Chapter 14: Investing in Stocks and Bonds Garman/Forgue Personal Finance Ninth Edition PPT slide...

Chapter 14:Investing in Stocks and Bonds

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 14 - 2

Learning Objectives

1. Explain how stocks and bonds are used as investments.

2. Classify common stocks according to their major characteristics.

3. Describe fundamental and numerical ways to evaluate stock values.


Learning Objectives

4. Determine whether an investment’s potential rate of return is sufficient.

5. Use the Internet to evaluate common stocks in which to invest.

6. Summarize how stocks are bought and sold.

7. Describe how to invest in bonds.


The Role of Stocks and Bonds in Investments

• Corporation

• Public Corporation

• Startup Capital


Common Stock

• Stocks

• Cash Dividends

• Market Price

• Shareholder (or Stockholder)


Common Stock

• Residual Claim

• Limited Liability

• Board of Directors

• Management


Preferred Stock

• Cumulative Preferred Stock

• Noncumulative Preferred Stock

• Convertible Preferred Stock


Bonds• Principal

• Maturity Date


Dividends and Splits

• How do stock dividends and stock splits work?


The Major Characteristics of Common Stocks

• Match your investment choices using P/E ratio and Beta.

• Price/Earnings (or P/E) Ratio– Trailing P/E Ratio– Projected P/E (or Forward P/E) Ratio– Earnings Yield



• Use Beta to Compare a Stock to Similar Investments– Beta (or Beta Value or Beta Coefficient):

Measure of stock volatility.



• Income Stocks

• Growth Stocks– Well-known growth stocks– Lesser-known growth stocks

• Value Stocks



• Value Stocks

• Speculative Stocks

• Tech Stocks

• Blue-Chip Stocks

• Large-cap, Mid-cap, Small-cap, and Microcap Stocks



• Most stocks are cyclical and some are countercyclical.– Cyclical stock– Countercyclical (or defensive) stock


How to Evaluate Stock Values

• Use fundamental analysis to evaluate stocks.– Fundamental Analysis– Technical Analysis

• Corporate earnings are most important.


How to Evaluate Stock Values

• Earnings per share

• Price/Sales ratio


Numerical Measures to Evaluate Stock Prices

• Cash Dividends

• Dividends Per Share

• Dividend Payout Ratio

• Dividend Yield

• Book Value

• Book Value Per Share

• Price-to-Book Ratio


About Employee Stock Options

• An employee stock options is a gift, like a bonus, from an employer to an employee that allows that allows employees to benefit from the appreciation of their employer’s stock without putting any money down.


Calculating a Stock’s Potential Rate of Return

• Alpha Statistic

• Use beta to estimate the risk of the investment.

• Estimate the market risk (or systematic risk).

• Calculate your required rate of return.


Calculate the Stock’s Potential Rate of Return

• Add up projected income and price appreciation.– Potential Rate of Return– Approximate Compound Yield (or ACY)

• Compare the required rate of return with the potential rate of return on the investment.


How To Use the Internet to Evaluate and Select Stocks

• Begin by setting criteria for your stock investments.

• Basic investment information:– Fool.com– kiplinger.com/personalfinance/– money.cnn.com/pf/indes.html– finance.yahoo.com/marketupdate?u



• Stock-Screening Tools:– Screen.yahoo.com/stocks.html– screen.morningstar.com

• Security analysts’ research reports

• Corporate news– Annual reports, 10-K reports, prospectus



• Stock research firms

• The two most popular firms that offer stock advisory research services:– Morningstar– Value Line



• Economic data

• Stock market data (Securities market index)– Dow Jones Industrial Average– Standard & Poor’s 500 Index– NASDAQ Composite Index– Russell 3000 Index– Wilshire 5000 Index



• Securities exchanges (stock markets)– Securities Exchange (or Stock Market)

– Over-The-Counter (or OTC) Marketplace

– NASDAQ



• Use portfolio tracking to monitor your investments:– E*Trade: us.etrade.com/e/t/home– MSN Money: moneycentral.msn.com– Morningstar: morningstar.com– InvestorGuide.com


Buying and Selling Stocks

• Stockbroker (or Account Executive)

• Security’s street name



• Discount, online, and full-service (or general) brokers– Many of these use a cash account.



• Broker commissions and fees– Round Lots– Odd Lot– Differential: The odd-lot portion of the

transaction.



• How to order stock transactions:– The process of trading stocks involves a

floor broker and a specialist.

– Securities prices are either matched or negotiated.

• Negotiated price: bid Price, ask price, spread



• Types of stock orders (executing an order):– Market order– Limit order– Stop order (or stop-loss order)– Time limits: fill-or-kill order, day order,

open (or good-till-canceled [GTC]) order



• Margin buying and selling short are risky trading techniques.

• Margin trading is buying stocks on credit (using a margin account).– Margin buying– Margin rate



• Buying on margin can increase returns.

• Buying on margin can also increase losses.

• A margin call makes matters even worse.



• Selling short is selling stock borrowed from your broker.– Buying long– Selling short


Investing In Bonds

• Investment-Grade Bonds

• Par (or Face) Value

• Speculative Grade (or Junk) Bonds

• Default Rate


Investing In Bonds

• Corporate, U.S. government, and municipal bonds– Bond rating– Default (or Credit) risk

• U.S. government bills, notes, and bonds


Investing In Bonds

• Treasury bills (t-bills), notes, and bonds– Discount yield, I-bonds– TIPS (or Treasury Inflation-Protected

Securities)– U.S. Government savings bonds– Series EE savings bonds


Investing In Bonds

• Federal agency debt issues

• Municipal Government Bonds (or Munis)

• Tax-Free (or Tax-Exempt) Bonds


Investing In Bonds

• Unique characteristics of bond investing:– Coupon rate (or coupon, coupon yield, or

stated interest rate)

– Serial or sinking fund

– Secured bond or unsecured bond (debenture)


Investing In Bonds

• Unique characteristics of bond investing:– Registered and issued

– Book entry

– Callable (call option)


Evaluating Bond Prices and Returns

• Interest rate risk results in variable value.– Market interest rates

– Interest rate risk

– Fixed yield

– Premium


Evaluating Bond Prices and Returns

• Premiums and discounts

• Current yield

• Yield to maturity


Six Decisions for Bond Investors

• Decide on credit quality.

• Decide on maturity.

• Determine the after-tax return.

• Select the highest yield to maturity.

• Consider selling.

• Think about investing in bond mutual funds.


The Top 3 Financial Missteps of Investing in Stocks and Bonds

People slip up in investing in stocks and bonds when they do the following:

1. Seek to invest in just one stock that promises to make them a lot of money.

2. Neglect to carefully research investment choices.

3. Hold onto a lousy investment too long instead of cutting losses by selling it.


Good Money Habits in Investing in Stocks and Bonds

• Include stocks and bond or mutual funds that own stocks and bonds in your investment portfolio.

• Use fundamental analysis to determine a company’s basic value before investing in a stock.


Good Money Habits in Investing in Stocks and Bonds

• Resist putting money into so-called hot stocks.

• Invest part of the conservative portion of your portfolio in TIPS to beat inflation.

• Use zero-coupon bonds to help fund a child’s education and your retirement.

Chapter 14: Investing in Stocks and Bonds Garman/Forgue Personal Finance Ninth Edition PPT slide...

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