Chapter 12The Stock Market

CHAPTER 12

Who are the owners of a corporation? Stockholders (shareholders) If a corporation does well financially,

stockholders will profit in two ways. What are these two ways mentioned in your text?

- Through dividends - Through capital gains

What are dividends?Part of a corporations

profit paid to stockholders

What are capital gains?

Increase in the value of stock above the price initially paid for it.

Chapter 12 If you bought stock in Walmart at $5.00 a

share and the value of a share rose to $10.00 then you would have a capital gain of how much?

If you sold the stock at $10.00 a share, then you would have a realized gain (profit) of $5.00. If you continued to hold the stock, then it would be an unrealized gain of $5.00.

Chapter 12 Stocks are traded in round lots or odd lots. A round lot is 100 shares or multiples of 100 shares of a particular stock. An odd lot is fewer than 100 shares of a particular stock.

Chapter 12 If you purchased stock in Target for

$6.00 a share and the value of Target’s stock dropped to $5.00 a share, then you would have a gain or loss of what?

You would have a realized loss of $1.00 per share if you sold your stock. If you held your stock, then you would have an unrealized loss of $1.00 per share.

Type of Stock

▪ Common Stock - pays a variable

dividend - voting rights - more risky than

preferred

▪ Preferred Stock - pays fixed dividend - no voting rights

Common Stock True or False?Do common stockholders directly manage

the corporation?

Do common stockholders vote on major policy decisions?

Does each share have the same voting power?

Common Stock

Does a common stockholder have to be present to vote?

No, may vote by proxy

A proxy is a written authorization to transfer voting rights to someone else.

Common vs. Preferred

In case of company failure, who is paid first, preferred or common stockholders?

Classifying Stock

When researching and evaluating common stock, investors often classify stock into different categories. What are some of these classifications?

Income, Growth, Less-Established,Blue Chip, Defensive, and Cyclical

Corporations use their profits in two ways, distribute to shareholders as dividends or reinvest their profits into the business to help it grow.

Growth stocks:

Stocks that reinvest profit into company for

future capital gains

Growth stocks pay little or no dividends.

Income Stock

Stocks that have a constant history of paying high dividends

● Less-Established

Young , often smaller, corporations with higher overall risk.

Stock Value Market Value

(Purchase and sale price is based on market value)

Par Value (arbitrary value on a stock certificate)

Undervalued Stock

Stocks that are worth more than the price for which they are selling.

Is this good for investors?Yes, this makes a good bargain

Is it good for business?No, company is vulnerable to a takeover

Overvalued Stock Stock selling at a

price that is not justified by its earnings potential.

Is this a good situation for investors?

No, possibility the stock will drop

Stock prices go up and down all the time. The wider the price swings – the riskier the investment.

Factors that affect stock price Company’s financial

status Interest Rates The Market Place Earnings Per Share

Market Place

When a company’s product is in demand and the company is part of a popular industry it’s stock will tend to rise.

Earnings Per Share

A corporation’s after tax earnings divided by # of shares outstanding.

For example, if Munch Inc. reported an after tax earnings (net profit) of $100,000 and has issued 10,000 shares of common stock the the EPS would be ($100,000/10,000) $10

Why use EPS

Investors use this as a measure of a company’s profitability.