Kapoor 8ce PPT Ch11
Kapoor 8ce PPT Ch11
Kapoor 8ce PPT Ch11
Investing in
Stocks
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Investing in Common Stocks (5)
Corporations and Common Stock
Public Corporations – stocked trades openly in stock
markets and may be purchased by individuals
Private Corporations – stocks are owned by relatively
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Investing in Common Stocks (7)
Why Investors Purchase Common Stocks
Income from dividends
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Investing in Common Stocks (8)
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Investing in Common Stocks (9)
Assumptions
100 shares of common stocks purchased Jan 5, 2018, sold Jan 4, 2020; annual
dividends of $1.86 per share for the 2-year period.
Cost When Purchased Proceeds When Sold
100 shares @ $33 = $3,300 100 shares @ $44 = $4,400
Plus commission 9 Minus commission −9
Total cost $3,309 Net proceeds $4,391
Transaction Summary
Net proceeds $ 4,391
Minus total cost −3,309
Profit from stock $ 1,082
sale
Total dividends + 372 ($1.86 per share per year × 100 shares × 2 years) 11
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Preferred Stocks (1)
Discuss the Most Important Features of Preferred Stocks
cash dividends
The dividend amount is either a stated amount of money for each
certificate
First claim on corporation’s assets
Callable preferred stock is stock a corporation may exchange for a
dividend
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Preferred Stocks (2)
Features of preferred stocks include:
Cumulative feature.
Stock Valuation
Important to understand different approaches used by experts to
analyze stocks
Fundamental Analysis
A way to value stocks by looking at micro and macro factors that might
influence the economic value of stocks
Technical Analysis
The idea that changes in investor sentiment are responsible for changes
in trends, and that the value of a stock can be predicted by
extrapolating price from historical patterns
Efficient Market Hypothesis
States that future prices cannot be predicted from past trends and
patterns 14
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Evaluation of a Stock Issue (2)
For you the investor, EMH has several implications
including:
1. Stock prices move randomly and therefore cannot be predicted from past trends in
any consistent manner.
2. The current market price of a security reflects its “true” value. Therefore, it is
difficult, if not impossible, to consistently find bargains.
3. Securities are priced and traded on their expected risk–return merits and not on
their unique features. Prices incorporate new information almost instantly and excess
returns are almost impossible to obtain based on historical information.
4. Market indices (such as the S&P/TSX Composite) and other aggregate market
trends are usually leading indicators of future economic prospects and serve as
benchmarks as to the price behaviour of the average stock.
5. The relationship between risk and return is positive and the average risk premium
(investment risk minus the risk-free rate of return) is fairly constant over time.
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Evaluation of a Stock Issue (3)
Classification of Stock Investments
Blue chip stock
Safe investment in strong and respected companies
Attracts conservative investors
ex. Bell Canada, Royal Bank
Income stock
Pays higher than average dividends, ex. utility stock
Growth stock
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Evaluation of a Stock Issue (5)
Classification of Stock Investments
Large cap stocks
Issued by a large corporation that has a large amount of
stock outstanding & a large amount of capitalization
Capitalization
The total amount of securities – stocks and bonds
issued by a corporation
Small cap stocks
Issued by a company that has a capitalization of $150
million or less
Penny Stocks
Typically sell for less than $1 per share
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Evaluation of a Stock Issue (6)
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Evaluation of a Stock Issue (7)
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Evaluation of a Stock Issue (8)
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Evaluation of a Stock Issue (9)
1. Difference between the price paid for the last transaction today and the price paid for the last
share on the previous day: plus $1.30 (in Bay Street terms, Finning International “is up 1.30” on
this day)
2. Ex-dividend date: February 26, 2020
3. Quarterly dividend per share: $0.205
4. Annual earnings per share: $1.48
5. Number of shares outstanding (all classes): 163,319,120
6. 52-week price is trending: downwards
7.Exchange Finnings is traded on: TSX
8.Finnings International Inc. stock beta: 1.3388
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Evaluation of a Stock Issue (10)
Sources of Stock Information:
Newspapers
The Internet
Charge a fee
Hundreds to choose from
Corporate News
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Evaluation of a Stock Issue (11)
Web Site and Description Web Address
Financial Post: Provides news, opinions, market and http://www.financialpost.com
investment information, tools, and much more.
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Evaluation of a Stock Issue (13)
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Evaluation of a Stock Issue (14)
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Evaluation of a Stock Issue (15)
Factors That Influence the Price of a Stock
Bull market
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Evaluation of a Stock Issue (16)
Measures of Corporate Risk, Performance, and
Shareholder’s Return
Annual Shareholder’s Return
A stock’s annual dividend and increase in value divided
by its beginning-of-year stock price
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Evaluation of a Stock Issue (17)
Dividend Yield
A stock’s annual dividend divided by its beginning-of-
year stock price
If the dividend is divided by the end-of-year stock
price, it is referred to as its trailing dividend yield
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Evaluation of a Stock Issue (18)
Capital Gains Yield
A stock’s increase in value divided by its beginning-of-
year stock price
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Evaluation of a Stock Issue (19)
Earnings Per Share
Are the corporation’s after tax-earnings divided by the
number of outstanding shares of common stock
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Evaluation of a Stock Issue (20)
Price-Earnings (PE) Ratio
Price of one share of stock divided by the earnings per
share of stock over the past 12 months
A low price-earnings ratio means a stock could be a
good investment
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Evaluation of a Stock Issue (21)
Beta is an index that compares the risk associated
with a specific stock issue with the risk of the stock
market in general.
Beta < 1 lower than average risk
Beta = 1 average risk
Beta > 1 higher than average risk
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Buying and Selling Stocks (1)
Describe How Stocks are Bought and Sold
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Buying and Selling Stocks (2)
Secondary Markets for Stocks
A market for existing financial securities that are
currently traded among investors
A marketplace where member brokers who represent
investors meet to buy and sell securities
The securities sold at an exchange must be listed, or
accepted for trading, at the exchange
Toronto Stock Exchange or Canadian Venture
Exchange
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Buying and Selling Stocks (3)
Secondary Markets for Stocks
The Over-the-Counter (OTC) market.
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Buying and Selling Stocks (4)
Brokerage Firms and Account Executives
An account executive, or stockbroker, is a
licensed individual who buys and sells
securities for his or her clients
Churning
investment decision.
Third, consider how easy it is to buy and sell stocks and other
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Buying and Selling Stocks (6)
stocks?
8. Is there a minimum amount of money that I need to invest in the brokerage?
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Buying and Selling Stocks (7)
Should you Use A Full-Service, Discount,
or online Brokerage Firm?
Service Type Investor Type
• Full-service Beginning investors with little or no
experience.
Individuals do not have time to research or
are uncomfortable making investment
decisions.
• Discount People who understand the “how to” of
researching stocks and prefer making their
own decisions.
Individuals who are comfortable trading
stocks online.
• Online People who understand the “how to” of
researching stocks and prefer to make their
own decisions. Individuals who are
comfortable trading stocks online. 41
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Buying and Selling Stocks (8)
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Buying and Selling Stocks (10)
Firm Basic Flat Fees* Additional Services
RBC Direct from the $6.95 to $9.95 for all equity trades Education centre, monthly data,
Royal Bank of Canada depending on volume and account statements for tax reporting, links
http://www.rbcdirectinvesting.com balance
Scotia iTrade $4.99 to $9.99 per trade, depending on Margin interest, quarterly statements,
http://www.scotiabank.com/itrade/e volume and account balance analyst reports, tax statements,
n/0,,3692,00.html research
Questrade $4.95 to $9.95 per trade, depending on Market analyses, online service
http://www.questrade.com volume and account balance demonstration, portfolio management
tools
Investorline from the $9.95 for all equity trades Online services demonstration,
Bank of Montreal glossary of products
http://www.bmoinvestorline.com
TD Direct Investing from TD Bank $7.00 to $9.95 per trade, depending on Real-time quotes, research, news,
http://www.tdwaterhouse.ca/produc volume and account balance charts, statistics
ts-services/investing/td-direct-
investing/index.jsp
An independent online brokerage $6.95 to $9.95, depending on volume Online tools and research available, as
http://www.qtrade.ca well as information and tutorials on
many investment options; low
commission rates. 44
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Buying and Selling Stocks (11)
Securities Regulation
To ensure full, true and plain disclosure of all facts by
sellers of securities
Provincial Regulation
Registration
Disclosure
Enforcement
Self Regulatory Organizations
Are responsible for industry conformity with securities
legislation
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Long-Term and Short-Term Investment
Strategies (1)
Explain the Trading Techniques Used by Long-term
Investors and Short-term Speculators
Long-Term Techniques
Diversification
Involves combining many assets in a portfolio to reduce the
risk
Buy and Hold Technique
Portfolio value increases through dividend payment,
appreciation in stock value and dividend reinvestment
Dollar Cost Averaging
Investors purchase an equal dollar amount of the same
stocks at equal intervals
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Long-Term and Short-Term Investment
Strategies (2)
Long-Term Techniques
Direct Investment and Dividend Reinvestment Plans
Purchase stocks directly from the corporation
Reinvest dividends to purchase more stocks
Private Equity
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Long-Term and Short-Term Investment
Strategies (3)
Short-Term Techniques
Hedge Funds
Selling short
Trading in options
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Long-Term and Short-Term Investment
Strategies (5)
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Long-Term and Short-Term Investment
Strategies (6)
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Summary (1)
LO1 Identify the most important features of
common stocks
Corporations sell stocks to
Finance their start up costs
Help pay for ongoing business activities
People invest because of
Dividend income, appreciation of value, and gain
through stock splits
Dividend payments must be approved by the Board of
Directors
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Summary (2)
LO1 Identify the most important features of
common stocks
Shareholders have right to elect Board and approve
changes to corporate policy that include
Amendment to corporate charter
Sale of certain assets
Possible mergers
Issuance of preferred stocks or corporate bonds
Changes in the amount of common stock
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Summary (3)
LO2 Discuss the most important features of
preferred stock
Receive dividends before common shareholders
May include extra features
Cumulative feature
Participation feature
Conversion feature
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Summary (4)
LO3 Explain how you can evaluate stock investments
Information contained in newspaper or internet
Be familiar with various measures of corporate and
investment performance
Typical psychological biases
Two different analytical techniques used in stock selection
Theory of efficient markets
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Summary (5)
LO4 Describe how stocks are bought and sold
New stock issues sold through investment bank or
directly to current shareholders
In secondary market through a securities exchange or
over-the-counter market
Most investments done through account executive or
online
Minimum commission charged for buying or selling stocks
Additional commission charged based on
Number and value of shares bought or sold
Full service or discount broker or online
Regulations in place to protect investors
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Summary (6)
LO5 Explain the trading techniques used by long-term
investors and short-term speculators
Long-term
Hold investments for at least a year
Build a diversified portfolio
Buy-and-hold technique
Dollar cost averaging
Direct investment plans
Dividend reinvestment plans
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Summary (7)
Explain the trading techniques used by long-term
investors and short-term speculators
Short-term
Sell investments within short period of time
Buy on margin
Sell short
Trade in options
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