Ch 14 Investing in Stocks
Monday, May 4, 2026 11:47 AM
Common & Preferred Stocks
- Most people don’t know where to start or what to ask themselves when investing
1. Try to find out where to find the best info for potential investments
2. Verify your info
i. Is the increase in this sale healthy for the business?
ii. Should a firms after tax go up or down?
iii. Should corporate earning go up or down w/ time?
- Why Corporations Issue Common Stocks
○ Concern Stock
§ The most basic form of ownership for a corporation
□ Used to finance business start ups & expansions
® A form of Equity
- The money doesn’t have to be repaid or bought back
○ Equity Financing
§ Money received from the sale of shares of ownership in a business
○ The price of a common stock is whatever the buyer is willing to pay
§ This price can change based on the prospects of the firm or if its future might
change & that info is made public, anything that might in/decrease the price of
the shares
- Dividends not Mandatory
○ A dividend is a distribution of money, stock and/or other property that corporations
pay to stockholders
- Voting Rights & Control of the company
○ A proxy
§ A legal form that lists issues to be decided by stockholders meetings & their
requests that transfer their voting rights to some people
- Why Investors Purchase Common Stock
○ The Psychology of Stock Investing
§ Investors want larger returns that the stock can offer despite being aware of
the high risk & potential losses
○ Psychologists suggest the following if you decide to invest in stocks:
§ Evaluate each assessment
□ Learn everything you can about the company & its stocks where you want
to invest
§ Analyze the firms finances
□ Look for their sales, trends, profits, dividends
§ Track the product line
□ Is the product worth it? How are sales? Is their a new product?
§ Monitor Economic Developments
□ Is the economy strong or in recovery?
□ Look at the unemployment rate, interest rates & other indicators of the
economy
§ Be patient
□ The easiest way to make money from stocks is income from dividends &
dollar appreciation of stock value
○ Income From Dividends
§ Corporate dividends for common stock can be cash, additional stock or
company property
○ Record Date
§ The date which the stockholder must be registered on the corporations books
to remove dividend payments
§ Dividends remain w/ the stock until one business day before the record date
○ Ex- Dividend
§ When a stock is traded “w/o dividends” and the seller is entitled to declared
dividend payment
- Dollar Appreciation of Stock Value
○ Depending on the selling value of the stock you decide whether to hold on to it or
sell it
§ If you decide to sell it, the dollar amount difference between the purchase &
selling price shows your profit
- What happens when a corporation splits its stocks?
○ Stock Split
§ A procedure where the shares of stock owned by an exsisting stockholder is
divided into a larger number of shares (Example formula from the book)
§
§ Be warned that there are no guarantees that a stock price will go up after a split
□ Be aware of total market capitalization
- The current value of a company’s stocks & other securities don’t
change bc of a stock split
○ Preferred Stock
§ Gives the owner the advantage of receiving cash dividends before common
stock holders are paid dividends
§ AKA middle investments, they represent the midway between stock
(ownership) & corporate (lender)
○ Preferred stock is a mix between stocks & bonds but still allows ownership of the
stock
§ It’s less risky & doesn’t grow a lot
○ In the event of a bankruptcy, preferred shareholders & creditors MIGHT get paid,
usually creditors are always paid before the shareholder if there is enough money in
the stock
Evaluating a Stock Issue
- Classification of Stock Investments
○
- The Internet
○ Here are some websites you can use to obtain information about stocks
§ Yahoo Stocks
- Stock Advisory Services
○ One of the oldest/most recognized stock market activity is the Dow Jones Industrial
Average (DJIA) that measures an average of 30 stocks
- Newspaper Coverage & Corporate News
○ Major well known news outlets that still cover this information from print to digital
§ Wall Street Journal
§ securities and exchange commission
§ https://www.investor.gov/
○ Other websites/sources to keep in mind
§ https://www.bloomberg.com/
Numerical Measures that Influence Investment Decisions
- Why Corporate Earnings are Important
○ Stock Market Bubble
§ Used to describe a situation when stocks are trading above their actual worth
○ Earning Per Share
§ A corporates after tax income divided by the number of shares of a firms
common stock
○ Price Earning Ratio
§ The price of a share of stock divided by the corporations ratings per share of
stock
- Projected Earnings
○ What has the company done in the past? You want to compare that past & present
to see how they have grown
- Dividend & Total Return Calculations
○ Dividend Payout
§ The percentage of a firms earnings paid to the stockholders in cash
○ Dividend Yield
§ The annual dividend amount divided by the investments current price per share
○ Total Return
§ A calculation including the annual dollar amount of dividends & any
in/decreases in the original purchase price of the investment
○ Annualized Holding Period Yield
§ A calculation that takes into account the total return of an original investment
& the time the investment is held
- Other factors that influence the price of a stock
○ Beta
§ A measure reported in various financial publications that compare the volatility
of a certain stock issue w/ the overall stock market
○ Book Value (First National)
○ Market Price to book Ratio (First National)
- Investment Theories
○ Fundamental Analysis
§ Based on the assumption that a stock value is determined by the companies
future earnings
○ Things to keep in mind w/ investments
1. The financial strength of the company
2. The type of industry the company is in
3. New product development
4. Economic growth if possible
○ Technical Analysis
§ Based on the assumption that the stock market value is determined by supply &
demand NOT on expected earnings or value of an individual corporations stock
○ Chartist
§ Technical analysts that make charts/use computers to track prices & other
market averages to follow economic trends
○ Efficient Market Hypothesis (EMH)
§ An investment theory based on the assumption that stock prices move
randomly
Buying & Selling Stocks
- The Primary Market
○ Where you purchase financial securities through investments banks and/or other
financial representatives
- Investment Bank
○ A financial firm that helps corporations raise funds by helping them sell new
securities (products)
- Initial Public Offering (IPO)
○ When a corporation sells their stocks to the general public for the first time
- The Secondary Market
○ A market for existing financial securities that are currently traded between
investors
○ Security Exchange
§ A marketplace where member brokers who represent the investor meet & buy
securities (I.E. The New York Stock Exchange [NYSE])
○ Designated Market Maker (DMM)
§ Someone who buys or sells a stock to attempt to maintain order in the stock
market
- Over the Counter Market (OTC)
○ A network of dealers who buy & sell stocks of various corporations that aren’t listed
as securities exchanges
- NASDAQ (pronounced NAZZ-dack)
○ An electronic market place for buying/selling global stocks/securities
○ The NASDAQ is known for company growth, specifically in tech but can be seen in
smaller securities like Intel, Microsoft, Amazon, Facebook etc
- Brokerage Firms & Account Executives
○ Account Executive
§ A licensed person who buys/sells securities on behalf of their clients to help
develop an investment program
- Should you use a full service, discount or online brokerage firm?
○ Full Service
§ Beginning investor w/ little to no experience who aren’t yet comfortable
making investment decisions
○ Discount
§ For those who understand how to research stocks & prepare to make their own
decisions & uncomfortable trading online
○ Online
§ For those who understand how to research stocks & prefer trading
online/making their own decisions
○ Be sure to ask yourself the following Q’s:
1. Can I buy/sell over the phone/online?
2. How easily can I use a firms site & what services are available online?
3. Do you have a phone number for customer assistance to call you?
4. If there is a charge for statements, research reports or other types of reports?
5. Are they’re any fee’s + commission you have to pay when buying/selling stocks?
- Commission Charges
○ Full service brokerage firms usually charge higher commissions, in return you have
access to executive accounts every time you buy or sell stocks
- Completing Stock Transactions
○ Market order
§ A request to buy/sell a stock at current market price
○ Limit order
§ Buying/selling stock at a specified price
○ Stop-loss order (aka a stop order)
§ Used to sell specific stocks at the next available opportunity once it reaches a
certain market value price
Long & Short term Investment Strategies
- Long term techniques
○ Buy & Hold
§ This is done to increase investment value two ways
1. Repayment, re-investments that can grow over time
2. To see if the price of the stock grows
- Dollar Averaging cost
○ A long term technique used to buy stock in intervals continuously at the same price
- Direct Investment & Dividend Reinvestment Plan
○ Allows you to purchase stocks directly from a corporation w/o using an executive
account and/or brokerage firm
- Dividend Reinvestment Plan
○ Allows you to reinvest your cash to purchase corporation stocks
- Short Term Techniques
○ Day Trading
§ A Day Trader is someone who buys & sells stocks & other securities in a short
period of time
○ Buying Stock on Margin
§ When you borrow part of the amount needed to buy a particular stock
Margin Transaction (PepsiCo) Example
If stocks increased $4 a share
W/o a margin: $400 = $4 increase per share X 100 shares
W/ a margin: $800 = $4 increase per share X 200 shares
- Selling Short
○ Selling stock that was borrowed from a brokerage firm that is replaced at a later
date, to make money w/ this kind of transaction:
1. Have a Borrow a certain # of shares of a particular stock from a brokerage firm
2. Sell the borrowed Stock at a lower price than purchased
3. Buy the stock at a lower price than sold
4. Replace the borrowed from the brokerage firm in step 1
- When selling short the profit is the difference between the amount received from step
2 & the amount paid in step 3
- Trading in Options
○ Option
§ Gives you the right but not the obligation to buy or sell a stock at a
predetermined price during a set period of time
○ Call Option
§ Sold by a stockholder & gives the purchaser the right to 100 shares at a
guaranteed price before the expiration date
○ Put Option
§ The right to sell 100 shares of a stock at a guaranteed price before a specific
date
Monday, May 4, 2026 11:47 AM
Common & Preferred Stocks
- Most people don’t know where to start or what to ask themselves when investing
1. Try to find out where to find the best info for potential investments
2. Verify your info
i. Is the increase in this sale healthy for the business?
ii. Should a firms after tax go up or down?
iii. Should corporate earning go up or down w/ time?
- Why Corporations Issue Common Stocks
○ Concern Stock
§ The most basic form of ownership for a corporation
□ Used to finance business start ups & expansions
® A form of Equity
- The money doesn’t have to be repaid or bought back
○ Equity Financing
§ Money received from the sale of shares of ownership in a business
○ The price of a common stock is whatever the buyer is willing to pay
§ This price can change based on the prospects of the firm or if its future might
change & that info is made public, anything that might in/decrease the price of
the shares
- Dividends not Mandatory
○ A dividend is a distribution of money, stock and/or other property that corporations
pay to stockholders
- Voting Rights & Control of the company
○ A proxy
§ A legal form that lists issues to be decided by stockholders meetings & their
requests that transfer their voting rights to some people
- Why Investors Purchase Common Stock
○ The Psychology of Stock Investing
§ Investors want larger returns that the stock can offer despite being aware of
the high risk & potential losses
○ Psychologists suggest the following if you decide to invest in stocks:
§ Evaluate each assessment
□ Learn everything you can about the company & its stocks where you want
to invest
§ Analyze the firms finances
□ Look for their sales, trends, profits, dividends
§ Track the product line
□ Is the product worth it? How are sales? Is their a new product?
§ Monitor Economic Developments
□ Is the economy strong or in recovery?
□ Look at the unemployment rate, interest rates & other indicators of the
economy
§ Be patient
□ The easiest way to make money from stocks is income from dividends &
dollar appreciation of stock value
○ Income From Dividends
§ Corporate dividends for common stock can be cash, additional stock or
company property
○ Record Date
§ The date which the stockholder must be registered on the corporations books
to remove dividend payments
§ Dividends remain w/ the stock until one business day before the record date
○ Ex- Dividend
§ When a stock is traded “w/o dividends” and the seller is entitled to declared
dividend payment
- Dollar Appreciation of Stock Value
○ Depending on the selling value of the stock you decide whether to hold on to it or
sell it
§ If you decide to sell it, the dollar amount difference between the purchase &
selling price shows your profit
- What happens when a corporation splits its stocks?
○ Stock Split
§ A procedure where the shares of stock owned by an exsisting stockholder is
divided into a larger number of shares (Example formula from the book)
§
§ Be warned that there are no guarantees that a stock price will go up after a split
□ Be aware of total market capitalization
- The current value of a company’s stocks & other securities don’t
change bc of a stock split
○ Preferred Stock
§ Gives the owner the advantage of receiving cash dividends before common
stock holders are paid dividends
§ AKA middle investments, they represent the midway between stock
(ownership) & corporate (lender)
○ Preferred stock is a mix between stocks & bonds but still allows ownership of the
stock
§ It’s less risky & doesn’t grow a lot
○ In the event of a bankruptcy, preferred shareholders & creditors MIGHT get paid,
usually creditors are always paid before the shareholder if there is enough money in
the stock
Evaluating a Stock Issue
- Classification of Stock Investments
○
- The Internet
○ Here are some websites you can use to obtain information about stocks
§ Yahoo Stocks
- Stock Advisory Services
○ One of the oldest/most recognized stock market activity is the Dow Jones Industrial
Average (DJIA) that measures an average of 30 stocks
- Newspaper Coverage & Corporate News
○ Major well known news outlets that still cover this information from print to digital
§ Wall Street Journal
§ securities and exchange commission
§ https://www.investor.gov/
○ Other websites/sources to keep in mind
§ https://www.bloomberg.com/
Numerical Measures that Influence Investment Decisions
- Why Corporate Earnings are Important
○ Stock Market Bubble
§ Used to describe a situation when stocks are trading above their actual worth
○ Earning Per Share
§ A corporates after tax income divided by the number of shares of a firms
common stock
○ Price Earning Ratio
§ The price of a share of stock divided by the corporations ratings per share of
stock
- Projected Earnings
○ What has the company done in the past? You want to compare that past & present
to see how they have grown
- Dividend & Total Return Calculations
○ Dividend Payout
§ The percentage of a firms earnings paid to the stockholders in cash
○ Dividend Yield
§ The annual dividend amount divided by the investments current price per share
○ Total Return
§ A calculation including the annual dollar amount of dividends & any
in/decreases in the original purchase price of the investment
○ Annualized Holding Period Yield
§ A calculation that takes into account the total return of an original investment
& the time the investment is held
- Other factors that influence the price of a stock
○ Beta
§ A measure reported in various financial publications that compare the volatility
of a certain stock issue w/ the overall stock market
○ Book Value (First National)
○ Market Price to book Ratio (First National)
- Investment Theories
○ Fundamental Analysis
§ Based on the assumption that a stock value is determined by the companies
future earnings
○ Things to keep in mind w/ investments
1. The financial strength of the company
2. The type of industry the company is in
3. New product development
4. Economic growth if possible
○ Technical Analysis
§ Based on the assumption that the stock market value is determined by supply &
demand NOT on expected earnings or value of an individual corporations stock
○ Chartist
§ Technical analysts that make charts/use computers to track prices & other
market averages to follow economic trends
○ Efficient Market Hypothesis (EMH)
§ An investment theory based on the assumption that stock prices move
randomly
Buying & Selling Stocks
- The Primary Market
○ Where you purchase financial securities through investments banks and/or other
financial representatives
- Investment Bank
○ A financial firm that helps corporations raise funds by helping them sell new
securities (products)
- Initial Public Offering (IPO)
○ When a corporation sells their stocks to the general public for the first time
- The Secondary Market
○ A market for existing financial securities that are currently traded between
investors
○ Security Exchange
§ A marketplace where member brokers who represent the investor meet & buy
securities (I.E. The New York Stock Exchange [NYSE])
○ Designated Market Maker (DMM)
§ Someone who buys or sells a stock to attempt to maintain order in the stock
market
- Over the Counter Market (OTC)
○ A network of dealers who buy & sell stocks of various corporations that aren’t listed
as securities exchanges
- NASDAQ (pronounced NAZZ-dack)
○ An electronic market place for buying/selling global stocks/securities
○ The NASDAQ is known for company growth, specifically in tech but can be seen in
smaller securities like Intel, Microsoft, Amazon, Facebook etc
- Brokerage Firms & Account Executives
○ Account Executive
§ A licensed person who buys/sells securities on behalf of their clients to help
develop an investment program
- Should you use a full service, discount or online brokerage firm?
○ Full Service
§ Beginning investor w/ little to no experience who aren’t yet comfortable
making investment decisions
○ Discount
§ For those who understand how to research stocks & prepare to make their own
decisions & uncomfortable trading online
○ Online
§ For those who understand how to research stocks & prefer trading
online/making their own decisions
○ Be sure to ask yourself the following Q’s:
1. Can I buy/sell over the phone/online?
2. How easily can I use a firms site & what services are available online?
3. Do you have a phone number for customer assistance to call you?
4. If there is a charge for statements, research reports or other types of reports?
5. Are they’re any fee’s + commission you have to pay when buying/selling stocks?
- Commission Charges
○ Full service brokerage firms usually charge higher commissions, in return you have
access to executive accounts every time you buy or sell stocks
- Completing Stock Transactions
○ Market order
§ A request to buy/sell a stock at current market price
○ Limit order
§ Buying/selling stock at a specified price
○ Stop-loss order (aka a stop order)
§ Used to sell specific stocks at the next available opportunity once it reaches a
certain market value price
Long & Short term Investment Strategies
- Long term techniques
○ Buy & Hold
§ This is done to increase investment value two ways
1. Repayment, re-investments that can grow over time
2. To see if the price of the stock grows
- Dollar Averaging cost
○ A long term technique used to buy stock in intervals continuously at the same price
- Direct Investment & Dividend Reinvestment Plan
○ Allows you to purchase stocks directly from a corporation w/o using an executive
account and/or brokerage firm
- Dividend Reinvestment Plan
○ Allows you to reinvest your cash to purchase corporation stocks
- Short Term Techniques
○ Day Trading
§ A Day Trader is someone who buys & sells stocks & other securities in a short
period of time
○ Buying Stock on Margin
§ When you borrow part of the amount needed to buy a particular stock
Margin Transaction (PepsiCo) Example
If stocks increased $4 a share
W/o a margin: $400 = $4 increase per share X 100 shares
W/ a margin: $800 = $4 increase per share X 200 shares
- Selling Short
○ Selling stock that was borrowed from a brokerage firm that is replaced at a later
date, to make money w/ this kind of transaction:
1. Have a Borrow a certain # of shares of a particular stock from a brokerage firm
2. Sell the borrowed Stock at a lower price than purchased
3. Buy the stock at a lower price than sold
4. Replace the borrowed from the brokerage firm in step 1
- When selling short the profit is the difference between the amount received from step
2 & the amount paid in step 3
- Trading in Options
○ Option
§ Gives you the right but not the obligation to buy or sell a stock at a
predetermined price during a set period of time
○ Call Option
§ Sold by a stockholder & gives the purchaser the right to 100 shares at a
guaranteed price before the expiration date
○ Put Option
§ The right to sell 100 shares of a stock at a guaranteed price before a specific
date
