Proper Information about Common Stock - Represents ownership in a corporation and allows investors to participate in the profits

1. Common Stock Investments
Dhanashri Academy

2. Key Topics
Key topics include:
long-term perspective;
advantages and disadvantages;
characteristics, new issues, stock quotations and transaction
costs;
measures of common stock value;
dividends;
different kinds of common stock; and
uses and strategies of common stock investing.

3. Common Stock
Represents ownership in a corporation and allows investors
to participate in the profits
Stocks offer investors the opportunity to shape an investment
program to their individual needs

4. Stock Returns
Stock returns come mainly from capital appreciation
Stock market returns have averaged about 12% per year over
the past 50 years, but over 18% during the past decade

5. Advantages: Common Stock
Potential for high returns; no upper limits.
May provide current income return from dividends.
Shares are highly liquid and easily transferred.
Transaction costs are relatively low; on-line trades can
be very cheap.
Low unit prices relative to other securities.

6. Disadvantages: Common Stock
Earnings and performance are subject to wide swings.
Selection of common stocks is complex.
Current income is relatively low, compared to bonds.

7. Publicly Traded Stocks
Public offering
an offering to sell to the investing public a set number of shares
of a firm's stock at a specified price
Rights offering
an offering of a new issue of stock to existing shareholders,
who may purchase new shares in proportion to their current
ownership position

8. Publicly Traded Stocks
Stock spin-off
a conversion of one of a firm's subsidiaries to a stand-alone
company by distribution of stock in that new company to
existing shareholders
Stock splits
a maneuver in which a company increases the number of shares
outstanding by exchanging a specified number of new shares of
stock for each outstanding share

9. Publicly Traded Stocks
Treasury stock
stock that has been sold and subsequently repurchased by the
issuing firm
Classified common stock
Stock issued by a company in different classes, each of which
offers different privileges and benefits to its holders

10. Buying and Selling Stocks
The investor must be familiar with stock quotes
The investor must also consider transaction costs

11. Stock Quotes
NYSE – New York Stock Exchange
AMEX – American Stock Exchange
NASDAQ
Published in a twelve-column format

12. Column Titles
52 weeks Hi
highest price within past year, adjusted for stock splits if any
52 weeks Lo
lowest price w/n past year
Stock
name of company

13. Column Titles (2 of 5)
Sym
ticker symbol; 1-3 characters on NYSE and AMEX; 4-5 on
NASDAQ.
Div
annual dividend

14. Column Titles
Yld %
dividend yield based on current annual dividend divided by
market price PE - price-earnings ratio based on most recent
four quarters of earnings
Vol 100s
number of shares traded yesterday (in 100s)

15. Column Titles
Hi
highest price at which stock traded yesterday
Lo
lowest price yesterday Close - closing price yesterday

16. Column Titles
Close
 closing price yesterday
Net Chg
change in price from close of previous day

17. Transaction Costs
average 1-5% of value of transaction when using a full-
service broker
Odd-lot trades (less than 100 shares) carry an added cost
called odd-lot differential

18. Transaction Costs (continued)
Discount brokers can save an investor up to 70% on
commission
On-line trades can now cost less than $ 10 per trade

19. Measures of Value
Par value
the stated or face value (meaningless for investment purposes)
Book value
the amount of shareholder equity in a company; equals the
amount of the firm's assets minus liabilities and preferred stock

20. Measures of Value (continued)
Market value
the prevailing price of a security.
Investment value
the amount that investors believe a security should be trading
for, or what they think it's worth.

21. Dividends and Earnings per Share
(EPS)
The directors make the dividend decisions based on several
factors.
Earnings per share (EPS) represents the amount that is
earned per share
EPS = (net profit after taxes - pfd dividends)
# shares outstanding

22. Dividends and Earnings per Share
(EPS)
Dividends are paid out of earnings, but do not have to be
paid even when the firm is profitable
Generally, however, higher EPS lead to higher dividends

23. Dividends (Important dates)
Record date
date on which an investor must be a registered shareholder to
be entitled to receive a dividend
Ex-dividend date
3 business days prior to the date of record; determines if one is
an official shareholder and thus eligible to receive a declared
dividend
Payment date
the actual date on which the company pays the dividend

24. Cash Dividends and the Dividend Yield
Dividends are normally paid in cash, although stock
dividends are also common.
Cash dividends are current income, which can be
expressed as the dividend yield.
Dividend yield = annual dividend per share
market price per share

25. Dividend Payout Ratio (DPR)
One measure of stability of the cash dividend is the dividend
payout ratio (DPR).
DPR = dividend per share / current market price per share.
A high DPR could suggest difficulty in paying future
dividends.

26. Dividend Reinvestment Plans and
Stock Dividends
Dividend reinvestment plans (DRIPs)
plans in which shareholders have cash dividends automatically
reinvested into additional shares.
Stock dividend
A dividend payment in the form of additional shares of stock.

27. Market Classifications of Common
Stock
Blue chip stocks
financially strong, high quality stocks with long and stable
records of earnings and dividends.
Income stocks
Have long and sustained records of paying higher-than-average
dividends.
Growth stocks
experience high rates of growth in operations and earnings.

28. Market Classifications of Common
Stock
Speculative stocks
offer the potential for substantial price appreciation, usually
because of some special situation, such as new management or
the introduction of a promising new product.
Cyclical stocks
Stocks whose earnings and overall market performance are
closely linked to the general state of the economy.

29. Market Classifications of Common
Stock
Defensive stocks
tend to hold their own, and even do well, when the economy
starts to falter.
Mid-cap stocks
medium-sized stocks, generally with market value of less than
$3-4 billion, but more than $750 million.
Small-cap stocks
have market value of less than $750 million, and may offer
above-average returns.

30. Foreign Stocks
Foreign equity markets
 outperform US markets in most years
Investors can buy foreign stocks directly
Has many logistical problems
American Depository Receipts (ADRs)
Backed by foreign securities held by US banks

31. Foreign Stocks
Both direct purchase and ADRs
have usual risks associated with common stocks, plus the
currency exchange rate risk that drastically can affect total
return.
Total return in US$ = dividends + cap gains (losses) + (or) -
changes in FOREX rates.

32. Investment Strategies
Investment strategies can be employed to satisfy one of three
basic investment needs:
warehouse of value
accumulation of capital
and/or as a source of income

33. Buy-and-Hold Strategy and The High-
Income Approach
The most basic strategy is the buy-and-hold.
 High-quality stocks are selected and held for extended periods;
a strategy popular with value-oriented investors.
The high-income approach
uses common stocks for current income. Since dividends
mostly increase through time, the level of current income
increases as well.

34. Quality Long-Term Growth and
Aggressive Stock Management
Quality long-term growth
a less conservative strategy. This strategy relies on capital gains
as the primary source of return.
Aggressive stock management
uses quality issues to seek attractive rates of return in a fully
managed portfolio.
has substantial risk and requires a substantial amount of
investor time.

35. Speculation and Short-Term Trading
Speculation and short-term trading
the highest risk strategy.
investor seeks returns from capital gains while holding the
stock only a short period of time.

36. Using Investment Strategies
The first three strategies go well with the objective to use
stocks as a warehouse of value
All five could be used to accumulate capital
The high-income strategy fits best with the objective of using
stocks as a source of income

37. Popular Investment Strategies
 Some Popular Investment Strategies Include:
Growth Investing, which is investing in stocks with above average forecasts
of earnings growth and high price/earnings ratios in expectation of higher
returns.
Value Investing, which is investing in stock of companies that are out of
favor with the market for some reason, as reflected by low price/earnings
ratios and low prices compared to their fundamentals.
Sector Investing, which is an investing style based on the premise that
certain industry sectors perform better during specific stages of the
economic cycle.
Momentum Investing, which is an investing style that focuses on using
relative stock price movement to determine when to buy and sell.