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.

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.

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 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)

TYPES OF STOCK 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.

PREFERRED STOCK VS COMMON STOCK 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.

STOCK CLASSIFICATIONS

Blue Chip• Large, well-established corporations

Large Cap• Largest corporations in the world; total stock value of $10 Billion +

Growth• Smaller or younger corporations that are expected to have rapid growth

Mid Cap• Large but not enormous corporations; total stock value of $2 – 10 Billion

Small Cap• Most numerous but smallest corporations; substantial risk of failure but may have highest returns

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