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9.2 How to invest in corporations

9.2 How to invest in corporations

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9.2 How to invest in corporations

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  1. Goals: • Describe ways to purchase different types of stock. • Explain differences between investing in corporate stocks and corporate bonds. 9.2 How to invest in corporations

  2. 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. Corporate Stock

  3. 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 Corporate Stock work

  4. 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. How stockholders earn returns

  5. 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 Buying stock

  6. A stock exchange is a location where orders to buy or sell stocks are sent and carried out. • Which is the largest one in the world? • New 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) The stock exchange & NASDAQ

  7. Preferred stock: a nonvoting share that pays a fixed dividend. • Preferred stockholders receive the same dividend unless the company suffers a loss. • Preferred stockholders do not have the right to vote on how the company is run. • 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. • Common stock holders have the right to vote on important corporate decisions. They normally have one vote for each share that they own. Types of stock

  8. Preferred stock is less risky than common stock. Preferred stockholders receive their share of the company’s assets before common stockholders. Common stock generally has a better return than preferred stock in the same corporation. Preferred stock vs common stock

  9. Stock classifications

  10. 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. Corporate bonds

  11. 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. Why own corporate Bonds?

  12. 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 Junk bonds