CHAPTER 35 INVESTING IN BONDS AND STOCKS
TYPES OF SECURITIES • SECURITIES ARE BONDS, STOCKS, AND OTHER DOCUMENTS SOLD BY CORPORATIONS AND GOVERNMENTS TO RAISE LARGE SUMS OF MONEY • DEBT SECURITIES--BONDS, AND DOCUMENTS THAT REPRESENT BORROWING • EQUITY SECURITIES--REPRESENTS OWNERSHIP IN A COMPANY; FOR EXAMPLE, A SHARE OF STOCK
INVESTING IN CORPORATE BONDS • USED FOR OPERATIONS OF FUTURE EXPANSION • BOND--A CERTIFICATE REPRESENTING A PROMISE TO PAY A DEFINITE AMOUNT OF MONEY AT A STATED INTEREST ON A SPECIFIED MATURITY DATE • WHEN YOU BUY A BOND, YOU ARE LENDING MONEY TO THE ORGANIZATION; YOU BECOME A CREDITOR
INVESTING IN CORPORATE BONDS • CORPORATE BONDS--BONDS ISSUED BY CORPORATIONS • FACE VALUE--THE MATURITY VALUE, IS THE AMOUNT BEING BORROWED BY THE SELLER • INTEREST IS PAID PERIODICALLY TO THE INVESTOR BASED ON THE AMOUNT AND INTEREST RATE • ON THE MATURITY DATE THE FACE VALUE IS REPAID TO THE INVESTOR
INVESTING IN CORPORATE BONDS • IF A BOND CLOSED AT 109 3/4 IT IS SELLING FOR $1, 097. 50 OR $109. 75 x 10 • IF INTEREST RATES ON SIMILAR BONDS ARE HIGHER THAN THE BOND’S STATED RATE, INVESTORS WANT TO BUY BOND FOR LESS THAN FACE VALUE • IF INTEREST RATES ON SIMILAR BONDS ARE LOWER THAN THE BOND’S STATED RATE, THE SELLER WILL WANT TO SELL FOR MORE THAN ITS FACE VALUE
TYPES OF GOVERNMENT BONDS • MUNICIPAL BONDS--BONDS ISSUED BY LOCAL AND STATE GOVERNMENTS; MUNIS • MOST INTEREST EARNED ON MUNIS ARE EXEMPT FROM FED AND MOST STATE TAXES • MUNIS USUALLY DO NOT PAY HIGH INTEREST RATES, BUT ARE SAFER • US SAVINGS BONDS--ONE OF THE SAFEST INVESTMENTS; PAY INTEREST THROUGH DISCOUNTNG
TYPES OF GOVERNMENT BONDS • EE BONDS--FOR EXAMPLE, BUY FOR $25 AND RECEIVE $50 WHEN IT MATURES • HH BONDS--BUY IN LARGER AMOUNTS, NOT DISCOUNTED, PAYS A FIXED RATE OF INTEREST • OTHER FEDERAL SECURITIES--ALSO HAVE TREASURY BILLS (SHORT TERM BORROWING) , NOTES (INTERMEDIATELENGTH), AND BONDS (LONG TERM)
INVESTING IN STOCKS • PREFERRED STOCK--PRIORITY OVER COMMON STOCK FOR DIVIDENDS; DIVIDENDS ARE LIMITED • COMMON STOCK--GENERAL OWNERSHIP; NO STATED DIVIDEND; GIVEN ONE VOTE PER SHARE OWNED AT MEETINGS; OPPORTUNITY FOR MUCH HIGHER DIVIDENDS OR NO DIVIDENDS
SELECTING STOCK INVESTMENTS • FOUR STEP PROCESS – OBSERVE AND ANALYZE ECONOMIC AND SOCIAL TRENDS – DETERMINE INDUSTRIES THAT WILL BE AFFECTED – IDENTIFY COMPANIES IN THOSE INDUSTRIES – DECIDE WHETHER TO BUY, SELL, OR HOLD STOCK OF THOSE COMPANIES
SELECTING STOCK INVESTMENTS • ANALYZING POTENTIAL STOCKS – HAS COMPANY BEEN PROFITABLE? – HAVE MANGERS MADE GOOD BUSINESS DECISIONS? – DOES COMPANY HAVE GROWTH POTENTIAL? – DOES COMPANY HAVE UNUSUALLY LARGE AMOUNT OF DEBT? – HOW DOES COMPANY COMPARE WITH OTHERS IN ITS INDUSTRY?
SELECTING STOCK INVESTMENTS • DIVIDEND YIELD = DIVIDEND/SHARE MARKET PRICE/SHARE • YIELD IS IMPORTANT IF GOAL IS TO EARN A GOOD RETURN FROM YOUR INVESTMENT • PRICE-EARNINGS RATIO = SELLING PRICE EARNINGS/SHARE • P/E RATIOS GIVES INDICATION OF WHETHER THE STOCK IS PRICED HIGH OR LOW IN RELATION TO ITS EARNINGS PER SHARE
SELECTING STOCK INVESTMENTS • STOCKBROKER--LICENSED SPECIALIST IN BUYING AND SELLING STOCKS AND BONDS • COMMISSION--FEE FOR SERVICES • STOCK EXCHANGES--BUSINESS ORGANIZATIONS THAT ACCOMMODATE THE BUYING AND SELLING OF SECURITIES (NYSE, AMSE)
INVESTING WITH OTHERS • INVESTMENT CLUBS--GROUP OF PEOPLE TO GET TOGETHER TO STUDY AND INVEST IN STOCKS • MUTUAL FUNDS--SET UP AND MANAGED BY INVESTMENT COMPANIES THAT RECEIVE MONEY FROM INVESTORS AND BUY A DIVERSE SET OF STOCKS AND BONDS
WHICH INVESTMENT IS BEST FOR YOU? • CAN YOU AFFORD TO LOSE PART OR ALL OF YOUR INVESTMENT? • BEFORE INVESTING IN STOCKS AND BONDS YOU SHOULD HAVE ADEQUATE SAVINGS AND INSURANCE COVERAGE • WHAT IS MOST IMPORTANT TO YOU? SAFETY, LIQUIDITY, RATE OF RETURN? • SEE ILLUSTRATION 35 -5
FYI • MORE THAN 6, 800 MUTUAL FUNDS WERE IN OPERATION (GROWING) • STOCK OF NEW OR SMALLER COMPANIES TRADED OVER-THECOUNTER (OTC) • MUNI BONDS DO HAVE SOME RISK, COME CITIES HAVE DEFAULTED ON THEIR BOND PAYMENTS
FYI • MORE THAN 40 STOCK EXCHANGES ARE IN OPERATION AROUND THE WORLD • THE US T-BILL IS USED AS AN INDICATOR OF THE CURRENT LEVEL OF SHORT-TERM INTEREST RATES
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