Introduction to InvestingIntroduction to Investing

OverviewOverview StocksStocks

• Classifying StocksClassifying Stocks• MarketsMarkets• Key TermsKey Terms• RatiosRatios

Bonds Bonds Mutual funds Mutual funds

StocksStocks Shares represent Shares represent

units of ownership units of ownership in a businessin a business

Fluctuate in value Fluctuate in value over timeover time

Allow companies to Allow companies to raise money in the raise money in the stock marketstock market

Stock MarketsStock Markets Stock markets are vital to economy Stock markets are vital to economy

because:because: Act as an indicator of where economy is headed in six Act as an indicator of where economy is headed in six

monthsmonths Give young companies access to capitalGive young companies access to capital Connect investors’ money with the businesses that Connect investors’ money with the businesses that

need itneed it Method of investing in our futureMethod of investing in our future Provide us with a convenient way of investing in Provide us with a convenient way of investing in

foreign countries, and foreigners with a way to invest foreign countries, and foreigners with a way to invest in Canadain Canada

Stock MarketsStock Markets Stock market vs. stock indexStock market vs. stock index North American indicesNorth American indices::

Dow Jones Industrial Average – AmericanDow Jones Industrial Average – American Nasdaq - AmericanNasdaq - American S&P 500 (Standard & Poors) - AmericanS&P 500 (Standard & Poors) - American S&P TSX Composite Index – TorontoS&P TSX Composite Index – Toronto

Types of StocksTypes of Stocks Blue chipsBlue chips - large, well-established companies - large, well-established companies

Examples: IBM, McDonald’s, Coca Cola, General ElectricExamples: IBM, McDonald’s, Coca Cola, General Electric History of consistent performanceHistory of consistent performance Usually pay out dividendsUsually pay out dividends

GrowthGrowth companiescompanies - potential for serious growth - potential for serious growth Examples: eBay, Google, WestaimExamples: eBay, Google, Westaim A bit more risky and volatile than blue chipsA bit more risky and volatile than blue chips Typically invest profits back into the business Typically invest profits back into the business

(expanding the business)(expanding the business)

Types of StocksTypes of Stocks ValueValue stocksstocks – a bargain because… – a bargain because…

Examples: Norfolk Southern, EdisonExamples: Norfolk Southern, Edison Recently experienced a negative eventRecently experienced a negative event Are in an industry that is not hot at the momentAre in an industry that is not hot at the moment Investors have simply overlooked themInvestors have simply overlooked them

Penny stocksPenny stocks are those which are worth less are those which are worth less than $5than $5

Examples: Junior mining companies and start-up techsExamples: Junior mining companies and start-up techs Riskiest type of stock (most volatility)Riskiest type of stock (most volatility) Most potential for price appreciationMost potential for price appreciation Many of the biggest companies started out as penny Many of the biggest companies started out as penny

stocksstocks

Market CapitalizationMarket Capitalization Large-caps - Large-caps - market caps of more than market caps of more than

$10 billion$10 billion Usually well established companies with a successful Usually well established companies with a successful

pastpast Not Not alwaysalways old companies old companies Most stable stocks of the four categoriesMost stable stocks of the four categories

Mid-caps -Mid-caps - market caps of market caps of $1 billion - $10 $1 billion - $10 billionbillion

Sometimes they have a lot of room for growthSometimes they have a lot of room for growth Other times they have already done most of their Other times they have already done most of their

growinggrowing

Market CapitalizationMarket Capitalization Small-capsSmall-caps - market caps of - market caps of $150 million $150 million

- $1 billion- $1 billion Relatively new companiesRelatively new companies They have already proven they have potentialThey have already proven they have potential There is quite a bit of risk with these investmentsThere is quite a bit of risk with these investments

Micro-capsMicro-caps - market caps of less than - market caps of less than $150 million$150 million

For some investors, the fewer advantages of micro-For some investors, the fewer advantages of micro-caps outweigh the many disadvantagescaps outweigh the many disadvantages

Riskiest of the four categoriesRiskiest of the four categories

Key TermsKey Terms Volume – number of shares Volume – number of shares

tradedtraded Volatility – measures Volatility – measures

fluctuations in pricefluctuations in price Dividends – a portion of Dividends – a portion of

net income paid in cash to net income paid in cash to investorsinvestors

Research has proven that Research has proven that stocks are best investment stocks are best investment for the long run (12% avg for the long run (12% avg return)return)

Financial RatiosFinancial Ratios Allow us to: Allow us to:

Assess the financial Assess the financial strength of companiesstrength of companies

Measure return on Measure return on investmentinvestment

Understand relationships Understand relationships between different between different accounts on financial accounts on financial statementsstatements

Compare similar Compare similar companiescompanies

Find good value!Find good value!

Key RatiosKey Ratios Price to Earnings (P/E)Price to Earnings (P/E)

Price per Share/Earnings per SharePrice per Share/Earnings per Share Earnings per Share (EPS)Earnings per Share (EPS) The most commonly used ratioThe most commonly used ratio Varies among industriesVaries among industries

Dividend YieldDividend Yield Dividend/Share priceDividend/Share price Varies among industriesVaries among industries Watch out for very high yieldsWatch out for very high yields Great source of incomeGreat source of income

Key RatiosKey Ratios Price to SalesPrice to Sales

Price per Share/Revenue per SharePrice per Share/Revenue per Share Useful ratio when there are no earningsUseful ratio when there are no earnings

Book Value per ShareBook Value per Share (Tangible Assets – Liabilities)/# of Shares(Tangible Assets – Liabilities)/# of Shares Price to Book Value Price to Book Value Price/(Book Value per Price/(Book Value per

Share) Share)

Net Profit MarginNet Profit Margin Percentage of Sales that are left over as net Percentage of Sales that are left over as net

profitprofit

Key RatiosKey Ratios Return on EquityReturn on Equity

Net Income/Shareholders’ EquityNet Income/Shareholders’ Equity

Debt:Equity Debt:Equity Varies among industriesVaries among industries Affects ability of companies to borrowAffects ability of companies to borrow

BondsBonds Company borrows money from you Company borrows money from you They pay you interest on the principalThey pay you interest on the principal Maturity – the date in the future when the Maturity – the date in the future when the

principal will be repaidprincipal will be repaid Yield – % of principal paid as interestYield – % of principal paid as interest Government bonds vs. Corporate bondsGovernment bonds vs. Corporate bonds Perceived as conservative investmentsPerceived as conservative investments

Mutual FundsMutual Funds A collection of stocks A collection of stocks

and/or bonds, and/or bonds, managed by a managed by a professional investorprofessional investor

Provide diversificationProvide diversification Allow you to benefit Allow you to benefit

from experience of from experience of managementmanagement

Management fees cut Management fees cut into gainsinto gains

Effective for passive Effective for passive investorsinvestors

That’s it!That’s it!

Questions?Questions?