investing in stocks and bonds. introduction when you invest in stocks and bonds, you can increase...
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Investing in Stocks and Bonds
IntroductionWhen you invest in stocks and bonds, you can increase returns significantly while increasing risk only slightly. These investments belong in everyones investment portfolio because they provide opportunities for conservative, moderate, and aggressive investors alike
Your Next Five YearsIn the next five years:
1.Include stocks and bond or mutual funds that own stocks and bonds in your investment portfolio.
Your Next Five Years2.Use fundamental analysis to determine a companys basic value before investing in any individual stock.
3.Resist putting money into so-called hot stocks.
Your Next Five Years4.Invest part of the conservative portion of your portfolio in TIPS (Treasure Inflation-Protected Securities) to beat inflation.
5.When you have children use zero-coupon bonds to help save for their education.
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #1
Explain how stocks and bonds are used as investments.
The Role of Stocks and Bonds in InvestmentsCorporation
Common StockStocks are shares of ownership in a corporation.
Shareholder (or Stockholder)
Common StockResidual Claim
Board of Directors
Preferred StockCumulative Preferred Stock
Noncumulative Preferred Stock
Convertible Preferred Stock
BondsBonds are interest-bearing, negotiable instruments certificates of long-term debt.
Concept Check 14.1Distinguish between common stocks and bonds.
How do public corporations use stocks and bonds?
Why do individuals invest in stocks and bonds?
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #2
Classify common stocks according to their major characteristics.
The Major Characteristics of Common StocksMatch your investment choices using P/E ratio and Beta.
Price/Earnings (or P/E) RatioTrailing P/E RatioProjected P/E (or Forward P/E) RatioEarnings Yield
The Major Characteristics of Common StocksUse Beta to Compare a Stock to Similar InvestmentsBeta (or Beta Value or Beta Coefficient): Measure of stock volatility.
The Major Characteristics of Common StocksMost stocks are cyclical and some are countercyclical.
Countercyclical (or defensive) stock
The Major Characteristics of Common StocksIncome Stocks
Growth StocksWell-known growth stocksLesser-known growth stocks
The Major Characteristics of Common StocksSpeculative Stocks
Large-cap, Mid-cap, Small-cap, and Microcap Stocks
Concept Check 14.2Distinguish between income stocks and growth stocks.
Explain how a value stock might or might not differ from a blue-chip stock or a tech stock.
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #3
Describe fundamental and numerical ways to evaluate stock values.
How to Evaluate Stock ValuesUse fundamental analysis to evaluate the financial strength of the company.Use technical analysis to predict the success of a stock based on indicators of the workings of the market as a whole.
How to Evaluate Stock Values
Corporate earnings are most important.
Earnings per share
Numerical Measures to Evaluate Stock PricesCash Dividends
Dividends Per Share
Dividend Payout Ratio
Copyright Cengage Learning. All rights reserved.14 - *Numerical Measures to Evaluate Stock PricesBook Value
Book Value Per Share
Concept Check 14.3What is the focus of fundamental analysis?
Distinguish between EPS and the P/E ratio.
Summarize the differences among dividend payout ratio, dividends per share, and dividend yield.
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #4
Determine whether an investments potential rate of return is sufficient.
Calculating a Stocks Potential Rate of Return
Use beta to estimate the risk of the investment.
Estimate the market risk (or systematic risk).
Calculate your required rate of return.
Calculate the Stocks Potential Rate of ReturnAdd up projected income and price appreciation.Potential Rate of ReturnApproximate Compound Yield (or ACY)Compare the required rate of return with the potential rate of return on the investment.
Concept Check 14.4Explain why individuals considering investing in stocks begin by thinking about the return on U.S. Treasury bills.Explain how a stock with a beta of 1.0 differs form ones with a beta of 1.2 and 2.5.Summarize the steps in calculating the potential rate of return on a stock investment.
Learning Objective #5
Use the Internet to evaluate common stocks in which to invest.
Use the Internet to Evaluate and Select StocksBegin by setting criteria for your stock investments.
Basic investment information:Fool.comkiplinger.com/personalfinance/money.cnn.com/pf/indes.htmlfinance.yahoo.com/marketupdate?u
How To Use the Internet to Evaluate and Select StocksStock-Screening Tools:Screen.yahoo.com/stocks.htmlscreen.morningstar.com
Security analysts research reports
Corporate newsAnnual reports, 10-K reports, prospectus
How To Use the Internet to Evaluate and Select Stocks
The two most popular firms that offer stock advisory research services:MorningstarValue Line
How To Use the Internet to Evaluate and Select StocksEconomic dataStage in the business cycleInflation ratesInterest ratesExpected changes in these
Copyright Cengage Learning. All rights reserved.14 - *How To Use the Internet to Evaluate and Select StocksSecurities market indexesDow Jones Industrial AverageStandard & Poors 500 IndexNASDAQ Composite IndexRussell 3000 IndexWilshire 5000 Index
How To Use the Internet to Evaluate and Select StocksSecurities exchanges (stock markets)
Over-The-Counter (or OTC) Marketplace
Figure 14.2: How Stocks Are Quoted
How To Use the Internet to Evaluate and Select StocksUse portfolio tracking to monitor your investments:E*Trade: us.etrade.com/e/t/homeMSN Money: moneycentral.msn.comMorningstar: morningstar.comInvestorGuide.com
Concept Check 14.5Give three examples of the types of website resources available to investors on the Internet.
List five places where you can obtain investment information on a specific stock.
Concept Check 14.5Distinguish between the Dow Jones Industrial Average and the S&P 500.
Where can you go to look up stock symbols and prices
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #6
Summarize how stocks are bought and sold.
Buying and Selling StocksStockbroker (or Account Executive)
Securitys street name
Buying and Selling StocksDiscount, online, and full-service (or general) brokers
Buying and Selling StocksBroker commissions and feesRound LotsOdd LotDifferential: The odd-lot portion of the transaction.
Figure 14.3: Securities Transactions
Buying and Selling StocksHow to order stock transactions:The process of trading stocks involves a floor broker and a specialist.
Securities prices are either matched or negotiated.
Buying and Selling StocksTypes of stock orders (executing an order):Market orderLimit orderStop order (or stop-loss order)Time limits: fill-or-kill order, day order, open order
Buying and Selling StocksMargin buying and selling short are risky trading techniques.
Margin trading is buying stocks on credit (using a margin account).
Buying and Selling StocksBuying on margin can increase returns.
Buying on margin can also increase losses.
A margin call makes matters even worse.
Buying and Selling StocksSelling short is selling stock borrowed from your broker.Buying longSelling short
Concept Check 14.6Summarize the differences among discount, online, and full-service brokers.
Distinguish between round lot and odd lot brokers commissions.
Summarize the differences among types of stock orders: market, limit, and stop order.
Concept Check 14.6Explain what buying on margin is an how it can go wrong for an investor.
Explain what selling short is and how it can go wrong for an investor.
Copyright Cengage Learning. All rights reserved.14 - *Learning Objective #7
Describe how to invest in bonds.
Investing In BondsInvestment-Grade Bonds
Speculative Grade (or Junk) Bonds
Investing In BondsCorporate, U.S. government, and municipal bondsBond ratingDefault (or Credit) risk
Table 14.3: Summary of Bond RatingsMoodysS&PDescriptionAaAAAA-AHigh Quality
B-CaCCC-CP and I at Risk
Investing In BondsTreasury bills (t-bills), notes, and bondsDiscount yield, I-bondsTIPS (or Treasury Inflation-Protected Securities)Series EE savings bondsFederal agency debt issues
Investing In Bonds
Municipal Bonds (or Munis)
Tax-Free (or Tax-Exempt) Bonds
Investing In BondsUnique characteristics of bond investi