Stock Market. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-1

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2 What is a Stock Stock implies ownership of the company, with each share of stock representing a tiny piece of ownership of the company. The more shares you own, the more of the company you own. The more shares you own, the more dividends you earn when the company makes a profit. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-2

3 Two classes of stock Preferred stock typically pays regular dividends and is favoured by investors who want income foremost from their stocks. Common stock represents ownership of a company and may offer more rights and privileges than preferred stock Investors may purchase stock on the primary or secondary market. A company sells its stock to the public on the primary market through its initial public offering. Investors may sell their shares through brokers to other investors on the secondary market. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-3

4 Why do companies issue stock? Businesses issue stock to raise money they need to finance expansions, pay for equipment, and fund new projects, etc Corporations issue stock when they may need additional capital to operate successfully. The term for issuing stock to raise money is equity financing. The money received from investors who buy stocks is called equity capital. When companies make profits, they may reward their stockholders with pieces of their profits, known as dividends. Dividends are an incentive for investors to hold stocks. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-4

5 What is a stock exchange? Exchanges are the physical locations where stocks are bought and sold. The primary and secondary markets together make up the stock market. Exchanges are located all over the world, with the most famous one being the New York Stock Exchange. In Namibia, we have Namibia Stock Exchange ( NSX). Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-5

6 Types of stock Each of the following types refers to any of several different qualities of stocks or companies. For example, a stock's name may come from the size of the company that issued it, or it may be named for its investment objective. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-6

7 Blue chip stock The term "blue chip" comes from poker, where the blue chips carry the highest value. Large established firms with a long record of profit growth, dividend payout and a reputation for quality management, products and services are referred to as Blue Chip companies. These firms are generally leaders in their industries and are considered likely candidates for long-term growth. Well-known blue chips include IBM, Coca-Cola, General Electric and McDonald s. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-7

8 Penny Stock These are low-priced, speculative stocks that are very risky. Issued by companies with a short or erratic (unreliable) history of revenues and earnings Penny stocks have these specific qualities: they sell for less than $5, they are sold over the counter The appeal of penny stocks comes from their low price. Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-8

9 Income Stock Those stocks that pay higher-thanaverage dividends over a sustained period. These above average dividends tend to be paid by large, established companies with stable earnings. Utilities and telephone company stocks are often classified as income stock. Income stocks are popular with investors Copyright 2007 Pearson Addison-Wesley. All rights reserved. 12-9

10 Value stock A value stock is a stock that is currently selling at a low price. Companies that have good earnings and growth potential but whose stock prices do not reflect this are considered value companies. Investors who buy value stocks believe that these stocks are only temporarily out of favour and will soon experience great growth. Copyright 2007 Pearson Addison-Wesley. All rights reserved

11 Types of common stock dividends Cash dividends are those that are paid out in cash form. They are treated as investment income and are taxable in the year they are paid. Stock dividends are dividends paid out in the form of additional stock shares in the corporation, or shares of a subsidiary corporation. They are usually issued in proportion to shares owned. For example, for every 100 shares of stock owned, a 4 percent stock dividend will yield four extra shares. Copyright 2007 Pearson Addison-Wesley. All rights reserved

12 Types of common stock dividends cont d Stock dividends benefit the company by conserving its cash and they benefit the shareholder by increasing his/her number of shares of the company. Property dividends are paid with assets owned by the issuing company. Property dividends are usually paid in the form of products or services that the corporation produces. Copyright 2007 Pearson Addison-Wesley. All rights reserved

2 Basic Types of Stock. Stock Classifications

2 Basic Types of Stock. Stock Classifications The Language of the Market Family Economics & Financial i Education Why Learn About s The stock market is the core of America s economic system is a share of ownership in the assets and earnings of a company