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What are stocks?• Represent a fraction of ownership in a corporation
• Referred as:– Shares– Equity– Stock
Characteristics• Represent a claim to part of the
corporations assets and earnings
• Ownership gives shareholders the right to vote on management placement and policies
• Price determined by supply and demand
• Potential to earn a lot if a company is successful, but also stand to lose entire investment if the company isn't successful.
Common Stocks
• Represents voting rights
• Most frequently used
• Returns– Dividends– Capital Appreciation
Types Of Stock Returns• Dividends: Distributing a
portion of company earnings, decided by the board of directors, to its shareholders
• Capital Appreciation: A rise in the value of an asset based on a rise in market price
Preferred Stocks
• Preference in dividends.
• Preference in assets in the event of liquidation.
• Convertible into common stock.
• Nonvoting.
Risk
• Systematic risk– The risk inherent
to the entire market
• Unsystematic risk– Company specific risk
that is inherent in each investment
Advantages
• Limited liability
• Historically outperforms other investment alternatives
• Very liquid
Disadvantages
• Does not guarantee a return
• Less claim on assets than creditors– Bond Holders>Preferred >
Common
• Not all pay dividends
Trading Stocks
• Most stocks are traded on exchanges– Places where buyers and sellers meet and decide
on a price. Physical Virtual
Purchasing Stocks
• Using a Broker– Party that arranges transactions
between a buyer and a seller, and gets a commission• Full- service brokerages• Discount brokerages
• Using dividend reinvestment plans– Reinvesting dividends to acquire
additional shares
Mutual Funds
• A mutual fund is a collection of stocks and/or bonds. Investors make money three ways:
1) A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
3) The value of the fund's shares increase in price.