Personal Finance Part 3...• A company raises capital (money) when it issues stock. Since the...

Personal FinancePart 3

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© Take Charge Today – August 2013 – The Fundamentals of Investing– Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

• Before a company can raise capital by issuing stocks or bonds, it must register the stock or bond issue with the Securities and Exchange Commission (SEC).

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• An investment banking firm assists the corporation in completing the registration forms and serves as an intermediary between the issuing corporation and the initial investors.

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• A company raises capital (money) when it issues stock. Since the corporation has not obligation to pay stockholders back the price of the stock, issuing stock does not create a debt, as does issuing bonds or borrowing money from a financial institution or the government.

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• Stock represents shares of ownership in a corporation.

• Usually corporations issue stock to raise capital (money) to expand the business.

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•An investor buys stock through a stockbroker, who earns a commission from both the purchase and the sale of stock.

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• The share price of stock is likely to decrease because of the negative publicity and the additional costs and penalties the company will likely incur.

• Depending on how a company handles the problem, the incident may have only a temporary negative impact on its share price.

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• Stockholders receive dividends if the company issues dividends, have voting rights, and can sell their stock to another investor at any time. They may also receive dividends.

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• Shareholders do not receive interest payments.

• A shareholder has the right to vote for members of the board of directors and for policy issues, the right to receive quarterly dividends if paid, and the right to transfer ownership of his/her shares to someone else through sale, gift, or inheritance (bequest in a will).

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• A proxy, which is a kind of absentee ballot, is written authorization given by a shareholder to someone else, usually the corporate board of directors, to represent him/her and vote his/her shares at a stockholder's meeting.

• It is usually easier to vote by mail through a proxy than to attend the annual meeting in person.

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Stock Stockholder or shareholder

A share of ownership in a company

Owner of the stock

Usually a stockholder owns a very small part of a company

http://www.youtube.com/watch?v=GnJCOof2HJk

Before a company can issue stocks or bonds, it must register with the SEC (Securities and Exchange Commission)

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• Publicly held corporations have shares of stock (ownership in the company) outstanding that are held by individual investors as well as pension plans and mutual funds.

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•A company converts from a privately held corporation to a publicly held corporation through an Initial Public Offering (IPO) of stock.

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• Investment banks will underwrite the IPO and provide the company with the money they needed to raise and then offer the shares to the public in what is known as the secondary market.

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• Shareholders have the right to vote at the annual meeting of the corporation. If they are unable to attend, they can vote online or by mail via proxy.

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Dividends

Share of profits

distributed in cash to

stockholders

Stockholder may or may not receive dividends

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• Dividends are part of the company's profits that are distributed to shareholders. They may be in the form of money, company stock, or other property.

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• A company is not required to distribute any of its profits to shareholders as dividends. In fact, newer companies usually do not pay dividends because they reinvest any profits back into the company to grow and expand the business.

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• A dividend reinvestment plan is designed to help the shareholder acquire additional shares (or partial shares if there is not enough money) of the stock by immediately reinvesting the dividend in the same company’s stock as soon as the dividend is declared. The shareholder is still responsible for paying taxes on the dividends earned.

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• Current events (for example, a war or major oil spill), investor confidence, and interest rate levels can all affect the financial markets in general as well as a specific company's stock or bond prices. Diversification is an investing technique that can affect the value of an investor's portfolio but not the price of securities.

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• Positive news about corporate earnings will make the stock price rise

• Negative publicity due to problems with a product or lawsuits which would cost the company money.

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• In recent years, the stock of many high‐tech companies reached a very high price in a short period of time, then declined in value as the company failed, eventually declaring bankruptcy.

• A stock that trades for less than $1.00 is called a "penny stock."

• Investing in penny stocks is considered a high risk because there is a high chance that the issuing company may default.

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• Blue chip stocks are of well‐known companies with a long record of profit growth and or dividend payment and a reputation for quality management, products, and services. Some examples of blue chip stocks: General Electric and Dupont.

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Market PriceCurrent price a buyer is

willing to pay

Stocks sells for a price higher than what was paid

Capital gain – unearned income received from the sale of an asset above its

purchase price

Stock sells for a price lower than what was paid

Stockholder will lose money

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• A stock split is when the existing stock divides into a larger number of shares and the price of each share is then reduced accordingly, i.e., a 2‐for‐1 split on 40 shares that is worth $80 would result in 80 shares at $40 at the time of the split. Among other reasons, companies often decide to declare a stock split when they want to bring in more investors and do not want to issue more stock. Or, they believe that by bringing down the price of the stock through a stock split, that they will increase activity and interest in the corporation’s stock.

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Everyone has a tolerance level for the amount of risk they are willing to take on

Generally divided into three categories: conservative, moderate, aggressive

Time may influence investment philosophy

If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio?

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Stock exchange provides an

organized, central service to buy and sell all stocks,

bonds and other investments that

are traded

Worldwide, there are many different stock exchanges

A limited number of people are allowed to buy and sell directly from each stock

exchange

Investments are purchased from a stock exchange(except for real estate and some speculative investments)

In other words, a pharmacy is to drugs as the American Stock Exchange is to securities. The largest equities market in the world is the NY Stock

Exchange.

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Full‐service

Offer investment transactions and a financial advisor

Financial advisor –trained professional that helps make

investing decisions

Discount

Only completes orders to buy and sell investments

Advice is not offered

Brokerage firms facilitate the buying and selling of investments on the stock exchange

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Service fee Maintenance fee

Inactivity feeFees specific

to an investment

Will usually charge a fee for completing a buy/sell transaction

Additional fees may include:

Total fees are often lower, but an individual must have the knowledge and time to monitor

their investments

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Financial advisors are compensated for the time and knowledge

they provide investors.

Most charge fees using one of these

methods.

% of the Investment

Value

% of the Amount Invested

Hourly Rate & Flat Fee

In addition to fees, financial advisors may

earn commissions paid by the company.

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• Margin is a speculative method whereby an investor borrows up to 50% of the money needed from a brokerage firm in order to buy a wanted stock and pays a fee for the privilege.

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Questions to ask:

How are the firm’s financial advisors compensated?

How long has the firm been in business?

Does the firm have a history of positive reviews and success?

How does the firm rank in comparison to other brokerage firms?

Important to research the financial advisor and firm he/she works for

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Investments are important to

building net worth

A trade‐off to higher returns is lower liquidity and

higher risk

Investments are ideal for the long‐

term

Take advantage of portfolio

diversification

Discuss your goals with a financial

advisor

Use tax‐advantaged investments & employer‐

sponsored plan

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