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Risk and Reward. Investment options. Stocks, Bonds, and Mutual Funds. Stock- An investment in the ownership of a corporation, usually represented by shares of the business. A companies profits are paid to it’s stockholders in the form of dividends
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Risk and Reward Investment options
Stocks, Bonds, and Mutual Funds • Stock- An investment in the ownership of a corporation, usually represented by shares of the business. • A companies profits are paid to it’s stockholders in the form of dividends • If a company’s value goes up, the value of the stock will also go up (Vise Versa) • When you sell your stock, you either earn a capital gain or a capital loss
Stocks, Bonds, and Mutual Funds • Basic Types of Stock • Common Stock • Preferred Stock
Stocks, Bonds, and Mutual Funds • Common Stock • Receive dividends based on the companies earnings • Voting rights in the companies board of directors • Each share you own, you have one stock • Owning this type of stock is a pro/con
Stocks, Bonds, and Mutual Funds • Preferred Stock • Receive a fixed earning • Receive the same dividends no matter what kid of profit the company is/isn’t making. • If the company does not make enough money, the preferred stockholders get paid, however the common stockholders will not • No voting rights • Owning this type of stock is a pro/con
Stocks, Bonds, and Mutual Funds • The Stock Markets- Stocks are bought and sold on the stock market, also called the stock exchange. • Anyone who has the money to buy a share of stock can invest • Three major stock markets • New York Stock Exchange • NASDAQ • American Stock Exchange
Stocks, Bonds, and Mutual Funds • New York Stock Exchange • In terms of dollars, it is the largest in the world and one of the oldest (1790s) • Very similar to what you see in the movies • Around 1,366 brokers buying and selling orders per day. • About 3,000 US and foreign companies are listed on the NYSE
Stocks, Bonds, and Mutual Funds • NASDAQ • Founded in 1971 • Represents the largest US stock market in terms of listings • Approx. 3,200 companies are listed and trades more shares per day than any other US market. • NASDAQ= National Association of Securities Dealers Automated Quotations systems • All done online
Stocks, Bonds, and Mutual Funds • American Stock Exchange • AMEX • Not very big • Only handles 10% of trades
Stocks, Bonds, and Mutual Funds • Before you invest in a stock you will want to know the following…. • What has it been doing the past year • Has its price been going up or down • What kind of dividends does it pay
Stocks, Bonds, and Mutual Funds • Newspaper (or online) terms you will want to know • 52 Week High- in dollars and cents, the highest price paid for one share during the past 52 weeks • 52 Week Low- shows the lowest price paid for a share during the past 52 weeks. • Stock(Ticker)-The name of the company and its stock ticker symbol
Stocks, Bonds, and Mutual Funds • Newspaper (or online) terms you will want to know • Div- indicates, in dollars, the amount of dividend forecasted for the following year • Yield- % indicates the rate of return, which is equal to the dividend per share of stock dividend by the closing price. • P/E- the price-earning ratio-the closing price per share of stock divided by the company’s net earning per share over the past year
Stocks, Bonds, and Mutual Funds • Newspaper (or online) terms you will want to know • Vol(00s) indicates the number of shares traded on that particular day (in hundreds) • High- each day’s intra-day high trading price • Low- each day’s intra-day low trading price • Close- shows the closing price-the price paid in the final transaction of the day • Net Chg- the difference between today’s closing price and the closing price on the previous day.
Stocks, Bonds, and Mutual Funds • Evaluating Stocks • Blue-Chip Stocks- safe investments in the ownership of large respected corporations that have been around for many years • Dow Jones Industrial Average • Daily average of the 30 largest blue-chip companies • “The Dow” quotes on a number of points not actual stock prices • Each point is equal to $1.00
Stocks, Bonds, and Mutual Funds • Evaluating Stocks • Bull Market • When investors are optimistic about the market • Bear Market • When investors are pessimistic about the market
Stocks, Bonds, and Mutual Funds • Risk and Return • How much risk are you willing to take? • The greater potential on your return, the greater the risk • Are you buying and selling stocks to make money? • If this is the case you may be wiling to take more risk since you are not in it for the dividends
Stocks, Bonds, and Mutual Funds • Higher Risk Investments for the extreme dare devils • Futures • Options • Penny Stocks
Stocks, Bonds, and Mutual Funds • Futures • Contracts to buy or sell a commodity, stock, or other financial instrument for a set price, at a specific date in the future. • Wheat, Corn, and/or Soybeans • Livestock • A person investing in futures is basically betting that the price of a particular stock is going to rise or fall in the future.
Stocks, Bonds, and Mutual Funds • Options • The owner of a option has the right- but not the obligation- to buy or sell a stock at a predetermined price, on or before a specific date.
Stocks, Bonds, and Mutual Funds • Penny Stocks • Low-priced stocks, usually less then $1.00 per share. • Issued by start up companies • They do not have reliable growth patterns. • Not traded on major markets, so they are not easy to find • More times than not they end up closing- if this happens investors lose all their money • If the company is successful, investors could end up with a lot of money.
Stocks, Bonds, and Mutual Funds • Many different organizations sell bonds to raise money • Bonds can be purchased from companies as well as towns, cities, states or the government.
Stocks, Bonds, and Mutual Funds • Basic Types of Bonds • Bond- similar to an IOU • Bonds are sold in order to borrow money for things such as new buildings, starting up new businesses or creating new transportation systems. • When you buy a bond you are simply lending money to that organization. • The issuer of the bond (the lender) must pay you back, plus interest when the bond is mature- or reaches its due date.
Stocks, Bonds, and Mutual Funds • Four types of Bonds • Corporate • Municipal • Savings • T-Bill
Stocks, Bonds, and Mutual Funds • Corporation Bond • Corporations sell corporation bonds • Must be repaid in full at maturity • The bond owner receives regular, periodic interest payments during the life of the bond
Stocks, Bonds, and Mutual Funds • Municipal Bonds • Sold by cities, towns, countries, and other governments • Also must be repaid when they reach maturity • Interest on these bonds are tax-exempt • You do not have to pay taxes on the income you receive by these bonds
Stocks, Bonds, and Mutual Funds • Savings Bonds • Sold by the US government • Most popular is the Series EE Savings Bond • This type of bond is purchased at a financial institution for half of what it will be worth when it is mature. • Electronic EE Savings Bond • Done via the Internet, purchased for face value, but cannot be redeemed for 12 months. • Another way to save money
Stocks, Bonds, and Mutual Funds • T-Bills – Treasury Bills • Very similar to a savings bond • Lowest denomination for a T-Bill is $1,000. • Maturity rates vary from a few years up to 30 years.
Stocks, Bonds, and Mutual Funds • Risk and Return • People like Bonds because they are less risky than stocks • You are garneted your money back after the maturity date