investing in stocks and bonds. objectives describe stocks and bonds and how they are used by...
TRANSCRIPT
Investing in Stocks and Bonds
Objectives
Describe stocks and bonds and how they are used by corporations and investors.
Define everyday terms in the language of stock investing.
Classify stock according to their basic descriptive categories.
Objectives
Describe the major characteristics of bonds.
Differentiate among the four general types of bonds.
Objectives
Describe what the investor should consider before investing in bonds, particularly the current yield and yield to maturity.
List the advantages and disadvantages of investing in bonds.
Common stock
Preferred stock
Bonds
Stocks and Bonds and How They are Used
Why do corporations issue common stock?To raise money to start or expand a
businessTo help pay for ongoing business
expensesThey don’t have to repay the money Dividends are not mandatoryStockholders have voting rights
Investing in Stocks
Why Do Investors Purchase Stock?
Income from dividends
Dollar appreciationof stock value
Increased value from stock splits
Common vs. Preferred Stock
Common stockget dividends depending on profit the
company makes
Preferred stock receive cash dividends before common
stock holderspre-determined dividend ratemost preferred stock is callable
Calculating Total Return
100 shares of common stock purchased December 21, 2008, sold December 21, 2009; total dividedts of $2.60 per share for the investment period.
Cost when purchased: Return when sold:100 Shares @ $71 $7,100 100 shares @ $89 $8,900Commissions +55 Commissions - 70Total investment $7,155 Total Return $8,830
Transaction Summary:Total Return $8,830Minus Total Investment 7,155Profit from Stock Sale $1,675Plus Dividends +260Total Return for the transaction $1,935
Features of Preferred Stock Cumulative preferred stock
unpaid cash dividends accumulate and are paid before cash dividends to common stock holders
Participation feature rare form of investment can share in earnings beyond stated dividend
amount Conversion feature
can be traded for shares of common stock
How to Evaluate a Stock Read stock quotes in a newspaper, such as the
Wall Street Journal 52 week high and low stock abbreviation and symbol dividends per share in the last 12 months percent yield price earnings ratio volume high and low for the day closing price and net change
Earnings per share (EPS)
Price/earnings ratio (P/E ratio)
Dividend payout ratio
Market price
Book value
Language of Stock Investing
Market-to-book ratio
Par value
Total return
Language of Stock Investing
Preemptive rights
Stock dividends
Stock splits
Voting rights
Language of Stock Investing
Classifications of Common Stock
Income stocks
Growth stocks
Speculative stocks
Other characterizations
Types of Stock Investments
Blue chip stock low riskconsistent dividendsex. AT&T, Kellogg's, General Electric
Income stockhigher than average dividendsex. utility stock
Types of Stock Investments
Growth stock -earns above average profits low or no dividendsProfits reinvested in
company, so...Stock price
should go upex. Microsoft or Intel
(continued)
Types of Stock Investments
Cyclical stock follows business cycles of advance
and declines in the economy ex. new construction, cars, timber
Defensive stock remains stable even if the economy is
declining ex. food and utility stocks
(continued)
Numeric Measures to Consider When Evaluating a Stock
Look at book value of one sharenet worth of company divided by the
number of outstanding shares
if a share costs more than the book value the company may be overextended or it may have a lot of money in research and development
Numeric Measures to Consider When Evaluating a Stock Look at the price earnings ratio
also called the P-E price of one share of stock divided by the
earnings per share of stock over the last 12 months
a low number means could be a good time to buy it, however many technology stocks have high P-Es
Look at the beta for the stock stock with a beta >1.0 means more volatility
(continued)
Long-Term and Short Term Investment Strategies
Buy-and Hold TechniqueDollar Cost Averaging
Direct Investment and Dividend Reinvestment Plan (DRIP)
Long-Term and Short Term Investment Strategies
Day TradingBuying Stocks on MarginSelling Short
Trading in options
Make a Decision toSell Stocks
1. Stock reaches target price. 2. Favorable development temporarily push up
price. 3. Good profits unlikely to continue. 4. Stock lags behind others in industry group. 5. Company profits begin to fall short of
projections. 6. Industry/company prospects are deteriorating. 7. Losses are moderate. 8. Stock’s price/earnings ratio appears too high.
Corporate bond Face value Maturity date Bond indenture Debenture Mortgage bond Trustee Secured and unsecured Senior and subordinated
Language of Bond Investing
Registered and bearer
Callable
Convertibility
Bond Ladder
Language of Bond Investing
Corporate bonds
U.S. government securities
Treasury bills, notes, and bonds Federal agency issues
Municipal Bonds
Types of Bonds
Tax Equivalent Yield
Taxable equivalent yield = Tax exempt yield 1.0 – tax rate
The taxable equivalent yield on a 5% tax-exempt municipal bond for a person in the 28% tax bracket is 6.94%
.05 1.0-.28 = .0694 = 6.94%
Susceptibility to certain risks
Credit
Callability
Inflation
Interest rate
Considerations Before Investing in Bonds
Premiums and discounts
Current yield
Yield to maturity
Tax-equivalent yields
When to sell
Considerations Before Investing in Bonds
Approximate Market Value of a Bond
Example: Shawn purchased a corporate bond that pays 4.5% interest based on a face value of $1,000. Comparable new corporate bond issues are paying 7%. How much is Shawn’s bond worth?
Formula:Dollar Amount of Annual Interest = Approximate Market Interest Rate of Comparable Bonds Value
A. Find the dollar amount of annual interest.Face Value of Bond x Annual Interest Rate = Dollar Amount of Annual Interest$1,000 x 4.5% = $45
B. Solve for approximate market value.Dollar Amount of Annual Interest = Approximate Market Interest Rate of Comparable Bonds Value
$45 = $642.86 7%
Current Yield
Assume you own a $1,000 corporate bond that pays 7% interest annually and matures on July 15, 2013. This means you will receive $70.00 annually. Also assume the market price is $940. The current yield is calculated:
Yield to Maturity
Corporate Bond TransactionAssume that on March 15, 1998, you purchased a 9.2% corporate bond. Your cost for the bond was $920 plus a $10 commission charge. Also assume that you held the bonds until March 15, 2008, when you sold them for the current value of $1,040.
Bond Ratings
Pay higher interest rates than savings
Offer safe return of principle
Have less volatility than stocks
Offer regular income
Require smaller initial investment
Advantages of Investing in Bonds
No hedge against inflation
Can be quite volatile
Compounding is almost impossible
Subject to investors tax rate
Poor marketability
Disadvantages of Investing in Bonds