BUSINESS AND PERSONAL FINANCE

BUSINESS AND PERSONAL FINANCE

Chapter 18

Stocks&

Stock Evaluation

Quiz True or False??Quiz True or False??1. All stocks pay dividends. 2.Growth stocks are generally a safe investment

that attracts conservative investors. 3.A bull market occurs when investors are

optimistic about the economy. 4.A defensive stock stays stable during downturns

in the economy. 5.Capitalization is the amount of stocks issued by a

corporation. 6.The appeal of investing in blue-chip stock is the

possibility of large returns. 7.Corporations issue stock as a form of equity or

money for the company.8.The larger the Price/Earnings ratio, the better the

company is doing.

Stock that provides the most basic form of corporate ownership.

Common StockCommon Stock

Don’t repay the money to stockholder

A form of equity (money) for the corporation

Dividends are not mandatory.

Why Corporations Issue Common Stock:

Preferred StockPreferred Stock

It is another method of financingAttracts conservative investors who do not want to buy common stock.

Why do investors buy preferred stock?•Income from Dividends•Appreciation of stock value•Increase value from stock splits•Voting Rights and control of company

Why Corporations Issue Preferred Stock:

Blue-chip stocksBlue-chip stocks——a VERY safe investment that generally attracts conservative investors.

Income stocksIncome stocks——pay higher dividends compared to other stock issues. Safer!

Growth stocksGrowth stocks——stocks that have the potential to bring higher than average earnings. Risky! Usually don’t pay dividends.

Types of Stock Investments (1 of 3)

Evaluation of Evaluation of a Stock Issuea Stock Issue

Cyclical stocksCyclical stocks—have a market value that tends to reflect the state of the economy.

Defensive stocksDefensive stocks—remain stable during declines in the economy.

Large cap stocksLarge cap stocks—issued by a company with a large amount of capitalization – lots of $$$$$$$$.

Types of Stock Investments (2 of 3)

Evaluation of Evaluation of a Stock Issuea Stock Issue

Small cap stocksSmall cap stocks—issued by a company with a capitalization of $150 million or less.

Penny stocksPenny stocks—sell from less than $1 to $10 a share.

Types of Stock Investments (3 of 3)

Evaluation of Evaluation of a Stock Issuea Stock Issue

The Internet

Statistical Averages or Stock Indices Statistical Averages or Stock Indices

Sources for Evaluating Stock Investments

Evaluation of Evaluation of a Stock Issuea Stock Issue

1.1. Dow Jones IndustrialDow Jones Industrial Average (DOW) Average (DOW) 30 companies30 companies2.2. Standard & Poor’s 500 Stock Index Standard & Poor’s 500 Stock Index 500 companies500 companies

The average indicates whether the Stock Market in general is increasing or decreasing in value.

Factors That Influence the Price of Stock

A bull marketbull market occurs when investors are optimistic about the economy and buy stocks.

Evaluation of Evaluation of a Stock Issuea Stock Issue

A bear marketbear market occurs when investors are pessimistic about the economy and sell stocks.

Factors that Influence the Price of Stock

Current Yield of a Stock• (Annual Dividend ÷ Market Price of the stock) X 100 = Current Yield (%)

Total Return of a Stock• Current Return + Capital Gain = Total Return• Current Return = Dividend X the number of shares of stock• Capital Gain = (Selling price/share – Purchase price/share) X the number of

shares a stockholder hasE

arnings Per Share of a Company (Corporate profit)• Net Earnings ÷ Common Stock Shares Outstanding

Price-Earnings Ratio of a Company (Goal is 5-35; the lower the better)• (Market Price Per Share ÷Earnings Per Share) = Price Earnings Ratio

Current Yield

Paul purchased jellybean.com stock. The company pays an annual dividend of $1.25/share and the stock is selling for $15.00 per share. What is the current yield?

Annual Dividend/Current Market Value of the stock = Current Yield (%)

$1.25/$15.00 = .0834

.0834 X 100 = 8.34%

Total ReturnSusie bought 20 shares of Verizon stock for $25.00/share. The stock pays an annual dividend of $1.45/share. Susie is going to sell her stock at the current price of $40 per share. What is the total return on her investment?

1.Current Return = Dividend X the number of shares of stock

$1.45 X 20 shares = $29.002.Capital Gain = (Selling price – Purchase price) X the number of shares a stockholder has

($40-$25) X 20 shares = $300.003.Current Return + Capital Gain = Total Return$29.00 + $300.00= $329.00

Earnings Per Share of a Company(Corporate profit)

Net Earnings/Common Stock Outstanding

•Purple Hat Company had net earnings of $250,000. Their outstanding common stock was 150,000 shares. What are their earnings per share?

$250,000/150,000 shares = $1.67 per share

Price-Earnings Ratio of a Company

(Goal is 5-35; the lower the better)Market Price Per Share/Earnings Per Share = Price Earnings Ratio

GGoats Incorporated oats Incorporated is selling their stock for $103 per share. Their earnings per share are $15. What is their P-E Ratio?

$103/$15 = 6.86

Quiz True or False??Quiz True or False??1. All stocks pay dividends. 2.Growth stocks are generally a safe investment

that attracts conservative investors. 3.A bull market occurs when investors are

optimistic about the economy. 4.A defensive stock stays stable during downturns

in the economy. 5.Capitalization is the amount of stocks issued by a

corporation. 6.The appeal of investing in blue-chip stock is the

possibility of large returns. 7.Corporations issue stock as a form of equity or

money for the company.8.The larger the Price/Earnings ratio, the better the

company is doing.