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Lecture Topic 3b - Investing in Common Stocks
Lecture Topic 3b - Investing in Common Stocks
Investing in
Common Stocks
Investing in Common Stocks
• Learning Goals
1. Explain the investment appeal of common stocks and
why individuals like to invest in them.
2. Describe historical stock returns and how current
returns measure up to historical standards
of performance.
3. Discuss the basis features of common stocks,
including issue characteristics, stock quotations, and
transaction costs.
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Investing in Common Stocks
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The Appeal of Common Stocks
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Figure 6.1
Thirteen
Years of the
Dow, the
S&P, and
the Nasdaq
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Sometimes You Win,
Sometimes You Lose
6-6
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What is a Bear Market?
6-7
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From Stock Prices to Stock Returns
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Table 6.3 Comparative Returns
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Figure 6.2
Bulls, Bubbles, and Bears
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Advantages of Stock Ownership
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Disadvantages of Stock Ownership
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Figure 6.3 The Current Income
of Stocks and Bonds
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Basic Characteristics
of Common Stock
• Equity Capital: evidence of ownership position
in a firm, in the form of shares of common stock.
This is why stocks are sometimes called “equities”
• Publicly Traded Issues: shares of stock that are
readily available to the general market and are
bought and sold in the open market
• Public Offering: an offering to sell to the
investing public a set number of shares of a firm’s
stock at a specified price
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Basic Characteristics
of Common Stock (cont’d)
• Rights Offering: an offering of a new issue
of stock to existing stockholders, who may
purchase new shares in proportion to their
current ownership
• Stock Spin-Off: conversion of one of a
firm’s subsidiaries to a stand-alone
company by distribution of stock in the new
company to existing shareholders
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Basic Characteristics
of Common Stock (cont’d)
• Stock Split: when a company increases the
number of shares outstanding by exchanging a
specified number of new shares of stock for each
outstanding share
– Usually done to lower the stock price to make it more
attractive to investors
– Stockholders end up with more shares of stock that sells
for a lower price
– Investor with 200 shares in a 2-for-1 stock split would
have 400 shares after the stock split
– If the stock price was $100 before the split, the price
would be near $50 after the split
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Basic Characteristics
of Common Stock (cont’d)
• Treasury Stock: shares of stock that were
originally sold by the company and have been
repurchased by the company. Share repurchases
are often called “buybacks.”
– Reduces the number of shares outstanding to public
– Companies buyback when they believe stock is
undervalued and a good buy
– Companies may try to raise undervalued stock price or
prop up overvalued stock price
– May be used for mergers, acquisitions or employee
stock option plans
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Basic Characteristics
of Common Stock (cont’d)
• Classified Common Stock: common stock issued
in different classes, each of which offers different
privileges and benefits to its holders
– Different shares may have different voting rights
– Often used to allow a relatively small group to control
the voting of a publicly-trade company
– Ford family owns “B” shares and other investors own
“A” shares; Ford family controls 40% of Ford
Motor Company
– May have different dividend payout schedules
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Figure 6.5 Stock Quotations
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Watch Those Transaction Costs
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Common Stock Values
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Common Stock Values
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Dividends
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Key Dates for Dividends
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Dividends and Earnings Per Share
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Dividends and Dividend Yield
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Dividends and Dividend Payout Ratio
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Other Dividend Characteristics
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Types of Stock
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Figure 6.7 A Blue Chip Stock
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Types of Stock (cont’d)
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Types of Stock (cont’d)
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Types of Stock (cont’d)
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Types of Stock (cont’d)
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Types of Stock
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Types of Stock (cont’d)
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Types of Stock (cont’d)
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Investing in Foreign Stocks
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Going Global
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Going Global
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Returns on International
Investments
• Stronger U.S. dollar has negative impact on
foreign investments
• Weaker U.S. dollar has positive impact on
foreign investments
Total return Current income Capital gains Changes in currency
= +
(in U.S. dollars) (dividends) (or losses) exchange rates
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Alternative Investment Strategies
• Storehouse of Value
– Safety of investment is primary goal
– Investors use high-quality blue chip and non-
speculative stocks
• To Accumulate Capital
– Growth of investment is primary goal
– Investors use growth-oriented stocks to generate
capital gains
• Source of Income
– Current income is primary goal
– Investors use stocks with dependable flow of dividends
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Stock Investment Strategies
• Buy-and-Hold
– Investors buy high-quality stocks and hold
them for extended time periods
– Goal may be current income and/or
capital gains
– Investors often add to existing stocks over time
– Very conservative approach; value-oriented
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Stock Investment Strategies (cont’d)
• Current Income
– Investors buy stocks that have high dividend yields
– Safety of principal and stability of income are
primary goals
– May be preferable to bonds because dividends levels
tend to increase over time
– Often used to provide to supplement other income, such
as in retirement
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Stock Investment Strategies (cont’d)
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Stock Investment Strategies (cont’d)
6-49
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Stock Investment Strategies (cont’d)
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Chapter 6 Review
• Learning Goals
1. Explain the investment appeal of common stocks and
why individuals like to invest in them.
2. Describe historical stock returns and how
current returns measure up to historical standards
of performance.
3. Discuss the basis features of common stocks, including
issue characteristics, stock quotations, and
transaction costs.
6-51
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Chapter 6 Review (cont’d)
6-52
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