Personal finance 6th madura chapter 15 investing in stocks

Chapter Objectives15.2 Describe how to interpret stock quotations 15.3 Explain how to execute the purchase and sale of stocks 15.4 Explain how to analyze a stock 15.5 Explain how in

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Personal Finance

SIXTH EDITION

Chapter 15

Investing in Stocks

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Chapter Objectives

15.2 Describe how to interpret stock quotations

15.3 Explain how to execute the purchase and sale

of stocks

15.4 Explain how to analyze a stock

15.5 Explain how investing in stocks fits within your financial plan

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purchase or sell existing stocks

trades to fulfill orders placed by other investors

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Stock Exchanges (2 of 4)

or more stocks by taking the position opposite of orders placed by clients

through a brokerage firm and executed by a specialist

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communications network that allows investors to buy or sell securities

OTC market and earn commissions in the form of a bid-ask spread

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Stock Exchanges (4 of 4)

systems that match up desired purchases and sales of stocks

 Allow for after-hours trading

 No person needed to perform the exchange

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Internet, stock brokers or financial newspapers

over the previous day or a recent period

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 May be overly optimistic

 Must disclose ownership of stocks they recommend

 Information available on the Internet

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Purchasing and Selling Stocks (2 of 7)

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stock in which you are interested

stock that you specify

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 Ticker symbol: the abbreviated term that is used to identify a stock for trading purposes

 Round lot: shares bought or sold in multiples of 100

 Odd lot: less than 100 shares of stock

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 Market order: an order to buy or sell a stock at its prevailing market price

 Limit order: an order to buy or sell a stock only if the price is within the limits that you specify

 Stop order: an order to execute a transaction when the stock price reaches a specified level; a special form of limit order

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use when making investment decisions It also

illustrates how you can trade stocks online, which typically reduces your transaction costs.

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funds borrowed from a brokerage firm

investor to increase the cash in the account in order to bring the margin back up to the minimum level

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sell a stock that they do not own

return it

order)

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Analyzing Stocks (1 of 11)

on historical price patterns

based on an examination of fundamental

characteristics such as revenue or earnings, or the sensitivity of the firm’s performance to

economic conditions

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firm’s sources of funds and how it has invested its funds as of a particular point in time

a firm’s revenues, expenses, and earnings over a particular period of time

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 In the early 2000s many firms used fraudulent financial statements

 Enron and WorldCom are the most prominent examples

 Motivation for fraud

– Manager compensation

economy over a particular period

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of all products and services produced in a country

imposes taxes on individuals and corporations and by which it spends its money

 One country’s strong economy can improve another’s and the opposite is also true

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 Stocks perform better when interest rates are low

 Some stocks are more sensitive to interest rates than others

 The Federal Reserve uses monetary policy to influence interest rates

 Monetary policy – policy established by the Federal Reserve to adjust the supply of funds in the financial system in order to influence interest rates

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products and services over a specified period

 Consumer price index (CPI): a measure of inflation that represents prices of consumer products such as groceries, household products, housing and gasoline

 Producer price index (PPI): a measure of inflation that represents prices of products used to produce other products, such as coal, lumber, and metals

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EXHIBIT 15.3 Sources of Economic Information

Published Sources

 Federal Reserve Bulletin: provides data on economic conditions, including interest rates, unemployment rates, inflation

rates, and the money supply.

 Federal Reserve District Bank publications: provide information on national and regional economic conditions.

 Survey of Current Business: provides data on various indicators of economic activity, including national income,

production levels, and employment levels.

Online Sources

 Bloomberg (http://www.bloomberg.com): provides reports on interest rates, other economic conditions, and news

announcements about various economic indicators.

 Federal Reserve Meeting Information is also available online at http://www.federalreserve.gov.

 Federal Reserve District Bank publications are also online at http://www.frbsf.org.

 Federal Reserve System (http://www.federalreserve.gov): provides detailed statistics on economic conditions.

 St Louis Federal Reserve District (http://www.stlouisfed.org): provides updated information about U.S economic

conditions.

 Survey of Current Business is also online at http://www.bea.gov.

 Yahoo! Finance: provides information and news about economic conditions.

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Financial Planning Online (3 of 5)

economic conditions that can affect the values of investments.

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 Industry indicators

allows assessment of future performance

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Financial Planning Online (4 of 5)

performance.

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indexes that can be used as benchmarks when

assessing your investment portfolio’s

performance Click on “Charts” to review historical movements in any specific index

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How Stock Investment Methods Fit

for your financial plan are:

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EXHIBIT 15.5 How Stock Investment Methods Fit Within Stephanie Spratt’s Financial Plan

GOALS FOR INVESTING IN STOCK

1 Determine if I could benefit from investing more money in common stock.

2 If I consider investing in stocks, determine how to execute stock transactions.

ANALYSIS

Type of Brokerage Firm

Full-service Guidance on stock selection; higher commissions charged on transactions.

Discount No guidance on stock selection; lower commissions charged on transactions.

Type of Order When Purchasing Stock

Market Order A buy order is executed at the market price.

Limit Order A buy order is only executed if the price is at or below a price that I may specify.

Buy Stop Order A buy order is executed if the price rises to a price that I may specify.

Whether to Borrow

Pay with Cash Need cash to pay for the entire investment My return will be equal to the return on the

stock itself.

Buying on Margin Can make investment with less money (by borrowing a portion of the funds needed) My

return will be larger than the return on the stock itself My return (whether it is a gain or loss) is more pronounced if I borrow to buy the stock, which increases the risk of my investment.

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EXHIBIT 15.5 How Stock Investment Methods Fit Within Stephanie Spratt’s Financial Plan

DECISION

In the future when I invest in stocks, I will use a discount broker instead of a service broker because I prefer to make my own investment decisions and the commissions charged by a discount broker are low I will use only limit orders to buy stocks, so that I can set the maximum price that I am willing to pay I will only invest in a stock if I have sufficient funds to cover the entire investment because

full-it is a less risky method of executing a stock transaction Buying on margin

magnifies the return (whether positive or negative) on the stock, and causes the investment to be more risky than I desire.

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