9.2 How to invest in corporations

1. 9.2 How to invest in corporations

2. 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

3. 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

4. Investors generally buy and sell stock in two ways: • A stock exchange is an actual physical, central location where orders to buy or sell stocks are sent and carried out. (NYSE) • The NASDAQ electronically links brokerage firms. Stocks can be bought or sold without using a central location. • Transactions, sales or purchases of shares, are usually conducted through a: • Stock 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. How stock exchanges work

5. A capital gain is one way to earn a return • Suppose you bought 100 shares of stock for $20 per share. 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 capital gain • Capital gainis the profit you earn from selling stock at a higher price than you paid for it. • Capital lossis the amount you lose if your stock decreases in value and you sell it for a lower price than you paid for it. stockholders Can earn returns 2 ways

6. Dividends are the second way to earn returns • Dividends are a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits. • For example, you purchased 100 shares of stock in XYZ Corp. for $25 per share. XYZ Corp. decides to pay $.50 per share in dividends based upon their profits. • How much money will you receive in dividend returns? • 100 X $.50 = $50.00 • Shareholders sometimes choose to reinvest their dividend earnings. How many more shares of XYZ Corp could you buy if you did this? 2 How Stockholders Earn Returns

7. Preferred stock: a nonvoting share that pays a fixed dividend. Preferred stock is less risky than common stock • Common stock: a voting share that does not pay a set dividend. Common stock generally has a better return than preferred stock in the same corporation Types of stock

8. Another way to invest in corporations is to buy the bonds they sell. • Corporate bonds are sold by many corporations to finance business activities. They usually pay a fixed rate of interest and are paid off after a specific period of time. • 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. Corporate bonds

9. 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