Chapter 5: Second Half

Each year, a corporation may distribute to its shareholders dividends

Dividends are part of a company’s profits

Dividends are not as popular as they once were.

Dividends

The value of a stock is not fixed

It fluctuates (goes up and down) with changes in supply and demand.

Many people invest in stocks believing they will be worth more then what they paid for it (standard investors)

This increased value is CAPITAL GROWTH

Capital Growth

People looking to make quick money, who are often reckless in their use of the Stock Market are called Speculators

They try to profit in a variety of ways including

Quick buying / Quick selling Buying Long Selling Short

Speculators

Speculators who believe the stocks are rising are called bulls

For that reason, a Bull Market is where stock prices rise and profit is easily made

Bulls hope to profit from buying long, that they will buy now and look to sell later at a higher price

Buying Long

Speculators who believe the stocks are falling are called bears

For that reason, a Bear Market is where stock prices fall and profit is harder to come by

Bears hope to profit from Selling Short, that they will BORROW WITH CREDIT and look to BUY THEM LATER at a lower price

Selling Short

NOT BEARS LIKE THIS!!!

Brokers act as intermediaries between buyers and sellers They earn fees and commissions for every “trade” (buying or

selling of stock) they make For every bull buying there must be a bear selling

The Role of the Broker

“Buying on Margin” is a term which refers to people buying stocks partly on credit

Margin, in this case, is the percentage that people have to put up cash combined with the credit to get these stocks

Mass practice of buying on the margin resulted in this…

Margin/ Buying on the Margin

Stock Market Crash of 1929

The two major bond rating services are from two companies…

Moody’s

Standard and Poor’s (S&P)

Ratings of Bonds

Aaa Aa A Baa Ba B Caa Ca C

Moody’s Rating System

AA+ AA- A BBB BB B CCC CC C

Standard and Poor’s Rating System

Bonds that have a high risk that may not pay off

If they do pay out, they pay a very high interest rate

This high interest rate is to make the bonds look attractive to potential buyers

However does the risk outweigh the benefits?

Junk Bonds

Similar to securities exchanges…

These markets exist for selling and buying commodities (natural products which prices can rise and fall depending on the market)

Examples include: Coffee, wheat, sugar, oil, tin, gold silver, etc

Specialized Markets

Securities and Exchange CommissionSEC

NO!!!

Securities and Exchange CommissionSEC

YES!

Securities and Exchange CommissionSEC

Created in 1934 by congress, via President Franklin Roosevelt

This was a response to vast speculation, fraud, and illegal/ immoral practices on the stock exchange

Its purpose is to protect the public against deception or fraud in selling securities

Caveat Emptor

Even though the SEC exists, and ultimate justice can be had…

ASK THIS GUY!!!

Or Her…

Caveat Emptor

However, even with tons of regulation and the SEC being the government watch dog of the stock market, Caveat Emptor is always the best practice.

Caveat Emptor means “Let the buyer beware…

Caveat Emptor

Caveat Emptor means THE BEST SECURITY AGAINST FRAUD AND SCAMS IS…

YOU!

Insider Trading

The biggest violation that the SEC guards against is Insider Trading

Insider trading refers to individuals profiting with information about a company and then buys or sells its securities before the news is out.

This is how Martha Stewart got locked up…

Martha CAUGHT!!!

The SEC caught Martha Stewart selling her stock in a company before a company released information that ultimately lowered the stock price

The information came from her daughter’s boyfriend who worked for the company

Ultimately, she was convicted of perjury, or lying under oath in a court of law.

Financial Statements

THESE ARE REQUIRED READINGS FOR ANY INVESTOR OF ANY FINANCIAL INVESTMENT!!!

When first looking into an investment, one can look into a company’s prospectus

A prospectus describes the operations of a company that is issuing new securities. “Prospective money to be earned”

Financial Statements

An annual report is the next financial literature a potential investor should look into

An annual report provides financial information about a company whose securities are traded on an exchange

Comes out annually- DUH!

http://www.annualreports.com/

The most important of all of these documents are the Balance Sheet and the Income Statement

A balance sheet is a “snapshot” of a firm’s finances

The balance sheet summarizes information through the following:

Assets Liabilities Net Worth

Balance Sheet

Assets are anything owned by a business that have a money value

These include:

Assets

Liabilities are the debts or other financial obligations of a company

The liabilities of a balance sheet includes such items as:

Unpaid Bills Unpaid Salaries Borrowed Money Mortgages on the Building or Equipment

Liabilities

Net Worth is the difference between what a firm owns and owes…

So the formula would be????????????????????

_____________ - (Minus)____________ = NET WORTH

Net Worth

ASSETS

-LIABILITIES= NET

WORTH

If the balance sheet is like a photo, the Income Statement is like a movie

An income statement (also known as a profit-loss statement) summarizes financial activities of a firm over a period of time

Examples anyone?

Income Statement

Financial Statements have 3 major limitations1. Financial statements are a record of PAST events, not a forecast

of the future. (Past success does not guarantee a successful future. )

2. Financial statements may not reflect the changing value of money that results from inflation or deflation

3. Some of the data may be based on opinion and not fact.

(Any writing in these financial documents about “good will” or “best” or “customer comes first” are opinions the company has on themselves and could be outward lies)

Limitations of Financial Statements