch the economy
– Inflation rate, overall economyInflation rate, overall economy Be patientBe patient
– Wait it out if the company is goodWait it out if the company is good
Section 9.2 – Section 9.2 – Evaluating StocksEvaluating Stocks Types of stock investmentsTypes of stock investments Sources of information to Sources of information to
evaluate stock investmentsevaluate stock investments Factors that affect stock pricesFactors that affect stock prices
How are stocks How are stocks classified?classified? Blue-chip stocksBlue-chip stocks Income stocksIncome stocks Growth stocksGrowth stocks Cyclical stocksCyclical stocks Defensive stocksDefensive stocks Large and small cap stocksLarge and small cap stocks Penny StocksPenny Stocks
Blue Chip StocksBlue Chip Stocks
Safe investment, attracts Safe investment, attracts conservative investorsconservative investors
Issued by strongest, most Issued by strongest, most respected companiesrespected companies
At & T, General Electric, KelloggAt & T, General Electric, Kellogg
Income StocksIncome Stocks
Pays higher-than-average Pays higher-than-average dividendsdividends
Dividends are predictable, often Dividends are predictable, often choice of retired peoplechoice of retired people
Bristol-Myers Squibb, Dow Bristol-Myers Squibb, Dow ChemicalChemical
Growth StocksGrowth Stocks
Issued by a corporation whose potential Issued by a corporation whose potential earnings may be higher than average earnings may be higher than average earnings predicted for all the corporations earnings predicted for all the corporations in the countryin the country
Do not pay dividends, but buy for potential Do not pay dividends, but buy for potential increase in value (long-term investment)increase in value (long-term investment)
Indicators: building new facilities, Indicators: building new facilities, introducing new, high-quality products, or introducing new, high-quality products, or conducting recognized research and conducting recognized research and developmentdevelopment
Home Depot, Southwest AirlinesHome Depot, Southwest Airlines
Cyclical StocksCyclical Stocks
Do well when economy is good, Do well when economy is good, but poorly during recessionsbut poorly during recessions
Ford and CentrexFord and Centrex Airlines, manufacturing, industries Airlines, manufacturing, industries
based on travelbased on travel
Defensive StocksDefensive Stocks
Not subject to ups and downs of Not subject to ups and downs of business cyclebusiness cycle
Many blue-chip stocks, income Many blue-chip stocks, income stocks, and Procter & Gamblestocks, and Procter & Gamble
Utilities, drug companies, food Utilities, drug companies, food and health careand health care
Large-Cap and Small-Large-Cap and Small-Cap StocksCap Stocks Large-cap comes from company that Large-cap comes from company that
issued a large number of shares of issued a large number of shares of stockstock
Small-cap comes from company with Small-cap comes from company with less than $500,000 capitalizationless than $500,000 capitalization
Capitalization – total amount of stocks Capitalization – total amount of stocks and bonds issued by companyand bonds issued by company
Large-cap is conservative and secure Large-cap is conservative and secure and small-cap is a higher riskand small-cap is a higher risk
Penny StocksPenny Stocks
Cheap (less than $1 per share Cheap (less than $1 per share typically), but highly speculativetypically), but highly speculative
Those of “hot” new productThose of “hot” new product– Beanie Babies, Rubic’s Cube, Beanie Babies, Rubic’s Cube,
Cabbage Patch Kids, Furby’sCabbage Patch Kids, Furby’s
What's the Problem with What's the Problem with These Stocks?These Stocks?
What makes penny stocks risky? What makes penny stocks risky? Four major issues arise when you Four major issues arise when you decide to buy these securities:decide to buy these securities:
– Lack of Information Available to the Lack of Information Available to the PublicPublic
– No Minimum StandardsNo Minimum Standards– Lack of HistoryLack of History– LiquidityLiquidity
What company is this?What company is this? After just a few years in the public markets, it began paying a After just a few years in the public markets, it began paying a
dividend and never stopped -- amazing for such a tiny company.dividend and never stopped -- amazing for such a tiny company.
Related to that point, its dividend started in the teeth of a bear 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 market in the early 1970s -- a telling sign of the strength of its financials, given the trying times.financials, given the trying times.
Wall Street treated the company like it was a bunch of hillbillies in Wall Street treated the company like it was a bunch of hillbillies in Arkansas. For years, no analysts followed it.Arkansas. For years, no analysts followed it.
Institutional ownership was well below 50% for years and years. As Institutional ownership was well below 50% for years and years. As we said, hardly anyone cared.we said, hardly anyone cared.
Sam Walton owned the majority of the stock. Here was a founder Sam Walton owned the majority of the stock. Here was a founder with a stake in the organization's enduring success.with a stake in the organization's enduring success.
Its concept was new and innovative, yet Its concept was new and innovative, yet provenproven. This store had . This store had been in business for eight years before going public, with more 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 than 30 stores and more than $32 million in sales on the day of its IPO.IPO.
What is Pump and Dump?What is Pump and Dump?
Ever received one of those emails that pretends to be Ever received one of those emails that pretends to be TO someone else, passing on some hot stock tip TO someone else, passing on some hot stock tip they've learned? Referred to as 'pump and dump' they've learned? Referred to as 'pump and dump' scams, the intent of the email is to get lots of people scams, the intent of the email is to get lots of people to take advantage of this unexpected windfall of to take advantage of this unexpected windfall of information and buy the stock. This inflates the price, information and buy the stock. This inflates the price, at which time the scammers sell their shares for a at which time the scammers sell their shares for a hefty profit. It works like this: hefty profit. It works like this:
Scammers buy worthless stock at a very low price Scammers buy worthless stock at a very low price Fake email is sent to millions of people, claiming the Fake email is sent to millions of people, claiming the
stock is projected to move stock is projected to move People buy into the scam, and thus buy the stock, People buy into the scam, and thus buy the stock,
thereby raising the price thereby raising the price The scammers sell off their holdings for a hefty profit The scammers sell off their holdings for a hefty profit The victims are left holding worthless stock The victims are left holding worthless stock
Poop and ScoopPoop and Scoop
Here the manipulators spread highly Here the manipulators spread highly negative false rumors about a company negative false rumors about a company in order to drive the price downin order to drive the price down
They buy as the stock plummets, They buy as the stock plummets, counting on a rebound in price once the counting on a rebound in price once the rumor is dispelled. In a related fraud, rumor is dispelled. In a related fraud, manipulators first short sell stock before manipulators first short sell stock before releasing the rumors. On the subsequent releasing the rumors. On the subsequent decline, they cover their positions at a decline, they cover their positions at a profit. profit.
Front RunningFront Running
In this case, the news is actually true; In this case, the news is actually true; insiders or brokers, knowing what is insiders or brokers, knowing what is coming, take large positions ahead of coming, take large positions ahead of the news becoming public. the news becoming public.
If insiders are involved, this is also If insiders are involved, this is also referred to as referred to as insider tradinginsider trading
Circular TradingCircular Trading
Happens when a stock has been laying Happens when a stock has been laying dormant for a long timedormant for a long time
Using multiple accounts, often established Using multiple accounts, often established overseas, they will trade the same shares overseas, they will trade the same shares back and forth between their own accounts back and forth between their own accounts to create the appearance of activityto create the appearance of activity
Once Once third partythird party interest is generated, one of interest is generated, one of the schemes described above may be the schemes described above may be executed.executed.
How Do You Assess a How Do You Assess a Stock Investment?Stock Investment? NewspapersNewspapers The InternetThe Internet Stock Advisory SourcesStock Advisory Sources Corporate New PublicationsCorporate New Publications
NewspapersNewspapers Most major newspapers have Most major newspapers have
financial sectionsfinancial sections May cover stocks of local interestMay cover stocks of local interest Detailed stock Detailed stock informationinformation
InternetInternet Most corporations have their own Most corporations have their own
Web sitesWeb sites More up-to-date and detailed than More up-to-date and detailed than
printed publicationsprinted publications
Stock Advisory Stock Advisory ServicesServices Charge feesCharge fees Information varies from simple Information varies from simple
alphabetic listings to detailed alphabetic listings to detailed financial reportsfinancial reports
Corporate News Corporate News PublicationsPublications Annual and quarterly reports Annual and quarterly reports
have activities and detailed have activities and detailed financial info.financial info.
Call, write, or emailCall, write, or email
Factors that Influence Factors that Influence the Price of Stockthe Price of Stock
Bull Market – Occurs when Bull Market – Occurs when investors are optimistic about investors are optimistic about economy and buy stockseconomy and buy stocks
Bear Market – Occurs when Bear Market – Occurs when investors are pessimistic about investors are pessimistic about the economy and sell stocksthe economy and sell stocks
Company’s profits, losses, and Company’s profits, losses, and numerical measures of its numerical measures of its financial situationfinancial situation
Numerical Measures Numerical Measures for a Corporationfor a Corporation Current Yield Current Yield Total ReturnTotal Return Earnings Per ShareEarnings Per Share Price-Earnings RatioPrice-Earnings Ratio
Current YieldCurrent Yield
Synopsis: Computing the current yield of your Synopsis: Computing the current yield of your stocks will help you to determine the value of your stocks will help you to determine the value of your investmentinvestment
Example: Suppose that Tanika purchases stock in Example: Suppose that Tanika purchases stock in EatGrapes.com. Assume that EatGrapes.com pays EatGrapes.com. Assume that EatGrapes.com pays an annual dividend of $1.20 and is currently selling an annual dividend of $1.20 and is currently selling for $24 a share. What is Tanika’s current yield?for $24 a share. What is Tanika’s current yield?
Formula: Formula: Annual DividendAnnual Dividend = Current Yield = Current YieldCurrent Market ValueCurrent Market Value
Solution: Solution: $1.20 $1.20 = 0.05 = 5% or .05= 0.05 = 5% or .05 $24.00$24.00
Total ReturnTotal Return
Synopsis: Calculating the total return of your Synopsis: Calculating the total return of your investment will let you know whether your investment is investment will let you know whether your investment is increasing or decreasing in valueincreasing or decreasing in value
Example: Two years ago Mark bought 40 shares of Example: Two years ago Mark bought 40 shares of Ferguson’s Motor Company for $70 a share. The stock Ferguson’s Motor Company for $70 a share. The stock pays an annual dividend of $1.50. Mark is going to sell pays an annual dividend of $1.50. Mark is going to sell his stock at the current price of $120 a share. What his stock at the current price of $120 a share. What would be the total return on his investment?would be the total return on his investment?
Formula: Current Return + Capital Gain = Total ReturnFormula: Current Return + Capital Gain = Total Return
Current Return = Dividend * Number of Shares * Years Current Return = Dividend * Number of Shares * Years Held Held Capital Gain = (Selling Price per Share - Purchase Price Capital Gain = (Selling Price per Share - Purchase Price per per
share) * Number of Shares Heldshare) * Number of Shares Held
Current Return + Capital Gain = Total Current Return + Capital Gain = Total ReturnReturn
Current Return = Dividend * Number of Shares * Years Current Return = Dividend * Number of Shares * Years Held Held
Capital Gain = (Selling Price per Share - Purchase Capital Gain = (Selling Price per Share - Purchase Price per Price per
share) * Number of Shares Heldshare) * Number of Shares Held
Current Return $1.50 * 40 * 2 + $120Current Return $1.50 * 40 * 2 + $120
Capital GainCapital Gain ($120 - $70) * 40 = $2000 ($120 - $70) * 40 = $2000
Total ReturnTotal Return $120 + $2000 = $2,120 $120 + $2000 = $2,120
Earnings Per ShareEarnings Per Share
Synopsis: Figuring out the earnings per share can help Synopsis: Figuring out the earnings per share can help you find out a company's profits. This information can you find out a company's profits. This information can help you determine the general health of the company in help you determine the general health of the company in which you are investing.which you are investing.
Example: EFG Corporation had net earnings of $800,000 Example: EFG Corporation had net earnings of $800,000 last year. EFG had 100,000 outstanding shares of last year. EFG had 100,000 outstanding shares of common stock. What were EFG’s earnings per share?common stock. What were EFG’s earnings per share?
Formula: Formula: Net EarningsNet Earnings = Earnings Per Share = Earnings Per Share Common Stock OutstandingCommon Stock Outstanding
Solution: Solution: $800,000 $800,000 = $8= $8 100,000100,000
Price-Earnings RatioPrice-Earnings Ratio
Synopsis: The price-earnings ratio is the most Synopsis: The price-earnings ratio is the most common measure of how expensive a stock is. common measure of how expensive a stock is. Determining the price-earnings ratio can help you Determining the price-earnings ratio can help you decide whether a stock is worth purchasing.decide whether a stock is worth purchasing.
Example: EFG’s stock is selling for $96 a share. EFG’s Example: EFG’s stock is selling for $96 a share. EFG’s earnings per share are $8. What is EFG’s price-earnings per share are $8. What is EFG’s price-earnings ratio?earnings ratio?
Formula: Formula: Market Price Per ShareMarket Price Per Share = Price-Earnings = Price-Earnings RatioRatio
Earnings Per ShareEarnings Per Share
Solution: Solution: $96$96 = 12 = 12 $8$8
Investment TheoriesInvestment Theories
Theories on how to evaluate Theories on how to evaluate possible investmentspossible investments– Fundamental TheoryFundamental Theory– Technical TheoryTechnical Theory– Efficient Market TheoryEfficient Market Theory
Fundamental TheoryFundamental Theory
Assumes a stock’s real value is Assumes a stock’s real value is determined by looking at determined by looking at company's future earningscompany's future earnings
Look at financial strength, type of Look at financial strength, type of industry, new products, state of industry, new products, state of economyeconomy
Technical TheoryTechnical Theory
Based on idea that a stock’s value Based on idea that a stock’s value is determined by stock market is determined by stock market forcesforces
Look at # of stocks bought or sold Look at # of stocks bought or sold over timeover time
Look at total number of shared Look at total number of shared tradedtraded
Efficient Market Efficient Market TheoryTheory Believe stock price movements are purely randomBelieve stock price movements are purely random
All investors have considered all available information on a stock, All investors have considered all available information on a stock, therefore it is impossible to outperform the market over a long therefore it is impossible to outperform the market over a long period of timeperiod of time
Any time you buy and sell Any time you buy and sell securitiessecurities, you're engaging in a game of , you're engaging in a game of chance, not skill. If markets are efficient and current, it means that chance, not skill. If markets are efficient and current, it means that prices always reflect all information, so there's no way you'll ever prices always reflect all information, so there's no way you'll ever be able to buy a stock at a bargain price. be able to buy a stock at a bargain price.
The (now largely discredited) theory that all market participants The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no becomes available. If this were strictly true, no investmentinvestment strategystrategy would be better than a coin toss. Proponents of the efficient market would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the theory believe that there is perfect information in the stock marketstock market. . This means that whatever information is available about a This means that whatever information is available about a stockstock to to one investor is available to all investors (except, of course, insider one investor is available to all investors (except, of course, insider information, but information, but insider tradinginsider trading is illegal). Since everyone has the is illegal). Since everyone has the same information about a stock, the price of a stock should reflect same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn’t is no way for him/her to know something about a stock that isn’t already reflected in the stock's already reflected in the stock's priceprice. .
Stock Advisory Stock Advisory ServicesServices Charge feesCharge fees Information varies from simple Information varies from simple
alphabetic listings to detailed alphabetic listings to detailed financial reportsfinancial reports
Section 9.3 – Buying and Section 9.3 – Buying and Selling StocksSelling Stocks
How to describe how stock are How to describe how stock are bought and soldbought and sold
How to explain how the trading How to explain how the trading strategies used by long-term strategies used by long-term investors and short-term investors and short-term investorsinvestors
Markets for StocksMarkets for Stocks
The Primary MarketsThe Primary Markets The Secondary MarketsThe Secondary Markets
Primary MarketsPrimary Markets Investors purchase new securities Investors purchase new securities
from a corporationfrom a corporation– May buy through investment bankMay buy through investment bank– May buy from representative of May buy from representative of
corporationcorporation Initial Public OfferingInitial Public Offering
– When corporations sell to public for very When corporations sell to public for very first timefirst time
– Use for new business start ups or Use for new business start ups or business growth and expansionbusiness growth and expansion
– Considered high-risk investmentConsidered high-risk investment
Secondary MarketsSecondary Markets Market for existing securities being Market for existing securities being
currently tradedcurrently traded Securities exchange Securities exchange
– Marketplace where brokers who Marketplace where brokers who represent investors meet to buy and represent investors meet to buy and sell securitiessell securities
– NYSE is one of largest in worldNYSE is one of largest in world Over-the-counter market – network of Over-the-counter market – network of
dealers who buy and sell the stocks of dealers who buy and sell the stocks of corporations that are not listed on a corporations that are not listed on a securities exchangesecurities exchange
Most traded through NASDAQMost traded through NASDAQ
McDonaldsMcDonalds
VideoVideo
How to Buy and Sell How to Buy and Sell StockStock Brokerage FirmsBrokerage Firms Account ExecutivesAccount Executives Types of OrdersTypes of Orders Computerized TransactionsComputerized Transactions
Brokerage FirmsBrokerage Firms
Full service, discount, onlineFull service, discount, online Difference is in commission cost and Difference is in commission cost and
service doneservice done Full service charge highest for Full service charge highest for
personalized service and free personalized service and free researchresearch
Discount and online have printed Discount and online have printed material or info on website to help you material or info on website to help you
Account Account Executives/BrokersExecutives/Brokers Licensed, buy and sell securities for clientsLicensed, buy and sell securities for clients Handle your portfolio, but be sure to Handle your portfolio, but be sure to
describe your short, long-term goalsdescribe your short, long-term goals Stay involved, firms not responsible for Stay involved, firms not responsible for
financial lossesfinancial losses Be careful of churning, a lot of Be careful of churning, a lot of
buying/selling to make more commissions buying/selling to make more commissions for brokerfor broker
$25 to $55 for buying and selling stocks, $25 to $55 for buying and selling stocks, additional based on # of shares and valueadditional based on # of shares and value
Types of OrdersTypes of Orders
Order to buy/sell – done over Order to buy/sell – done over phone, Internet, or in person phone, Internet, or in person
Market OrdersMarket Orders Limit OrdersLimit Orders Stop OrdersStop Orders
Market OrdersMarket Orders
Request to buy/sell at current Request to buy/sell at current market valuemarket value
Brokers/rep tries to get best price Brokers/rep tries to get best price possible, like an auctionpossible, like an auction
Payment for stocks required with 3 Payment for stocks required with 3 weeksweeks
Stock Stock certificatecertificate arrive in 4 to 6 arrive in 4 to 6 weeksweeks
Limit OrdersLimit Orders
Request to buy/sell at a specific Request to buy/sell at a specific priceprice
No guarantee of purchase or saleNo guarantee of purchase or sale Limit orders filled in order Limit orders filled in order
received, so your turn may come received, so your turn may come after price has risenafter price has risen
Stop OrdersStop Orders
Used for selling a stock at next avail. Used for selling a stock at next avail. opportunity when price reaches a opportunity when price reaches a specified amountspecified amount
You enter a stop loss order at a point You enter a stop loss order at a point below the current market price. If the below the current market price. If the stock falls to this price point, the stop stock falls to this price point, the stop loss order becomes a market order and loss order becomes a market order and your broker sells the stock. If the stock your broker sells the stock. If the stock stays level or rises, the stop loss order stays level or rises, the stop loss order does nothing. does nothing.
Stop loss orders are cheap insurance Stop loss orders are cheap insurance that protects you from a loss. that protects you from a loss.
Computerized Computerized TransactionsTransactions Full and discount brokerage firms Full and discount brokerage firms
allow investors to trade onlineallow investors to trade online Software packages or broker's Software packages or broker's
sites can be used to evaluate sites can be used to evaluate stock, track and monitor portfolio, stock, track and monitor portfolio, buy and sell securitiesbuy and sell securities
Short Skirts and Short Skirts and StocksStocks VideoVideo
Investment StrategiesInvestment Strategies
Long-term techniquesLong-term techniques– Buy and HoldBuy and Hold– Dollar Cost AveragingDollar Cost Averaging– Direct investment and dividend Direct investment and dividend
reinvestmentreinvestment Short-term techniquesShort-term techniques
– Buying on marginBuying on margin– Selling shortSelling short
Buy and HoldBuy and Hold
Buy and hold for ten years or Buy and hold for ten years or moremore
You may get:You may get:– DividendsDividends– Price per stock may go upPrice per stock may go up– Stock may splitStock may split
Dollar Cost AveragingDollar Cost Averaging
Systematic purchase at regular Systematic purchase at regular intervalsintervals
Avoid having to buy high and sell Avoid having to buy high and sell lowlow
Simple and practical for those Simple and practical for those with steady incomeswith steady incomes
Direct Investment and Direct Investment and Dividend ReinvestmentDividend Reinvestment Direct investmentDirect investment
– Investors buy stock directly from Investors buy stock directly from companycompany
– Save brokerage fees and commissionSave brokerage fees and commission Dividend reinvestmentDividend reinvestment
– Automatically reinvests any dividends Automatically reinvests any dividends you earn back into more stockyou earn back into more stock
Buying on MarginBuying on Margin
Borrow money from broker to buy stock Borrow money from broker to buy stock by opening a margin account and sign a by opening a margin account and sign a contractcontract
Must deposit a minimum of $2000 in Must deposit a minimum of $2000 in cash or eligible securities with broker cash or eligible securities with broker (collateral)(collateral)
Buy stock using money from margin acct. Buy stock using money from margin acct. and borrowing money from broker and borrowing money from broker – Result – you get more stocks with less of your Result – you get more stocks with less of your
own cash own cash – Stock price goes up, you sell, pay back brokerStock price goes up, you sell, pay back broker
Selling ShortSelling Short
Arrange to borrow # of shares of Arrange to borrow # of shares of stock from brokerage firmstock from brokerage firm
Sell borrowed stock, assuming Sell borrowed stock, assuming value will drop within a short value will drop within a short period of timeperiod of time
Buy stock at a lower price than the Buy stock at a lower price than the price you sold it forprice you sold it for
Use new stock to replace original Use new stock to replace original stock that you borrowedstock that you borrowed
