Chapter 12 - Investing in Chapter 12 - Investing in StocksStocks

Types of StocksTypes of Stocks

• CommonCommon– A class of stock in which the owner of the A class of stock in which the owner of the

stock shares directly in the success or failure stock shares directly in the success or failure of a businessof a business

– Dividends – the part of the profits of a Dividends – the part of the profits of a corporation that each shareholder receivescorporation that each shareholder receives

• PreferredPreferred– Dividends are fixed, paid first, no voting Dividends are fixed, paid first, no voting

rightsrights

Classifications of StocksClassifications of Stocks

• Income or GrowthIncome or Growth

• Income - Stocks that have consistent Income - Stocks that have consistent histories of paying high dividendshistories of paying high dividends

• Growth – shares of stock in companies Growth – shares of stock in companies that reinvest their profits into the that reinvest their profits into the business so that it can grow and expand.business so that it can grow and expand.

Classifications of StocksClassifications of Stocks

• Penny or Blue ChipPenny or Blue Chip

• Penny – a stock that sells for less than $5 a Penny – a stock that sells for less than $5 a share (highly speculative)share (highly speculative)

• Blue Chip – stocks of large, well-established, Blue Chip – stocks of large, well-established, and usually profitable businesses (Coke, and usually profitable businesses (Coke, Walmart)Walmart)

• A a a a a a a a a a a a a a a a a a a a a a a a A a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a aa a a a a a a a a a a a

Classifications of StocksClassifications of Stocks

• Defensive or CyclicalDefensive or Cyclical

• Defensive – stocks that remain stable and pays Defensive – stocks that remain stable and pays dividends during an economic decline (utilities, dividends during an economic decline (utilities, drugs, food)drugs, food)

• Cyclical – stocks that do well when the Cyclical – stocks that do well when the economy is stable or growing (airlines, travel economy is stable or growing (airlines, travel industries)industries)

• ..• ..• ..

Where Stocks are Traded Where Stocks are Traded and Whyand Why

• Stock market exchange (auction market) Stock market exchange (auction market) – NYSE– NYSE

• Bull market – rising stock prices and a Bull market – rising stock prices and a general feeling of optimismgeneral feeling of optimism

• Bear market – investors are pessimistic Bear market – investors are pessimistic about the overall economy and start to about the overall economy and start to sell stockssell stocks

Stock InvestingStock Investing

• Strategies can be:Strategies can be:

1.1. Conservative – take limited risks, concentrate on Conservative – take limited risks, concentrate on liquidityliquidity

2.2. Aggressive – take risks, concentrate on growth stocksAggressive – take risks, concentrate on growth stocks3.3. Speculative – high probability of a loss but also a Speculative – high probability of a loss but also a

chance for large gainschance for large gains4.4. ..5.5. ..6.6. ..7.7. ..8.8. ..

Risk Trade OffsRisk Trade Offs

1.1. Low risk investments guarantee you Low risk investments guarantee you will get your money back, plus interestwill get your money back, plus interest

2.2. High risk investments have no High risk investments have no guarantees. They can bring large guarantees. They can bring large profits as well as large lossesprofits as well as large losses

3.3. No-risk investments do not exist. No-risk investments do not exist. Regardless of your choice, something Regardless of your choice, something can always go wrong with your can always go wrong with your investment or in your personal life, investment or in your personal life, requiring liquidation for needed cashrequiring liquidation for needed cash