Personal Finance Part 3

Transcription

1 Personal Finance Part 3

2 Before a company can raise capital by issuing stocks or bonds, it must register the stock or bond issue with the Securities and Exchange Commission (SEC). Take Charge Today August 2013 The Fundamentals of Investing Slide 2

3 An investment banking firm assists the corporation in completing the registration forms and serves as an intermediary between the issuing corporation and the initial investors. Take Charge Today August 2013 The Fundamentals of Investing Slide 3

4 A company raises capital (money) when it issues stock. Since the corporation has not obligation to pay stockholders back the price of the stock, issuing stock does not create a debt, as does issuing bonds or borrowing money from a financial institution or the government. Take Charge Today August 2013 The Fundamentals of Investing Slide 4

5 Stock represents shares of ownership in a corporation. Usually corporations issue stock to raise capital (money) to expand the business. Take Charge Today August 2013 The Fundamentals of Investing Slide 5

6 An investor buys stock through a stockbroker, who earns a commission from both the purchase and the sale of stock. Take Charge Today August 2013 The Fundamentals of Investing Slide 6

7 The share price of stock is likely to decrease because of the negative publicity and the additional costs and penalties the company will likely incur. Depending on how a company handles the problem, the incident may have only a temporary negative impact on its share price. Take Charge Today August 2013 The Fundamentals of Investing Slide 7

8 Stockholders receive dividends if the company issues dividends, have voting rights, and can sell their stock to another investor at any time. They may also receive dividends. Take Charge Today August 2013 The Fundamentals of Investing Slide 8

9 Shareholders do not receive interest payments. A shareholder has the right to vote for members of the board of directors and for policy issues, the right to receive quarterly dividends if paid, and the right to transfer ownership of his/her shares to someone else through sale, gift, or inheritance (bequest in a will). Take Charge Today August 2013 The Fundamentals of Investing Slide 9

10 A proxy, which is a kind of absentee ballot, is written authorization given by a shareholder to someone else, usually the corporate board of directors, to represent him/her and vote his/her shares at a stockholder's meeting. It is usually easier to vote by mail through a proxy than to attend the annual meeting in person. Take Charge Today August 2013 The Fundamentals of Investing Slide 10

11 Before a company can issue stocks or bonds, it must register with the SEC (Securities and Exchange Commission) Stock Stockholder or shareholder A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company Take Charge Today August 2013 The Fundamentals of Investing Slide 11

12 Publicly held corporations have shares of stock (ownership in the company) outstanding that are held by individual investors as well as pension plans and mutual funds. Take Charge Today August 2013 The Fundamentals of Investing Slide 12

13 A company converts from a privately held corporation to a publicly held corporation through an Initial Public Offering (IPO) of stock. Take Charge Today August 2013 The Fundamentals of Investing Slide 13

14 Investment banks will underwrite the IPO and provide the company with the money they needed to raise and then offer the shares to the public in what is known as the secondary market. Take Charge Today August 2013 The Fundamentals of Investing Slide 14

15 Shareholders have the right to vote at the annual meeting of the corporation. If they are unable to attend, they can vote online or by mail via proxy. Take Charge Today August 2013 The Fundamentals of Investing Slide 15

16 Dividends Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends Take Charge Today August 2013 The Fundamentals of Investing Slide 16

17 Dividends are part of the company's profits that are distributed to shareholders. They may be in the form of money, company stock, or other property. Take Charge Today August 2013 The Fundamentals of Investing Slide 17

18 A company is not required to distribute any of its profits to shareholders as dividends. In fact, newer companies usually do not pay dividends because they reinvest any profits back into the company to grow and expand the business. Take Charge Today August 2013 The Fundamentals of Investing Slide 18

19 A dividend reinvestment plan is designed to help the shareholder acquire additional shares (or partial shares if there is not enough money) of the stock by immediately reinvesting the dividend in the same company s stock as soon as the dividend is declared. The shareholder is still responsible for paying taxes on the dividends earned. Take Charge Today August 2013 The Fundamentals of Investing Slide 19

20 Current events (for example, a war or major oil spill), investor confidence, and interest rate levels can all affect the financial markets in general as well as a specific company's stock or bond prices. Diversification is an investing technique that can affect the value of an investor's portfolio but not the price of securities. Take Charge Today August 2013 The Fundamentals of Investing Slide 20

21 Positive news about corporate earnings will make the stock price rise Negative publicity due to problems with a product or lawsuits which would cost the company money. Take Charge Today August 2013 The Fundamentals of Investing Slide 21

22 In recent years, the stock of many high tech companies reached a very high price in a short period of time, then declined in value as the company failed, eventually declaring bankruptcy. A stock that trades for less than $1.00 is called a "penny stock." Investing in penny stocks is considered a high risk because there is a high chance that the issuing company may default. Take Charge Today August 2013 The Fundamentals of Investing Slide 22

23 Blue chip stocks are of well known companies with a long record of profit growth and or dividend payment and a reputation for quality management, products, and services. Some examples of blue chip stocks: General Electric and Dupont. Take Charge Today August 2013 The Fundamentals of Investing Slide 23

24 Market Price Current price a buyer is willing to pay Stocks sells for a price higher than what was paid Stock sells for a price lower than what was paid Capital gain unearned income received from the sale of an asset above its purchase price Stockholder will lose money Take Charge Today August 2013 The Fundamentals of Investing Slide 24

25 A stock split is when the existing stock divides into a larger number of shares and the price of each share is then reduced accordingly, i.e., a 2 for 1 split on 40 shares that is worth $80 would result in 80 shares at $40 at the time of the split. Among other reasons, companies often decide to declare a stock split when they want to bring in more investors and do not want to issue more stock. Or, they believe that by bringing down the price of the stock through a stock split, that they will increase activity and interest in the corporation s stock. Take Charge Today August 2013 The Fundamentals of Investing Slide 25

26 Everyone has a tolerance level for the amount of risk they are willing to take on Generally divided into three categories: conservative, moderate, aggressive Time may influence investment philosophy If someone was an aggressive investor, what types of investment Take Charge Today August 2013 The Fundamentals of Investing Slide 26 Funded by a grant from Take Charge America, Inc. to Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona tools would they primarily have in their portfolio?

27 Investments are purchased from a stock exchange (except for real estate and some speculative investments) In other words, a pharmacy is to drugs as the American Stock Exchange is to securities. The largest equities market in the world is the NY Stock Exchange. Stock exchange provides an organized, central service to buy and sell all stocks, bonds and other investments that are traded Worldwide, there are many different stock exchanges A limited number of people are allowed to buy and sell directly from each stock exchange Take Charge Today August 2013 The Fundamentals of Investing Slide 27

28 Brokerage firms facilitate the buying and selling of investments on the stock exchange Discount Full service Only completes orders to buy and sell investments Offer investment transactions and a financial advisor Advice is not offered Financial advisor trained professional that helps make investing decisions Take Charge Today August 2013 The Fundamentals of Investing Slide 28

29 Will usually charge a fee for completing a buy/sell transaction Additional fees may include: Service fee Inactivity fee Maintenance fee Fees specific to an investment Total fees are often lower, but an individual must have the knowledge and time to monitor their investments Take Charge Today August 2013 The Fundamentals of Investing Slide 29

30 Financial advisors are compensated for the time and knowledge they provide investors. Most charge fees using one of these methods. % of the Investment Value % of the Amount Invested Hourly Rate & Flat Fee Take Charge Today August 2013 The Fundamentals of Investing Slide 30 In addition to fees, financial advisors may earn commissions paid by the company.

31 Margin is a speculative method whereby an investor borrows up to 50% of the money needed from a brokerage firm in order to buy a wanted stock and pays a fee for the privilege. Take Charge Today August 2013 The Fundamentals of Investing Slide 31

32 Important to research the financial advisor and firm he/she works for Questions to ask: How are the firm s financial advisors compensated? How long has the firm been in business? Does the firm have a history of positive reviews and success? How does the firm rank in comparison to other brokerage firms? Take Charge Today August 2013 The Fundamentals of Investing Slide 32

33 Investments are important to building net worth A trade off to higher returns is lower liquidity and higher risk Investments are ideal for the longterm Take advantage of portfolio diversification Discuss your goals with a financial advisor Use tax advantaged investments & employersponsored plan Take Charge Today August 2013 The Fundamentals of Investing Slide 33