9.2 HOW TO INVEST IN CORPORATIONS  Goals:  Describe ways to purchase different types of stock.  Explain differences between investing in corporate stocks and corporate bonds. COMPARISON Savings Investments Objective Short-term needs or emergencies Long-term growth Products Savings account, money market account, CD Stocks, bonds, mutual funds Risks None on capital if FDIC insured (there is inflation risk) Source of Return Interest paid on money deposited Key Benefit Money is safe and accessible Key Drawback Returns have not historically outpaced inflation over the long term Varies, depends on investment choice Interest, dividends or capital gains or losses Returns have outpaced inflation over the long-term Risk of losing money if securities decline in value PYRAMID OF INVESTMENT RISK High Risk Futures Medium Risk Stocks, Bonds, Mutual Funds, Real Estate Low Risk Government Securities (Treasury Bills, Notes and Bonds) Savings Accounts Money Market Accounts Certificate of Deposit (CD) Cash CORPORATE STOCK  There are two ways to invest in a corporation  Corporate stocks  Corporate bonds  First we will focus on corporate stock! A share of corporate stock is a unit of ownership in a corporation.  Stockholders are the investors who own the corporation because they own shares of stock. HOW CORPORATE STOCK WORK     Corporations sell shares of stock to raise money for the business. Investors buy shares of stock in the hope of earning a return on your investment. Stock prices move up and down in response to how successful a corporation is. More people buy the stock when it is doing well (prices rise) and people sell when it is doing poorly (prices decline) If the corporation makes a profit you could earn a two part return:  Dividend – portion of a company’s profit paid to the owners  Increase in the price of the stock HOW STOCKHOLDERS EARN RETURNS      Suppose you bought 100 shares of stock for $20 per share. What is the total you invested?  $2,000 A few months later, the stock is selling for $30 per share. If you sell the stock at $30 per share, what will be your profit?  $30 X 100 shares = $3,000  $3,000 - $2,000 = $1,000 profit The profit you earn from selling stock at a higher price than you paid for it is called a capital gain. If your stock decreases in value and you sell it for a lower price than you paid for it. The amount you lose is called a capital loss. TYPES OF STOCK  Preferred stock: a nonvoting share that pays a fixed dividend.     receive the same dividend unless the company suffers a loss do not have the right to vote on how the company is run. less risky than common stock. Preferred stockholders receive their share of the company’s assets before common stockholders. Common stock: a voting share for which the dividend varies.    Each corporation’s board of directors is elected by the common stockholders to oversee the operation of the company. have the right to vote on important corporate decisions. They normally have one vote for each share that they own. generally has a better return than preferred stock in the same corporation. STOCK CLASSIFICATIONS Blue Chip Growth Small Cap •Large, wellestablished corporations •Smaller or younger corporations that are expected to have rapid growth •Most numerous but smallest corporations; substantial risk of failure but may have highest returns Large Cap Mid Cap •Largest corporations in the world; total stock value of $10 Billion + •Large but not enormous corporations; total stock value of $2 – 10 Billion BUYING STOCK    Transactions, sales or purchases of shares, are usually conducted through a stockbroker who works for a brokerage firm.  Brokerage firm- a company that specializes in helping people buy and sell stocks & bonds.  Stockbroker- a person who handles the transfer of stocks & bonds between buyer & seller. The other way to trade stock is on NASDAQ Dollar-cost averaging means investing equal amounts of money at regular intervals; this is a common investing strategy to get more shares at a lower price THE STOCK EXCHANGE & NASDAQ  A stock exchange is a location where orders to buy or sell stocks are sent and carried out.  Which  New  is the largest one in the world? York Stock Exchange (NYSE) NASDAQ is an electronic stock-trading system that links brokerage firms. Stocks can be bought or sold without using a central location.  National Association of Securities Dealers Automated Quotation System (NASDAQ) PRIMARY PLACES TO BUY STOCK New York Stock Exchange (NYSE) NASDAQ Founded in 1792 Founded in 1971 About 3,500 companies listed About 2,800 companies listed Home of large and wellestablished companies Considered the home of tech stocks Located in NYC No physical location; trades done on computer Listed companies must have at least $100,000,000 in outstanding stock and trade an average of at least 100,000 shares per day Largest market in terms of stocks traded 1,336 member seats No fixed number of members STOCK INDEXES   stock index - a composite of the value of a number of stocks used to measure the ups and downs of the overall market Dow Jones Industrial Average (DJIA), or “the Dow,”    30 of the biggest companies in the United States including firms such as Walt Disney, Coca Cola, and Walmart Today, the Dow is the most widely followed measurement of the stock market. Standard and Poor’s (S&P) 500  This index uses the stock prices of 500 companies including Boeing, Microsoft, and 3M READING A STOCK QUOTE Company name and Ticker Symbol Volume – # of shares sold (in hundreds) Previous day’s closing price. Market Cap – Used to classify a company by size. Bid - the price you would get if selling shares. P/E stands for Price – Earnings ratio and is calculated as price/EPS for the past 4 quarters. This is used by investors to know if the stock is a good value. Ask - the price you would pay if buying shares. This stock pays a dividend of $2.20 per share. Yield is calculated as dividend/share price (2.20/32.79 = 6.70%). EPS is Earnings Per Share. CORPORATE BONDS Another way to invest in corporations is to buy the bonds they sell.  Corporate bonds – Bonds sold by corporations to finance business activities, which usually pay a fixed rate of interest and are paid off after a specific period of time.  WHY OWN CORPORATE BONDS? You are basically lending money to a corporation. Corporations must make interest payments and repay their bonds on time, even if they earn no profit.  This makes bonds issued by a firm less risky than stock in the same firm. Unless the corporation fails, you will be paid.  Since bonds are less risky, they generally have a lower return.  JUNK BONDS  Some corporate bonds are high-risk investments. They offer high interest rates to encourage people to buy them. These high-return, high-risk bonds are called high-yield bonds or junk bonds.  Junk Bonds – Corporate bonds that are high-risk investments  TAX SHELTERED INVESTMENT OPTIONS Individual Retirement Accounts (IRA) 529 College Savings Plans 401K Plans Benefits:  Earnings accumulate on a tax-deferred basis  Contributions may be tax deductible  May have a matching contribution from your employer (401K plans)