chapter 5: second half. each year, a corporation may distribute to its shareholders dividends ...
TRANSCRIPT
Each year, a corporation may distribute to its shareholders dividends
Dividends are part of a company’s profits
Dividends are not as popular as they once were.
Dividends
The value of a stock is not fixed
It fluctuates (goes up and down) with changes in supply and demand.
Many people invest in stocks believing they will be worth more then what they paid for it (standard investors)
This increased value is CAPITAL GROWTH
Capital Growth
People looking to make quick money, who are often reckless in their use of the Stock Market are called Speculators
They try to profit in a variety of ways including
Quick buying / Quick selling Buying Long Selling Short
Speculators
Speculators who believe the stocks are rising are called bulls
For that reason, a Bull Market is where stock prices rise and profit is easily made
Bulls hope to profit from buying long, that they will buy now and look to sell later at a higher price
Buying Long
Speculators who believe the stocks are falling are called bears
For that reason, a Bear Market is where stock prices fall and profit is harder to come by
Bears hope to profit from Selling Short, that they will BORROW WITH CREDIT and look to BUY THEM LATER at a lower price
Selling Short
NOT BEARS LIKE THIS!!!
Brokers act as intermediaries between buyers and sellers They earn fees and commissions for every “trade” (buying or
selling of stock) they make For every bull buying there must be a bear selling
The Role of the Broker
“Buying on Margin” is a term which refers to people buying stocks partly on credit
Margin, in this case, is the percentage that people have to put up cash combined with the credit to get these stocks
Mass practice of buying on the margin resulted in this…
Margin/ Buying on the Margin
The two major bond rating services are from two companies…
Moody’s
Standard and Poor’s (S&P)
Ratings of Bonds
Bonds that have a high risk that may not pay off
If they do pay out, they pay a very high interest rate
This high interest rate is to make the bonds look attractive to potential buyers
However does the risk outweigh the benefits?
Junk Bonds
Similar to securities exchanges…
These markets exist for selling and buying commodities (natural products which prices can rise and fall depending on the market)
Examples include: Coffee, wheat, sugar, oil, tin, gold silver, etc
Specialized Markets
Securities and Exchange CommissionSEC
Created in 1934 by congress, via President Franklin Roosevelt
This was a response to vast speculation, fraud, and illegal/ immoral practices on the stock exchange
Its purpose is to protect the public against deception or fraud in selling securities
Caveat Emptor
However, even with tons of regulation and the SEC being the government watch dog of the stock market, Caveat Emptor is always the best practice.
Caveat Emptor means “Let the buyer beware…
Insider Trading
The biggest violation that the SEC guards against is Insider Trading
Insider trading refers to individuals profiting with information about a company and then buys or sells its securities before the news is out.
This is how Martha Stewart got locked up…
Martha CAUGHT!!!
The SEC caught Martha Stewart selling her stock in a company before a company released information that ultimately lowered the stock price
The information came from her daughter’s boyfriend who worked for the company
Ultimately, she was convicted of perjury, or lying under oath in a court of law.
Financial Statements
THESE ARE REQUIRED READINGS FOR ANY INVESTOR OF ANY FINANCIAL INVESTMENT!!!
When first looking into an investment, one can look into a company’s prospectus
A prospectus describes the operations of a company that is issuing new securities. “Prospective money to be earned”
Financial Statements
An annual report is the next financial literature a potential investor should look into
An annual report provides financial information about a company whose securities are traded on an exchange
Comes out annually- DUH!
http://www.annualreports.com/
The most important of all of these documents are the Balance Sheet and the Income Statement
A balance sheet is a “snapshot” of a firm’s finances
The balance sheet summarizes information through the following:
Assets Liabilities Net Worth
Balance Sheet
Liabilities are the debts or other financial obligations of a company
The liabilities of a balance sheet includes such items as:
Unpaid Bills Unpaid Salaries Borrowed Money Mortgages on the Building or Equipment
Liabilities
Net Worth is the difference between what a firm owns and owes…
So the formula would be????????????????????
_____________ - (Minus)____________ = NET WORTH
Net Worth
If the balance sheet is like a photo, the Income Statement is like a movie
An income statement (also known as a profit-loss statement) summarizes financial activities of a firm over a period of time
Examples anyone?
Income Statement
Financial Statements have 3 major limitations1. Financial statements are a record of PAST events, not a forecast
of the future. (Past success does not guarantee a successful future. )
2. Financial statements may not reflect the changing value of money that results from inflation or deflation
3. Some of the data may be based on opinion and not fact.
(Any writing in these financial documents about “good will” or “best” or “customer comes first” are opinions the company has on themselves and could be outward lies)
Limitations of Financial Statements