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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

    Public Corporation

    Startup Capital

  • Common StockStocks are shares of ownership in a corporation.

    Cash Dividends

    Market Price

    Shareholder (or Stockholder)

  • Common StockResidual Claim

    Limited Liability

    Board of Directors

    Management

  • Preferred StockCumulative Preferred Stock

    Noncumulative Preferred Stock

    Convertible Preferred Stock

  • BondsBonds are interest-bearing, negotiable instruments certificates of long-term debt.

    Principal

    Maturity Date

  • 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.

    Cyclical stock

    Countercyclical (or defensive) stock

  • The Major Characteristics of Common StocksIncome Stocks

    Growth StocksWell-known growth stocksLesser-known growth stocks

    Value Stocks

  • The Major Characteristics of Common StocksSpeculative Stocks

    Tech Stocks

    Blue-Chip 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

    Price/Sales ratio

  • Numerical Measures to Evaluate Stock PricesCash Dividends

    Dividends Per Share

    Dividend Payout Ratio

    Dividend Yield

  • Copyright Cengage Learning. All rights reserved.14 - *Numerical Measures to Evaluate Stock PricesBook Value

    Book Value Per Share

    Price-to-Book Ratio

  • 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

    NASDAQ

  • 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

    Default Rate

  • Investing In BondsCorporate, U.S. government, and municipal bondsBond ratingDefault (or Credit) risk

  • Table 14.3: Summary of Bond RatingsMoodysS&PDescriptionAaAAAA-AHigh Quality

    Baa-BaBBB-BMedium Quality

    B-CaCCC-CP and I at Risk

    CDDD-DIn Default

  • 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