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Explain the Common Stock Investing Strategies

Explain the Common Stock Investing Strategies
Introduction tow wS w.Thest isScio encks tist.com and InvestingObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsIntroduction Peter Looney works as an executive. For a long time, Peter has felt that he should invest the extra amount of money that he makes from his job. www.ThesisScientist.comIntroduction He has been saving in cash form for a long time. However, he wants that he should use the saved amount to invest in something that could help him multiply his money and help grow his finances. www.ThesisScientist.comIntroduction Peter has always thought of starting a business venture to grow his money, however, he is greatly averse to the huge amount of risk involved in any business venture. So, Peter starts asking advice from his colleagues about what possible investment options are available in the market. www.ThesisScientist.comIntroduction George, one of Peter’s colleagues, advices him to invest in stocks and mutual funds. Stocks are the capital raised by a corporation through the issue of shares entitling holders to an ownership interest also known as ‘equity’. www.ThesisScientist.comIntroduction Mutual funds are an investment vehicle made of pool of funds collected through a regulated investment company from many investors. This pooled money is then used for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. www.ThesisScientist.comIntroduction Money managers operate the mutual funds by investing the fund's capital and attempt to produce capital gains and income for the fund's investors. George tells Peter that by investing in stocks and mutual funds, Peter can earn a small share of the great profits that big and successful organizations make for themselves and their shareholders. www.ThesisScientist.comIntroduction George tells him that although Peter will get to enjoy a part of the profit made by the organization, he will be spared of the hassles of running a business on his own, and also will undertake a much lesser risk than if he would have to run a business on his own. Therefore, although stocks and mutual funds would help Peter to multiply and grow his money, he would be able to do so by taking advantage of the stability and experience of these fast growing and stable organizations that have been www.ThesisScientist.com operating and making profits for decades.Introduction George also adds a word of warning for Peter. He tells Peter that the most important thing that he should keep in mind while investing in stocks and mutual funds is that he should determine the maximum risk that he is willing to take. www.ThesisScientist.comIntroduction Peter should always make sure that he never invests more than his risk taking capacity. George assures Peter that if he takes calculated risks and invests wisely; then stocks and mutual funds prove to be a very lucrative way of growing his money. www.ThesisScientist.comIntroduction Therefore, you can understand that investing in stocks and mutual funds are a great way to multiply and grow your money by undertaking calculated amount of risk according to one’s own risk taking capacity. Let us learn about stocks and investing in detail. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsWhat is a Stock • Any business needs money or capital whenever it has to start its operations or expand its business operations. • Thus, in order to raise this capital for a business startup or expansion, the corporation would offer shares of stock for sale to the public. www.ThesisScientist.comWhat is a Stock • By selling these shares or stock to the public, the company is able to increase its finance reserves and also get the necessary funds to start operations or expand its operations. • So, any individual who purchases a ‘share’ or ‘stock’ of a company becomes a part owner of a portion of that company, based upon the number of shares purchased compared with the number of shares that make up the company’s total stock offering. www.ThesisScientist.comWhat are Stock Exchanges www.ThesisScientist.comWhat are Stock Exchanges www.ThesisScientist.comWhy Stocks should be in Your Portfolio • It has been found over several decades that, as an asset class, common stocks have outperformed all other major asset classes. • Also, stocks deliver strong longterm capital gains. • They prove to be one of the best and most taxefficient types of return. www.ThesisScientist.comWhy Stocks should be in Your Portfolio • You should include stocks in your diversified portfolio because the individual stocks in a diversified portfolio can reduce the overall risk of your portfolio. • Dividends and capital gains are taxed at a lower preferential federal tax rate and so if tax planning is done wisely, then stocks can prove to be taxefficient assets. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsTypes of Stocks There are two main types of stocks that are offered by any company such as follows: Common Stock Preferred Let’s look at each in detail. Stock www.ThesisScientist.comCommon Stock Common Stock is a ‘voting stock’. Hence, any individual who has purchased the common stock of a company is entitled to vote for appointing the officers of the company and it’s Board of Directors. Thus, common stock is the ownership share in publicly held company. Common stock holders have a residual claim on a company’s assets. Each common stockholder or shareholder of a corporation is entitled to certain rights Common and obligations. Thus, each common stockholder has Stock the right to vote. Moreover, if a common stockholder is not able to vote in person, he can give a written consent to give permission to someone else to vote on his behalf as a proxy. www.ThesisScientist.comCommon Stock Common Stock is a ‘voting stock’. Hence, any individual who has purchased the common stock of a company is entitled to vote for appointing the officers of the company and it’s Board of Directors. Thus, common stock is the ownership share in publicly held company. Common stock holders have a residual claim on a company’s assets. Each common stockholder or shareholder of a corporation is entitled to certain rights Common and obligations. Thus, each common stockholder has Stock the right to vote. Moreover, if a common stockholder is not able to vote in person, he can give a written consent to give permission to someone else to vote on his behalf as a proxy. www.ThesisScientist.comPreferred Stock ‘Preferred Stock’ as the names suggests has a preferential position over common stock. Therefore, during the payout of dividend to share holders, it is first paid to preferred stock owners before common stock holders. Preferred stock is also ownership shares of a company. However, it differs from common stock because Preferred in preferred stocks, the dividend is guaranteed Stock and paid before dividends on common stock are paid. On the other hand, if profits of the company increase, the dividend for preferred stocks isn’t increased accordingly. www.ThesisScientist.comPreferred Stock ‘Preferred Stock’ as the names suggests has a preferential position over common stock. Therefore, during the payout of dividend to share holders, it is first paid to preferred stock owners before common stock holders. Preferred stock is also ownership shares of a company. However, it differs from common stock because Preferred in preferred stocks, the dividend is guaranteed Stock and paid before dividends on common stock are paid. On the other hand, if profits of the company increase, the dividend for preferred stocks isn’t increased accordingly. www.ThesisScientist.comKey Asset Classes for Common Stocks The following are some of the key asset classes for common stocks: Small Capitalization / Small Cap Mid Stocks Capitalization / Mid Cap Stocks Large Capitalization / Large Cap Stocks www.ThesisScientist.comKey Asset Classes for Common Stocks The following are some of the key asset classes for common stocks: Large Cap stocks are stocks of companies with market capitalization Small (shares outstanding Capitalization / times’ price) of greater Small Cap Mid than 10 billion. Stocks Capitalization / Mid Cap Stocks Large Small Cap stocks Capitalization / are stocks of Large Cap companies with Stocks Mid Cap stocks are stocks market of companies with market capitalization of capitalization of between less than 2 2 billion and 10 billion. billion. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsClassification of Common Stock Common stock can be classified as follows: Bluechip Stocks Growth Stocks Value Stocks Income Stocks Cyclical Stocks Defensive Stocks Let us look at each in detail. www.ThesisScientist.comBluechip Stocks Bluechip Stocks • Bluechip Stocks: o ‘Blue Chip Stock’ is a stock that is issued by a large, stable, mature company. o This is not a specific list, but changes over time. www.ThesisScientist.comGrowth Stocks Growth Stocks • Growth Stocks: o ‘Growth Stock’ is the stock that compensates investors primarily through increase in value of the shares over time. o These are issued by companies which are growing faster than average and which generally reinvest dividends. o They generally have higher PE and PB ratios than the www.ThesisScientist.com market as a whole.Value Stocks Value Stocks • Value Stocks: o Value Stocks are issued by companies which are less expensive compared to the market. o They generally have lower PE and PB ratios than the market as a whole. www.ThesisScientist.comIncome Stocks Income Stocks • Income Stocks: o ‘Income Stock’ is the stock that compensates investors primarily through the regular payment of dividends. o These are issued by companies which pay dividends regularly. www.ThesisScientist.comCyclical Stocks Cyclical Stocks • Cyclical Stocks: o ‘Cyclical Stock’ is stock exhibiting aboveaverage sensitivity to the business cycle. o These are issue by companies whose share prices move up and down with the state of the economy. www.ThesisScientist.comDefensive Stocks Defensive Stocks • Defensive Stocks: o ‘Defensive Stock’ is a stock that is relatively insensitive to the business cycle. o These are issued by companies whose share prices move opposite to the state of the economy. www.ThesisScientist.comMCQ Q. Which of the following is a stock issued by a large, stable and mature company Click on the radio button to select the correct answer www.ThesisScientist.comMCQ Q. Which of the following is a stock issued by a large, stable and mature company www.ThesisScientist.comMCQ Q. Which of the following is a stock issued by a large, stable and mature company www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsWhat is ‘Beta’ www.ThesisScientist.comInterpreting Beta It is very important that you understand how to interpret ‘Beta’ to understand how a stock is behaving with respect to the movements in the overall market. www.ThesisScientist.comInterpreting Beta The following are some important points that you should bear in mind while interpreting ‘Beta’: If Beta = 1.0 = This If Beta 1.0 = This If Beta 1.0 = This means that the means that the means that the stock has the same stock has more risk stock has less risk risk as the market. than the market. than the market. Therefore, a stock Therefore, a stock Therefore, a stock with Beta = 1 will with Beta 1.0 will with Beta 1.0 move with the move more than will move less market. the market. than the market. www.ThesisScientist.comRole of Beta in Your Portfolio ••• So, this weighted ‘Beta’ The ‘Beta’ indicator Hence, when you build a or the ‘Beta of your plays a crucial role portfolio, you should always portfolio’ will indicate while selecting the track the beta of your and show you how stocks that will make portfolio. The ‘Beta’ of your risky your portfolio is up your portfolio. portfolio is the weighted versus the market. Beta of each of your stocks or funds in the portfolio. www.ThesisScientist.comRole of Beta in Your Portfolio •••• You should always keep Hence, it is So, you should You should not only in mind that a crucial that you diversify by invest in large diversified portfolio should always be buying a broad capitalization stocks, moves with the diversified in all array of financial but also broaden and market. So, in a your assets. deepen your portfolio diversified portfolio, investments. by buying you will feel less effect international stocks, www.ThesisScientist.com from one company. small cap stocks, etc.Understanding Leverage • ‘Leverage’ is another important concept while learning about stocks and investing. ‘Leverage’ is the process of increasing your purchasing power 1 by borrowing money to invest in more assets. • Therefore, it is very natural that the ‘Leverage’ increases your risk as you invest more than your own financial capacity by borrowing from 2 others. • Also, when you borrow money for investing the rate of return on the loan is fixed, however, there is no fixed or guaranteed rate of return on 3 your investments. www.ThesisScientist.comUnderstanding Leverage • Therefore, Leverage magnifies capital gains and losses. 4 • As a ground rule, you should always keep in mind that you should ‘never’ use leverage to invest. Leverage is as pure and simple as an 5 ordinary ‘debt’. • So, if you want to invest a larger amount, then the best thing that you can do is saving for making the larger investments but never borrow money for it. 6 www.ThesisScientist.comCosts of Investing in Stocks It is crucial for you to understand that there are a few major costs of investing in stocks. Also, the costs of investing in stocks can be divided into the following three major types: • Explicit Costs • Implicit Costs • Hidden Costs Let us look at each in detail. www.ThesisScientist.comExplicit Costs • Explicit Costs ‘Explicit Costs’ includes the costs that are reflected in and you see each month in your financial statement. Therefore, ‘Explicit Costs’ include: Brokerage Commission Costs and Fees Custody or Annual Fees www.ThesisScientist.com Let us look at each in detail.Explicit Costs • Explicit Costs ‘Explicit Costs’ includes the costs that are reflected in and you see each month in your financial statement. Therefore, ‘Explicit Costs’ include: Brokerage Commission Brokerage Commission Costs and Fees Costs and Fees Brokerage Commission Costs and Fees: • ‘Explicit Costs’ include the brokerage commission costs and fees. • Brokerage commission costs and fees is Custody or a service charge applied by a broker in Annual Fees return for arranging the purchase or sale of financial assets. www.ThesisScientist.com Let us look at each in detail.Explicit Costs • Explicit Costs ‘Explicit Costs’ includes the costs that are reflected in and you see each month in your financial statement. Therefore, ‘Explicit Costs’ include: Brokerage Commission Brokerage Commission Costs and Fees Costs and Fees Brokerage Commission Costs and Fees: • ‘Explicit Costs’ include the brokerage commission costs and fees. • Brokerage commission costs and fees is Custody or a service charge applied by a broker in Annual Fees return for arranging the purchase or sale of financial assets. www.ThesisScientist.com Let us look at each in detail.Explicit Costs • Explicit Costs ‘Explicit Costs’ includes the costs that are reflected in and you see each month in your financial statement. Therefore, ‘Explicit Costs’ include: Brokerage Commission Costs and Fees Custody or Annual Fees: • ‘Explicit Costs’ include custody or annual fees. • Custody or annual fees are fees the Custody or Custody or brokerage house charges to hold the Annual Fees Annual Fees stocks, bonds, or mutual funds in your account. www.ThesisScientist.com Let us look at each in detail.Explicit Costs • Explicit Costs ‘Explicit Costs’ includes the costs that are reflected in and you see each month in your financial statement. Therefore, ‘Explicit Costs’ include: Brokerage Commission Costs and Fees Custody or Annual Fees: • ‘Explicit Costs’ include custody or annual fees. • Custody or annual fees are fees the Custody or Custody or brokerage house charges to hold the Annual Fees Annual Fees stocks, bonds, or mutual funds in your account. www.ThesisScientist.com Let us look at each in detail.Implicit Costs • Implicit Costs ‘Implicit Costs’ are the taxes that you pay. Hence, it is crucial that you should take into account these ‘implicit costs’ as these are Capital Gains Taxes critical costs that must be taken into account to get the true return of your portfolio but which are not noted on your monthly financial reports. Shortterm Capital The following are some of the ‘Implicit Costs’ that you may have to pay: Longterm Capital Dividends www.ThesisScientist.com Let us look at each in detail.Implicit Costs • Implicit Costs ‘Implicit Costs’ are the taxes that you pay. Hence, it is crucial that you should take into account these ‘implicit costs’ as these are Capital Gains Taxes Capital Gains Taxes critical costs that must be taken into account to get the true return of your portfolio but which are not noted on your monthly financial reports. Shortterm Capital The following are some of the ‘Implicit Costs’ that you may have to pay: Longterm Capital Capital Gains Taxes: Dividends You may have to pay taxes on the gains you have made by selling financial assets. www.ThesisScientist.com Let us look at each in detail.Implicit Costs • Implicit Costs ‘Implicit Costs’ are the taxes that you pay. Hence, it is crucial that you should take into account these ‘implicit costs’ as these are Capital Gains Taxes critical costs that must be taken into account to get the true return of your portfolio but which are not noted on your monthly financial reports. Shortterm Capital Shortterm Capital The following are some of the ‘Implicit Costs’ that you may have to pay: Longterm Capital Shortterm Capital: You may have to pay taxes on the gains that Dividends you made in selling assets owned for a period of less than one year. www.ThesisScientist.com Let us look at each in detail.Implicit Costs • Implicit Costs ‘Implicit Costs’ are the taxes that you pay. Hence, it is crucial that you should take into account these ‘implicit costs’ as these are Capital Gains Taxes critical costs that must be taken into account to get the true return of your portfolio but which are not noted on your monthly financial reports. Shortterm Capital The following are some of the ‘Implicit Costs’ that you may have to pay: Longterm Capital Longterm Capital Longterm Capital: You may have to pay taxes on the gains that Dividends you made in selling assets owned for a period of more than one year. www.ThesisScientist.com Let us look at each in detail.Implicit Costs • Implicit Costs ‘Implicit Costs’ are the taxes that you pay. Hence, it is crucial that you should take into account these ‘implicit costs’ as these are Capital Gains Taxes critical costs that must be taken into account to get the true return of your portfolio but which are not noted on your monthly financial reports. Shortterm Capital The following are some of the ‘Implicit Costs’ that you may have to pay: Dividends: Longterm Capital You may have to pay taxes for the dividends that you receive from the companies. Dividends Dividends Dividends are the returns you get from the company. Different countries have different rules and policies for taxing stock dividends, bonds and other dividends at federal tax rate www.ThesisScientist.com Let us look at each in detail. and your state marginal tax rate.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Minimum Balance Fees Interest on Margin Loans Sales Charges or Loads www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Account Transfer Fees: Minimum Balance Fees ‘Account Transfer Fees’ are the charges that Interest on Margin Loans you need to pay for moving assets either into or out of an existing account. Sales Charges or Loads www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are Account Maintenance Fees as follows: Inactivity Fees Account Maintenance Fees: Minimum Balance Fees ‘Account Maintenance Fees’ are the charges Interest on Margin Loans that you need to pay for maintaining your account. Sales Charges or Loads www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Inactivity Fees Inactivity Fees: Minimum Balance Fees ‘Inactivity Fees’ are the charges that you Interest on Margin Loans need to pay because you did not trade or did not perform any account activity during a Sales Charges or Loads specified period. www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Minimum Balance Fees: Minimum Balance Fees Minimum Balance Fees ‘Minimum Balance Fees’ are the charges that Interest on Margin Loans you need to pay because you failed to maintain a minimum balance in your Sales Charges or Loads account. www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Interest on Margin Loans: Minimum Balance Fees ‘Interest on Margin Loans’ is the amount Interest on Margin Loans Interest on Margin Loans that you need to pay as an ‘interest’ on money you borrowed to buy securities. Sales Charges or Loads www.ThesisScientist.com Let us look at each in detail.Hidden Costs • Hidden Costs ‘Hidden Costs’ are the costs that you have to bear while investing in stocks that are not included in the ‘Explicit Costs’ and the ‘Implicit Account Transfer Fees Costs’. Some of the ‘Hidden Costs’ that you Account Maintenance Fees should look out for while investing in stocks are as follows: Inactivity Fees Sales Charges or Loads: Minimum Balance Fees ‘Sales Charges or Loads’ are the sales charges Interest on Margin Loans that you need to pay to the broker for helping you purchase specific securities such Sales Charges or Loads Sales Charges or Loads as mutual funds. www.ThesisScientist.com Let us look at each in detail.Risks in Stocks You should always bear in mind while investing stocks that all kinds of stocks are susceptible to a number of risks. Moreover, the amount of risk may not be equal in all stocks. The following are the major types of risks faced by stocks: Interest Rate Risk Inflation Risk Business Risk Financial Risk Liquidity Risk Political or Regulatory Risk Exchange Rate Risk Market Risk www.ThesisScientist.com Let us look at each in detail.Interest Rate Risk Interest Rate Risk Interest Rate Risk: • ‘Interest Rate Risk’ is the risk caused by the rise or fall in interest rates which may result in a decline or rise in the stock’s value. www.ThesisScientist.comInflation Risk Inflation Risk Inflation Risk: • ‘Inflation Risk’ is a risk caused due to a rise or fall in inflation which will result in a decrease or increase in the value of the stock. www.ThesisScientist.comBusiness Risk Business Risk Business Risk: • ‘Business Risk’ is risk that the share price will fall due to problems with the business. www.ThesisScientist.comFinancial Risk Financial Risk Financial Risk: • ‘Financial Risk’ is a risk is caused due to any adverse effect caused on the financial performance of the firm due to ways in which the firm raises money. www.ThesisScientist.comLiquidity Risk Liquidity Risk Liquidity Risk: • ‘Liquidity Risk’ is a risk that investors will be unable to find a buyer or seller for a stock when they need to sell or buy that particular stock. www.ThesisScientist.comPolitical or Regulatory Risk Political or Regulatory Risk Political or Regulatory Risk: • ‘Political or Regulatory Risk’ is a risk that unanticipated changes in the tax or legal environment will have an adverse impact on a business. www.ThesisScientist.comExchange Rate Risk Exchange Rate Risk Exchange Rate Risk: • ‘Exchange Rate Risk’ is a risk that changes in exchange rates will impact the profitability of firms that operate and function on a global or international level. www.ThesisScientist.comMarket Risk Market Risk Market Risk: • ‘Market Risk’ is risk of the impact on price due to the overall market movements. www.ThesisScientist.comStock Market Sectors When deciding to buy or sell any stock, it is crucial that you should have thorough knowledge about the sector of the particular stock that you intend to buy or sell. The performance of the overall sector in the economy will to a greater extent affect the stocks of the company belonging to that particular sector. www.ThesisScientist.comStock Market Sectors The following are some considerations that you should keep in mind with respect to the sector of any company: You should always be aware of which sectors are doing well. You should always be aware of which sectors are not doing well. Keep a track of the performance history of the various sectors to determine the high performing sectors. You should always be aware of what are the new rules and regulations that have come up in different sectors of the economy in your country. Always keep abreast of the latest news and trends with respect to the different sectors. www.ThesisScientist.comStock Market Sectors The given image shows the various sectors in an economy of any country: www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsStock Screening Criteria It is very important that you should screen each and every stock that you intend to buy or sell before deciding on a purchase or sale. Screening the stock carefully on certain crucial criteria will help you make informed and wise decision to safeguard your money against risk as well as losses. www.ThesisScientist.comStock Screening Criteria The following are some of the crucial criteria that you should screen the stock upon: www.ThesisScientist.com SectorStock Split • ‘Stock Split’ is a process through which a company splits its own shares to keep the price of its stock affordable and in a buying range. • Generally, a stock price of 6100 per share is considered affordable. • A company may decide to split each of its shares into a number of shares. • So, a company may split its stock (x) for 1, which results in the stock price declining by the same multiple (x). • You should bear in mind that a stock split has no impact on firm value, but it may give information on the firm’s prospects. www.ThesisScientist.comStock Split • For Example: o Assume you had 20 shares priced at 100 each or 20 100 = 2,000. o If the stock split 2 for 1, you would have 40 shares (2 20) and the price would adjust to 50 each, or 100 / 2. o Your value would be 40 50 = 2,000, the same as before www.ThesisScientist.comReverse Split www.ThesisScientist.comReal Life Example Let us now look at a real life example to understand stock splitting. www.ThesisScientist.comReal Life Example Peter Smith owns 300 shares of Globus Stock selling at 600 per share. At a recent Board Meeting, Globus’ management has decided to split the stock, in order to make the stock more affordable for the average investor. www.ThesisScientist.comReal Life Example Look at the questions given below and try answering them in context of the changing situations at Globus. How much was Peter’s investment before the split Consider that Globus’ management decides to split the stock threeforone, how many shares would Peter own after the split What is the new price per share after the split How much would Peter’s investment be worth after the three forone split Now, let’s take a look at the answers. www.ThesisScientist.comReal Life Example Look at the questions given below and try answering them in How much was Peter’s investment before the split context of the changing situations at Globus. How much was Peter’s investment before the split • Peter’s investment before the split = 300 shares x 600 per share = 180,000. Consider that Globus’ management decides to split the stock threeforone, how many shares would Peter own Consider that Globus’ management decides to split the after the split stock threeforone, how many shares would Peter own after the split What is the new price per share after the split How much would Peter’s investment be worth after the • Number of shares that Peter would have after the three forone split threeforone split = 300 x 3 = 900 shares. Now, let’s take a look at the answers. www.ThesisScientist.comReal Life Example What is the new price per share after the split How much was Peter’s investment before the split • New price per share after the split = 600/3 = 200. • Peter’s investment before the split = 300 shares x 600 per share = 180,000. How much would Peter’s investment be worth after the three forone split Consider that Globus’ management decides to split the stock threeforone, how many shares would Peter own • Peter’s investment worth after the three forone split after the split = 900 shares x 200 per share = 180,000. • Number of shares that Peter would have after the • Therefore, Peter’s investment worth after the three threeforone split = 300 x 3 = 900 shares. forone split remains the same as his initial investment amount. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsAnalysis in Stock Trading Before trading in stocks, various kinds of analysis is carried out by investors, financial experts, financial institutions, etc. to give an indication about the performance of a stock, its volatility etc. The following are a few key types of analysis performed on stocks: • Fundamental Analysis • Cash Flow Analysis • Technical Analysis www.ThesisScientist.com Let us look at each in detail.Fundamental Analysis • Fundamental Analysis The chief assumption on which ‘Fundamental Analysis’ is carried out is that the value of the stock can be determined based on the future earnings of the company. Financial Analysts carry out thorough research on the background and operations of a company, the state of the industry to which the company belongs, the global industry and the global economy etc. www.ThesisScientist.comFundamental Analysis • Fundamental Analysis The chief assumption on which ‘Fundamental Analysis’ is carried out is that the value of the stock can be determined based on the future earnings of the company. Financial Analysts carry out thorough research on the background and operations of a company, the state of the industry to which the company belongs, the global industry and the global economy etc. www.ThesisScientist.comCash Flow Analysis • Cash Flow Analysis The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the value of a company is the discounted value of the free cash flows to all shareholders and to equity shareholders. Cash flow models are built by investors to predict expected cash flows to the equity shareholders and to the total firm. www.ThesisScientist.comCash Flow Analysis • Cash Flow Analysis The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the value of a company is the discounted value of the free cash flows to all shareholders and to equity shareholders. Cash flow models are built by investors to predict expected cash flows to the equity shareholders and to the total firm. www.ThesisScientist.comTechnical Analysis • Technical Analysis The chief assumption on which ‘Technical Analysis’ is carried out is that supply and demand are the key factors needed to understand stock prices and market trends. Therefore, the company’s value is determined in Technical Analysis by focusing on psychological factors such as greed and fear and also economic factors. www.ThesisScientist.comTechnical Analysis • Technical Analysis The chief assumption on which ‘Technical Analysis’ is carried out is that supply and demand are the key factors needed to understand stock prices and market trends. Therefore, the company’s value is determined in Technical Analysis by focusing on psychological factors such as greed and fear and also economic factors. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsRatios for Valuing Firms There are a few key ratios that are used for valuing firms such as follows: • PricetoEarnings Ratio (PE) • PricetoBook Ratio (PB) • Return on Equity (ROE) • Dividend Payout Ratio www.ThesisScientist.com Let us look at each in detail.PricetoEarnings Ratio (PE) • PricetoEarnings Ratio (PE) • The ‘PricetoEarnings Ratio (PE)’ is defined as the market price of the stock divided by the Earnings perShare (EPS). This basically means it is what you would pay for 1 of earnings. • The PE Ratios is one of the most widely used ratios. It is chiefly used to compare financial performance of different companies. www.ThesisScientist.comPricetoEarnings Ratio (PE) • PricetoEarnings Ratio (PE) • The ‘PricetoEarnings Ratio (PE)’ is defined as the market price of the stock divided by the Earnings perShare (EPS). This basically means it is what you would pay for 1 of earnings. • The PE Ratios is one of the most widely used ratios. It is chiefly used to compare financial performance of different companies. www.ThesisScientist.comPricetoBook Ratio (PB) • PricetoBook Ratio (PB) • The ‘Price to Book Ratio (PB)’ is defined as the price of the company’s stock divided by the book value per share. • The PB ratio basically indicates the price you are paying for a 1 worth of assets as shown on the balance sheet. www.ThesisScientist.comPricetoBook Ratio (PB) • PricetoBook Ratio (PB) • The ‘Price to Book Ratio (PB)’ is defined as the price of the company’s stock divided by the book value per share. • The PB ratio basically indicates the price you are paying for a 1 worth of assets as shown on the balance sheet. www.ThesisScientist.comReturn on Equity (ROE) • Return on Equity (ROE) • The ‘Return on Equity (ROE)’ is defined as a ratio of the company’s EarningsperShare (EPS) divided by the company’s book value per share. • Thus, ROS measures how well the company is utilizing the assets of the company to make money. www.ThesisScientist.comReturn on Equity (ROE) • Return on Equity (ROE) • The ‘Return on Equity (ROE)’ is defined as a ratio of the company’s EarningsperShare (EPS) divided by the company’s book value per share. • Thus, ROS measures how well the company is utilizing the assets of the company to make money. www.ThesisScientist.comDividend Payout Ratio • Dividend Payout Ratio • The ‘Dividend Payout Ratio’ is defined as the ratio of dividends paid divided by the earnings of the company. • Also, it is also calculated as dividends per share divided by earnings per share. • So, when this ratio is high, it shows that a firm is returning to the shareholders a large percentage of company profits. www.ThesisScientist.comDividend Payout Ratio • Dividend Payout Ratio • The ‘Dividend Payout Ratio’ is defined as the ratio of dividends paid divided by the earnings of the company. • Also, it is also calculated as dividends per share divided by earnings per share. www.ThesisScientist.comMCQ Q. Which of the following ratios is often seen as a measure of future earnings potential Click on the radio button to select the correct answer www.ThesisScientist.comMCQ Q. Which of the following ratios is often seen as a measure of future earnings potential www.ThesisScientist.comMCQ Q. Which of the following ratios is often seen as a measure of future earnings potential www.ThesisScientist.comTypes of Orders As an investor and stock trader, you can place the following three types of orders on your stocks: Limit Stop Order Order Market Order www.ThesisScientist.comTypes of Orders As an investor and stock trader, you can place the following three types of orders on your stocks: ‘Stop Order’ is an order to buy or sell stock holdings when the market Limit ‘Limit Order’ is a price reaches a Stop Order request to buy certain level. Order stock at any price up to a specified maximum or to sell stock at any price above a specified Market ‘Market Order’ is an minimum. Order offer to buy stock at the market price. www.ThesisScientist.comMCQ Q. You have invested in a stock. The stock prices go up and have made a profit for you. Which of the following should you do to help you protect your gains Click on the radio button to select the correct answer www.ThesisScientist.comMCQ Q. You have invested in a stock. The stock prices go up and have made a profit for you. Which of the following should you do to help you protect your gains www.ThesisScientist.comMCQ Q. You have invested in a stock. The stock prices go up and have made a profit for you. Which of the following should you do to help you protect your gains www.ThesisScientist.comTypes of Brokers There are various types of brokers who offer various kinds of services for buying and selling of stocks and various securities such as follows: www.ThesisScientist.com Let’s look at each in detail.Full Service Brokers Full Service Brokers • ‘Full Service Brokers’ are the traditional brokers who are present since the start of stock exchanges across the world. • Such full service stock brokers develop and maintain personal relationships with clients. • Such brokers recommend to their client the purchase and sale of securities based upon the client’s needs. www.ThesisScientist.comFull Service Brokers Full Service Brokers • ‘Full Service Brokers’ are the traditional brokers who are present since the start of stock exchanges across the world. • Such full service stock brokers develop and maintain personal relationships with clients. • Such brokers recommend to their client the purchase and sale of securities based upon the client’s needs. www.ThesisScientist.comDiscount Brokers Discount Brokers • ‘Discount Brokers’ is a relatively new kind of brokerage service offering that has come up in the brokerage business. • The discount brokers through the firm execute a customer’s transaction on behalf of the client. • However, a discount broke does not give any advice to the customer regarding the purchase or sale of the security. www.ThesisScientist.comDiscount Brokers Discount Brokers • ‘Discount Brokers’ is a relatively new kind of brokerage service offering that has come up in the brokerage business. • The discount brokers through the firm execute a customer’s transaction on behalf of the client. • However, a discount broke does not give any advice to the customer regarding the purchase or sale of the security. www.ThesisScientist.comElectronic Trading Platforms Electronic Trading Platforms • Another more modern and latest form of trading can be done electronically by customers. • In such electronic trading, the customers can through the use of computer online services initiate their own buy and sell orders. www.ThesisScientist.comElectronic Trading Platforms Electronic Trading Platforms • Another more modern and latest form of trading can be done electronically by customers. • In such electronic trading, the customers can through the use of computer online services initiate their own buy and sell orders. www.ThesisScientist.comObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsCriteria for Choosing a Broker • As a new investor, it is important that you should start investing with the help of an experienced broker. • Hence, it is very crucial that you should choose the right broker who can guide you to make stock trades in a wise manner. www.ThesisScientist.comCriteria for Choosing a Broker There are a few criteria that you should keep in mind before choosing a broker. So, before you choose a broker, keep in mind the following considerations: • The brokerage site should have a useful and informative website and trading platform. • The trading platform and interface should be able to allow you to trade during hightraffic trading periods. • The account should be properly insured and valid as per local and national regulations. • Check and find detailed information about the commission structure. • Find out detailed information about all the types of services offered by the brokerage firm. • Find out if the brokerage firm offers any daily updates on the stock listings, news, information and dedicated relationship manager as well. • Check and find detailed information if the broker or brokerage firm is willing to pay you interest on any uninvested cash in your account. Also, what is the www.ThesisScientist.com interest rate that the broker is willing to payObjectives • Explain What is a Stock • Explain the Types of Stocks • Explain the Classification of Common Stock • Describe the Role of Beta in Your Portfolio • List the Various Stock Screening Criteria • Explain the Types of Analysis in Stock Trading • Explain the Ratios for Valuing Firms • List the Criteria for Choosing a Broker • Explain the Common Stock Investing Strategies • Explain the Steps of a Typical Stock Transaction • Explain How to Read Stock Quotations • Explain the Calculation of PricetoEarnings Ratio (PE) • Explain the Key Terms of Stocks and Investments • Describe the Rights of a Stockholder www.ThesisScientist.com • Describe the Various Investment OptionsCommon Stock Investing Strategies You can use a number of different strategies for investing in stocks. The following are a few of the most common strategies for investing in stocks: • Buy and Hold Strategy • Dollarcost Averaging Strategy • Dividend Reinvestment Strategy Let us look at each in detail. www.ThesisScientist.comBuy and Hold Strategy • Buy and Hold Strategy Buy and Hold Strategy: A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not selling it for an extended period of time. Hence, this is a longterm strategy. It proves to be very costeffective. www.ThesisScientist.comBuy and Hold Strategy • Buy and Hold Strategy Buy and Hold Strategy: A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not selling it for an extended period of time. Hence, this is a longterm strategy. It proves to be very costeffective. www.ThesisScientist.comDollarcost Averaging Strategy • Dollarcost Averaging Strategy Dollarcost Averaging Strategy: A ‘Dollarcost Averaging Strategy’ is a strategy of purchasing a fixed dollar amount of a security at regular intervals, such as every month. www.ThesisScientist.comDollarcost Averaging Strategy • Dollarcost Averaging Strategy Dollarcost Averaging Strategy: A ‘Dollarcost Averaging Strategy’ is a strategy of purchasing a fixed dollar amount of a security at regular intervals, such as every month. www.ThesisScientist.comDividend Reinvestment Strategy • Dividend Reinvestment Strategy Dividend Reinvestment Strategy: A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’. www.ThesisScientist.comDividend Reinvestment Strategy • Dividend Reinvestment Strategy Dividend Reinvestment Strategy: A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’. www.ThesisScientist.comManagementStudyGuide.com Learn Management the Easy Way – A Continuous Learning for People of Any Age Group – Learn At Your Own Pace…. You have Completed the Course on Basics of Stocks and Investing. To view the Complete Course on Stocks and Investing (280 Slides), Join Premium Membership and Get Access to Complete Course on Stocks and Investing + 80 Other Courses + New Courses Added Every Week. www.ThesisScientist.com
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