Investing in Bonds and Stocks

Investing in Bonds and Stocks Objectives  How investing in bonds differs from investing in       stocks Reasons why organizations sell bonds Types of bonds sold by the government Describe differences between preferred and common stocks Factors to consider when selecting stock investments Benefits of mutual funds Evaluation – needs, goals, safety, liquidity, rate of return Securities  Refers to bonds, stocks, and other documents that are sold by corporations and governments to raise large sums of money.   Debt securities – bonds that represent borrowing Equity securities – stocks, ownership in the company Bonds  A certificate representing a promise to pay a definite amount of money at a stated interest rate on a specified maturity date (due date)   You are lending money to that organization Certificate with a face value Types of Government Bonds  Governments issue bonds to raise money for funding public services.  Municipal Bonds – helps build parks, schools, repair roads    Exempt from federal and state taxes Interest rate is usually not as high Safer investment Types of Government Bonds  U.S. Savings Bonds – is very desirable for investors  EE Savings Bond - $50 to $10,000, purchased at half its face value  You will be paid at least face value when the bond matures  Interest paid when bond is cashed  $30,000 limit  HH Savings Bond - $50 to $10,000, no discount  Interest paid semiannually  No limit Investing in Stocks  Differences     You become a part owner of the business If profitable, you may be paid in the form of dividends Rate of return is higher Risk is higher Types of Stocks Market Value – price at which a share of stock can be bought and sold in the stock market  Preferred Stocks  Common Stocks The Differences  Preferred Stocks 1. Has priority over  Common Stocks 1. No stated dividend rate 2. Only receive dividends common stock in the payment of dividends 2. Priority on rate of return if the company goes out of business 3. No voting rights after preferred stockholders 3. One vote for every share 4. Could be more profitable Common Stock  Suppose a company has issued $100,000 worth of common stock and $100,000 worth of preferred stock with a stated dividend rate of 6%. If the company earns a profit of $20,000 and pays all the profit out as dividends, preferred stockholders would be paid $6,000 in dividends ($100,000 x .06). The remainder, $14,000, would be available to pay dividends to the common stockholders, which would be a return of 14%. Selecting Stock Investments  Analyzing Potential Stocks 1. Analyze Economic and Social Trend 2. Determine industries that will be affected 3. Decide whether to buy or sell, or hold the stock of those companies 4. Identify companies in those industries Selecting Stock Investments  Questions to ask 1. Has the company been profitable over a period of years? 2. Have the company’s managers made good business decisions? 3. Does the company have growth potential? 4. Does the company have a large amount of debt? 5. How does the company compare to others in its industry? Selecting Stock Investments  Dividend Yield (return): Dividend Yield = Dividend per Share Market Price per Share Quarterly Dividend = $0.60 per share Stock is selling for $40 a share Selecting Stock Investments  Price-Earnings Ratio (P/E): helps indicate whether the stock is priced high or low in relation to its earnings per share Example: 100,000 shares of stock, net profit of $150,000 (EPS is what? ______ ), stock is selling for $30 per share P/E = ______________ Using a Stockbroker  Stockbroker – a licensed specialist in buying and selling of stocks and bonds     The middle man between buyers and sellers, they earn a commission or fee Full-service brokers: provides information, higher commission Discount brokers: places orders only Internet trading Stock Exchanges  New York Stock Exchange  American Stock Exchange in NY  NASDAQ  Regional Exchanges – Boston, Chicago, Philadelphia, and San Francisco  World wide Mutual Funds  Mutual Fund – funds set up and managed by investment companies that receive money from many investors and then buy and sell a wide variety of stocks and bonds   Dividends go towards managing the fund Different types of mutual funds (high risk, low risk, growth potential, small cap, large cap)