Welcome Miami Northwestern Bulls!Florida International University State Farm Financial Literacy Lab

What are stocks?•Represent a fraction of ownership in a

corporation

•Referred as:▫Shares▫Equity▫Stock

Characteristics• Represent a claim to part of the

corporations assets and earnings

• Ownership gives shareholders the right to vote on management placement and policies

• Price determined by supply and demand

• Potential to earn a lot if a company is successful, but also stand to lose entire investment if the company isn't successful. 

Types of Stocks•Common Stock

•Preferred Stock

Common Stocks•Represents voting rights

•Most frequently used

•Returns▫Dividends▫Capital Appreciation

Types Of Stock Returns• Dividends:

Distributing a portion of company earnings, decided by the board of directors, to its shareholders

• Capital Appreciation: A rise in the value of an asset based on a rise in market price

Preferred Stocks•Preference in dividends.

•Preference in assets in the event of liquidation.

•Convertible into common stock.

•Nonvoting.

Risk•Systematic risk

▫The risk inherent to the entire market

•Unsystematic risk▫Company specific

risk that is inherent in each investment

Advantages•Limited liability

•Historically outperforms other investment alternatives

•Very liquid

Disadvantages•Does not guarantee a

return

•Less claim on assets than creditors▫Bond

Holders>Preferred > Common

•Not all pay dividends

Trading Stocks•Most stocks are traded on exchanges

▫Places where buyers and sellers meet and decide on a price.  Physical Virtual

Purchasing Stocks•Using a Broker

▫Party that arranges transactions between a buyer and a seller, and gets a commission

•Using dividend reinvestment plans▫Reinvesting dividends to

acquire additional shares

Mutual Funds• A mutual fund is a collection of stocks and/or bonds.

Investors make money three ways:

1) A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) The value of the fund's shares increase in price.

Advantages of Mutual Funds• Diversification

• Economies of Scale

• Liquidity

• Simplicity

Disadvantages of Mutual Funds• Professional Management

• Costs

• Dilution

• Taxes