What are stocks?• Represent a fraction of ownership in a corporation

• Referred as:– Shares– Equity– Stock

Characteristics• Represent a claim to part of the

corporations assets and earnings

• Ownership gives shareholders the right to vote on management placement and policies

• Price determined by supply and demand

• Potential to earn a lot if a company is successful, but also stand to lose entire investment if the company isn't successful.

Types of Stocks

• Common Stock

• Preferred Stock

Common Stocks

• Represents voting rights

• Most frequently used

• Returns– Dividends– Capital Appreciation

Types Of Stock Returns• Dividends: Distributing a

portion of company earnings, decided by the board of directors, to its shareholders

• Capital Appreciation: A rise in the value of an asset based on a rise in market price

Preferred Stocks

• Preference in dividends.

• Preference in assets in the event of liquidation.

• Convertible into common stock.

• Nonvoting.

Risk

• Systematic risk– The risk inherent

to the entire market

• Unsystematic risk– Company specific risk

that is inherent in each investment

Advantages

• Limited liability

• Historically outperforms other investment alternatives

• Very liquid

Disadvantages

• Does not guarantee a return

• Less claim on assets than creditors– Bond Holders>Preferred >

Common

• Not all pay dividends

Trading Stocks

• Most stocks are traded on exchanges– Places where buyers and sellers meet and decide

on a price. Physical Virtual

Purchasing Stocks

• Using a Broker– Party that arranges transactions

between a buyer and a seller, and gets a commission• Full- service brokerages• Discount brokerages

• Using dividend reinvestment plans– Reinvesting dividends to acquire

additional shares

Mutual Funds

• A mutual fund is a collection of stocks and/or bonds. Investors make money three ways:

1) A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) The value of the fund's shares increase in price.

Advantages of Mutual Funds

• Diversification

• Economies of Scale

• Liquidity

• Simplicity

Disadvantages of Mutual Funds

• Professional Management

• Costs

• Dilution

• Taxes

Exchange Traded Funds

• Securities that are created to behave the same way as a specific index o a collection of different securities