HIGH MODERATE LOW SECURITY. Speculative Stock Junk Bonds Collectibles. Blue Chip or Growth Stocks Real Estate Mutual Funds

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2 RETURN POTENTIAL $$$$ HIGH Speculative Stock Junk Bonds Collectibles $$$ $$ MODERATE LOW Blue Chip or Growth Stocks Real Estate Mutual Funds Corporate Bonds Preferred Stock Government Bonds $ SECURITY RISK POTENTIAL CD Pension Funds Savings Accounts

3 ONE SHARE To raise capital a company may choose to sell off pieces of ownership. COMMON STOCK There are often thousands of owners; each with an equal share. Each share gains one vote and rights to company assets.

4 ONE SHARE COMMON STOCK ANNUAL VOTE BOARD OF DIRECTORS Stockholders vote for the board of directors each year The board decides company direction, if dividends will be paid and hires executives. (i.e. CEO)

5 ONE SHARE COMMON STOCK VOTE BOARD OF DIRECTORS HIRE The Board of Directors hires executive management. The executive managers (CEO) run the business. Larry Page CEO - Google

6 Common Ownership Elect Board Dividends paid only if approved by board Last claim to assets Greatest profit potential Preferred Ownership No voting rights Guaranteed Dividend Higher claim to assets Lower profit potential

7 Stock Price SELL in the secondary market for capital gains. BUY LOW HOLD SELL HIGH $1.08 $1.06 $1.04 $1.02 $1.00 $0.98 $0.96 Dividend Per Share KEEP and earn a dividend when issued by the company. BUY HOLD EARN DIVIDENDS

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10 Use these to compare companies. Company, Ticker Symbol, Market where traded CLOSE PRICE, Price change (% change) Final trade price yesterday. Opening trade price today. Lowest price people are bidding to buy Highest price owners are asking to sell Analyst s prediction for the year Range of trade prices today Range of trade prices last 52 weeks Number of shares traded today Average # of shares for past 3 months Total value of all shares Price/Earnings Ratio Earnings Per Share (profit per share) Annual dividend payment

11 Short term stock investing is risky.

12 Short term stock investing is risky.

13 Short term stock investing is risky.

14 Aug 2004 for $100, sold March 2013 for $800 Aug 2004 for $100,sold Nov 2009 for $260 Dec 2007 for $700,sold Nov 2009 for $260 Long term stock investing is better, but still has risk.

15 1. Relative strength of the company and industry compared to competition. 2. Present Value of expected future dividends. (using time value) 3. Price/Earnings Ratio

16 Influenced by: Earnings and sales growth Risk or Volatility Liabilities compared to Owners Equity Dividend policy Quality of management Market value per share Earnings per Share (EPS)

17 Current trade price on NYSE = $35 Earning Per Share = $1.50 (total of previous year) Market value per share Earnings per Share (EPS) $35 $1.50 = Compare to similar companies in same industry. Higher is usually better.

18 Video: Finance_IncomeStatement

19 REVENUE (Sales) Cost of Goods Sold Expenses Taxes Profit (or loss)

20 Dental Drilling Company Income Statement Sales $ 470,000 Cost of goods sold $ 140,000 Gross Profit $ 330,000 Selling and administrative expense $ 60,000 Depreciation expense $ 70,000 Operating Profit $ 200,000 Interest expense $ 40,000 Pre Tax Earnings $ 160,000 Taxes $ 45,000 NET INCOME $ 115,000

21 Dental Drilling Company Income Statement Sales $ 470,000 Cost of goods sold $ 140,000 Gross Profit $ 330,000 Selling and administrative expense $ 60,000 Depreciation expense $ 70,000 Operating Profit $ 200,000 Interest expense $ 40,000 Pre Tax Earnings $ 160,000 Taxes $ 45,000 NET INCOME $ 115,000 NUMBER OF SHARES (Stock) NET INCOME 10, , EARNINGS PER SHARE

22 Cost of Goods Sold = $114,000 Expenses 1) Advertising = $6,000 2) Salaries = $9,000 3) Rent = $5,000 Sales = $190,000 Interest payments = $800 Taxes = $ shares of stock outstanding Revenue (Sales) - Cost of Goods Sold = Gross Profit - Expenses = Operating Income - Interest Paid = Pre-tax Earnings - Taxes = Net Income Outstanding Stock = Earnings per share

23 Revenue (Sales) 190,000 - Cost of Goods Sold 114,000 = 76,000 Gross Profit - Expenses 20,000 = 56,000 Operating Income - Interest Paid 800 = 55,200 Pre-tax Earnings - Taxes 900 = 54,300 Net Income Outstanding Stock 5000 = Earnings per share

24 VIDEO: Finance_BalanceSheet

25 List of all my stuff Total Assets Portion of stuff that I still owe on Portion of stuff that can be claimed by its owners Total Liabilities + Owners Equity

26 SIMPLE VERSION OF A BALANCE SHEET DEBT ASSETS EQUITY

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28 All publically traded companies must publish, at minimum, three financial reports. Income Statement Earnings (aka Profit and Loss) Balance Sheet Assets = Liabilities + Owners Equity Cash Flow Statement How much liquidity does the company have? 1-32

29 Get the stock quote and compare companies Use P/E Ratio, EPS and Dividend to compare SYMBOL COMPANY SYMBOL COMPANY A MMM AA AXP T 3M Company Alcoa Inc. American Express AT&T C IBM JNJ JPM MCD International Business Machines Johnson & Johnson JP Morgan Chase McDonald s BAC Bank of America MRK Merck BA CAT Boeing Caterpillar D MSFT PFE Microsoft Pfizer CVX Chevron PG Proctor & Gamble B CSCO DD Cisco DuPont KO TRV The Coca Cola Co Travelers Companies XOM Exxon Mobil UTX United Technologies C GE HPQ HD INTC General Electric Hewlett-Packard Home Depot Intel E UNH VZ WMT DIS United Health Group Verizon Communications Wal-Mart Walt Disney Co. 1-33