Stock Investing Basics Important Terminology Related to Stock Investing.

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Stock Investing Stock Investing Basics Basics Important Terminology Important Terminology Related to Stock Investing Related to Stock Investing
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Transcript of Stock Investing Basics Important Terminology Related to Stock Investing.

Page 1: Stock Investing Basics Important Terminology Related to Stock Investing.

Stock InvestingStock Investing BasicsBasics Important Terminology Related to Important Terminology Related to Stock InvestingStock Investing

Page 2: Stock Investing Basics Important Terminology Related to Stock Investing.

StockStock

Stock represents ownership in a Stock represents ownership in a corporation. corporation.

It also represents a proportional share in It also represents a proportional share in the assets and profits of the issuing the assets and profits of the issuing corporation.corporation.

Page 3: Stock Investing Basics Important Terminology Related to Stock Investing.

CorporationsCorporations

Corporations are legal entities owned by Corporations are legal entities owned by individual stockholders.individual stockholders.

20% of all businesses in the United States are 20% of all businesses in the United States are classified as corporations.classified as corporations.

90% of all products sold and services provided 90% of all products sold and services provided in the United States come from corporations.in the United States come from corporations.

The two types of corporations are publicly The two types of corporations are publicly traded and privately held.traded and privately held.

Page 4: Stock Investing Basics Important Terminology Related to Stock Investing.

Why do Corporations Why do Corporations Issue Stock?Issue Stock?

To raise financial capital that the To raise financial capital that the company can use to expand its business company can use to expand its business operations, update equipment, and operations, update equipment, and conduct research and development.conduct research and development.

All of these efforts are designed to All of these efforts are designed to improve the corporation’s profitability.improve the corporation’s profitability.

Page 5: Stock Investing Basics Important Terminology Related to Stock Investing.

Public CorporationsPublic Corporations

These are also referred to as publicly These are also referred to as publicly traded or publicly held corporations.traded or publicly held corporations.

These are companies that sell their stock These are companies that sell their stock to the general public. to the general public.

McDonald’s, Wal-Mart, Home Depot, and McDonald’s, Wal-Mart, Home Depot, and Coca-Cola are all examples of publicly Coca-Cola are all examples of publicly traded corporations.traded corporations.

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Private CorporationsPrivate Corporations

These are also referred to as privately These are also referred to as privately held or closely held corporations.held or closely held corporations.

These are corporations that issue stock These are corporations that issue stock but do not sell it to the general public.but do not sell it to the general public.

Chick-fil-A is an example of such a Chick-fil-A is an example of such a company.company.

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Why do People Invest in Why do People Invest in Stocks?Stocks?

To make a profit! Historically, stocks To make a profit! Historically, stocks have returned around 10%.have returned around 10%.

Profits are made from stock in two waysProfits are made from stock in two ways

1.1. DividendsDividends

2.2. Appreciation in value from the time of Appreciation in value from the time of purchase until the time of sale (capital purchase until the time of sale (capital gains).gains).

Page 8: Stock Investing Basics Important Terminology Related to Stock Investing.

Common StockCommon Stock

Common Stock Characteristics:Common Stock Characteristics: The shareholder (person that owns the stock) The shareholder (person that owns the stock)

has voting privileges on company matters.has voting privileges on company matters. The shareholder may receive dividends (profits The shareholder may receive dividends (profits

of the corporation that are distributed to of the corporation that are distributed to shareholders). shareholders).

There is a greater potential for growth There is a greater potential for growth (appreciation in value) with common stock.(appreciation in value) with common stock.

Page 9: Stock Investing Basics Important Terminology Related to Stock Investing.

Preferred StockPreferred Stock

Preferred Stock Characteristics:Preferred Stock Characteristics: The shareholder is guaranteed to be paid a dividend The shareholder is guaranteed to be paid a dividend

before common stock shareholders.before common stock shareholders. The shareholder has virtually no voting privileges in The shareholder has virtually no voting privileges in

company matters.company matters. A preferred share of stock is assigned a dollar value that A preferred share of stock is assigned a dollar value that

is printed on the stock certificate (par value). is printed on the stock certificate (par value). There is much less fluctuation in the price of preferred There is much less fluctuation in the price of preferred

stocks compared to common stocks.stocks compared to common stocks. Preferred stock is a much more conservative investment Preferred stock is a much more conservative investment

than common stock.than common stock.

Page 10: Stock Investing Basics Important Terminology Related to Stock Investing.

Market Capitalization

This is the total number of stocks issued by a corporation multiplied by the current market price of the stock.

We are going to discuss three types of market capitalization:

Large-Cap Mid-Cap Small-Cap

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Large-Cap Stocks

These are the stocks of corporations that have market capitalizations in excess of 10 billion dollars.

Some examples of large-cap stocks include: Exxon-Mobil (426 Billion), Microsoft (227 Billion), Wal-Mart (197 Billion), and General Electric (228 Billion).

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Mid-Cap Stocks

These are the stocks of corporations that have market capitalizations of between 2 billion and 10 billion dollars.

Some examples of mid-cap stocks include: Family Dollar (6 billion) and VeriSign (6 billion)

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Small-Cap Stocks

These are the stocks of corporations that have market capitalizations of between 300 million and 2 billion dollars.

Some examples of small-cap stocks include: The Cheesecake Factory (1.8 billion) and Ann Taylor Stores (1.4 billion).

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Stock ExchangesStock Exchanges

A stock exchange is where shares of stock A stock exchange is where shares of stock are bought and sold. are bought and sold.

Some examples of stock exchanges Some examples of stock exchanges include the New York Stock Exchange include the New York Stock Exchange (NYSE) and the NASDAQ.(NYSE) and the NASDAQ.

These are also sometimes referred to as These are also sometimes referred to as securities exchanges.securities exchanges.

Page 15: Stock Investing Basics Important Terminology Related to Stock Investing.

NYSE

The New York Stock Exchange is one of the world’s The New York Stock Exchange is one of the world’s largest and most well known exchanges.largest and most well known exchanges.

More than 3000 corporations are listed on the NYSE.More than 3000 corporations are listed on the NYSE. The NYSE uses a combination of human floor traders The NYSE uses a combination of human floor traders

and computerized trading.and computerized trading. The NYSE is open between 9:30 A.M.-4:00 P.M. (EST)The NYSE is open between 9:30 A.M.-4:00 P.M. (EST) Some of the world’s largest and most well known Some of the world’s largest and most well known

companies are traded on the NYSE.companies are traded on the NYSE. Some examples include: Coca-Cola, Wal-Mart, Exxon-Some examples include: Coca-Cola, Wal-Mart, Exxon-

Mobil, General Electric, and McDonald’s.Mobil, General Electric, and McDonald’s.

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NASDAQ

NASDAQ stands for the National Association of Securities Dealers Automated Quotation System.

This is a completely computerized stock exchange. More than 4000 corporations are listed on the

NASDAQ. The NASDAQ was started in 1971. Many high tech companies are listed and traded on the

NASDAQ. Some examples include: Microsoft, Intel, Dell,

Amazon.com, Google, and Apple.

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Brokerage FirmsBrokerage Firms

A brokerage firm is a company that conducts A brokerage firm is a company that conducts securities trading (the buying and selling of securities trading (the buying and selling of stocks, bonds, mutual funds, etc…), stocks, bonds, mutual funds, etc…), investment research, analysis, and advisory investment research, analysis, and advisory services for its clients.services for its clients.

We are going to talk about the differences We are going to talk about the differences between full-service and discount brokerage between full-service and discount brokerage firms.firms.

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Full-Service Brokerage Firms

Full-service brokerage firms provide the mostFull-service brokerage firms provide the most

personalized services (research, advice, retirement personalized services (research, advice, retirement planning, tax tips, etc…) planning, tax tips, etc…)

They also charge the highest fees and commissions. They also charge the highest fees and commissions. Typically, full-service brokerages are best for Typically, full-service brokerages are best for

individuals that do not have the time, level of comfort, individuals that do not have the time, level of comfort, or expertise to make their own investment decisions.or expertise to make their own investment decisions.

Some examples of full-service brokerage firms include: Some examples of full-service brokerage firms include: Merrill Lynch and Edward Jones.Merrill Lynch and Edward Jones.

Page 19: Stock Investing Basics Important Terminology Related to Stock Investing.

Discount Brokerage Firms

Discount brokerage firms carry out buy and sell orders for their clients but provide little or no investment advice.

The fees and commissions charged by discount brokerage firms are much lower than those charged by full-service firms.

Discount brokerage firms are best for individuals that have the ability, level of comfort, and expertise to conduct their own research and make their own investment decisions.

Some examples of discount brokerage firms include: E-Trade and ShareBuilder.

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Brokerage Firms (Continued)

Charles Schwab and TD Ameritrade are examples of brokerage firms that offer both full and discount services to their clients.

Fidelity and Vanguard are two of the largest mutual fund companies that also provide brokerage services to their clients.

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Stock Performance Stock Performance IndicatorsIndicators

Some common indicators of stock market Some common indicators of stock market performance include the:performance include the:

Dow Jones Industrial AverageDow Jones Industrial Average S&P 500S&P 500 NASDAQNASDAQ

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Dow Jones Industrial Dow Jones Industrial AverageAverage

The Dow Jones Industrial Average tracks the stocks of The Dow Jones Industrial Average tracks the stocks of 30 of the largest and most widely held companies in 30 of the largest and most widely held companies in the United States.the United States.

The DJIA is calculated by adding the sum stock values The DJIA is calculated by adding the sum stock values of the 30 companies listed in the index and dividing the of the 30 companies listed in the index and dividing the sum by an established divisor.sum by an established divisor.

The current divisor is .0123051408The current divisor is .0123051408 Because the divisor is less than one it actually serves Because the divisor is less than one it actually serves

as a multiplier.as a multiplier.

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S&P 500S&P 500

This is a stock index that contains 500 large This is a stock index that contains 500 large companies. companies.

Each of these companies trade on either the New York Each of these companies trade on either the New York Stock Exchange (NYSE) or on the National Association Stock Exchange (NYSE) or on the National Association of Securities Dealers Automated Quotation System of Securities Dealers Automated Quotation System (NASDAQ)(NASDAQ)

It is the second most watched US index after the Dow It is the second most watched US index after the Dow Jones Industrial Average. However, many investors Jones Industrial Average. However, many investors feel that the S&P 500 is a better indicator of the overall feel that the S&P 500 is a better indicator of the overall stock market because it contains more companies.stock market because it contains more companies.

Each of the 30 companies listed in the Dow Jones Each of the 30 companies listed in the Dow Jones Industrial Average are also listed in the S&P 500 Index.Industrial Average are also listed in the S&P 500 Index.

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Types of Stock Types of Stock InvestmentsInvestments

We are going to examine the following types of We are going to examine the following types of stocks:stocks:

Blue-Chip StocksBlue-Chip Stocks Income StocksIncome Stocks Growth StocksGrowth Stocks Cyclical StocksCyclical Stocks Defensive StocksDefensive Stocks The stocks of some companies can fit into The stocks of some companies can fit into

several of these categories.several of these categories.

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Blue-Chip Stocks

These are the stocks of the most well established and financially sound companies.

All 30 of the stocks that make up the DJIA are blue-chips.

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Income Stocks

These are the stocks of companies that pay regular and steadily increasing dividends.

These are typically conservative stock investments that may not appreciate (or decline) as much in value as other types of stocks.

Exxon-Mobil and Proctor & Gamble are examples of income stocks.

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Growth Stocks

These are the stocks of companies whose earnings are expected to grow at an above average rate.

Growth stock companies often do not pay dividends. They instead invest the profits back into the company in the hopes of becoming more profitable.

Google and Amazon.com are examples of growth stocks.

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Cyclical Stocks

These are stocks that appreciate in value quickly when economic growth is strong and fall rapidly when economic growth is declining.

Alcoa, Caterpillar, and Ford are examples of cyclical stocks.

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Defensive Stocks

These are stocks that remain stable during declines in the economy.

Blue-chip and income stocks like Exxon-Mobil and Proctor & Gamble are examples of defensive stocks.