Slide 1

Common Stock Investing Appendix B, Part VI Are Stock Market Indices and Stock Prices Leading Economic Indicators? Is this Information Useful?

Slide 2

Heres what you get when buying Stock Committee on Uniform Securities Identification Procedures OWNERSHIP IS FREELY TRANSFERABLE

Slide 3

How are Stock Prices reported? The Dow 30 Largest and Most Widely Held Public Companies Standard & Poors (S&P) 500 Large-Cap (>$3B) Companies traded on NASDAQ and NYSE National Association of Securities Dealers Automated Quotations 3,000 US/Foreign Growth/Technology Stocks

Slide 4

Why is a Stocks Price (Value?) what it is? EFFICIENT MARKET HYPOTHESIS Stock Prices Reflect All Publically- Available Information Theory: Prices are Never Under- or Over-Valued CANT BEAT MARKET

Slide 5

Isnt it all about Interpreting Information? How does Information effect a Firm, its Industry and the Economy? "I'd be a bum in the street with a tin cup if the markets were efficient." "I'd be a bum in the street with a tin cup if the markets were efficient."

Slide 6

RISK RISK (effects Value) CA $ H If, When and How Much CA $ H EXPECTED RATE OF RETURN Risk Aversion (%) Whats the VALUE of an Asset (Stock)? Future CA $ H to be Received while Owning Asset For Stockholders = Companys Future Net Income Future CA $ H to be Received while Owning Asset For Stockholders = Companys Future Net Income

Slide 7

Net Income (EPS) Expected Rate of Return Expected Rate of Return = Value * How much Less? Factor in Margin-of-Safety (Contingency ) Compare Your Value to Markets Price If Price less* than Value, then Buy

Slide 8

Risk-Free Rate of Return (2 Yr. Treasury) + Systematic Risk (Inflation CPI Change) + Equity Risk Premium (Firm Specific Risk) Total = Rate that Compensates for All Ownership Risks If Expected Rate of Return measures Risk, How to Calculate it?

Slide 9

How is a Stocks Price reported? ttm = Twelve Trailing Months S EPS = Earnings (Net Income) Per Share $70 to $90 = 29% Gain Dont Forget Cash Dividends