Investing in Stocks - Summary

Common and Preferred Stocks

Common Stock:
- Basic form of corporate ownership.
- Equity financing: Money from selling ownership shares.
- Dividends are not mandatory (30-70% of earnings).
- Stockholders have voting rights.
Why investors purchase common stock:
- Potential for larger returns.
- Income from dividends: Payments from profits, consider the record date and ex-dividend implications.
- Dollar appreciation: Profit from selling stock at a higher price.
- Stock Splits: Shares divided into a larger number, lowers stock price to attract investors.
Preferred Stock:
- Receive dividends before common stockholders.
- A middle investment (between common stock and bonds).
- Dividends are more secure but less secure than interest on corporate bonds.

Stock Classifications:
- Blue chip, large cap, cyclical, midcap, defensive, small cap, growth, micro cap, income, penny stock.
Information Sources:
- Corporate websites, financial websites (Yahoo Finance), stock advisory services (Standard & Poor’s, Value Line, Morningstar).
- Newspapers, SEC filings, annual reports.

Earnings Per Share (EPS):
- \text{EPS} = \frac{\text{After-tax income}}{\text{Number of shares outstanding}}
- Increase in earnings is a positive sign.
Price-Earnings (P-E) Ratio:
- \text{P-E ratio} = \frac{\text{Price per share}}{\text{Earnings per share}}
Dividend Payout:
- \text{Dividend payout} = \frac{\text{Annual dividend amount}}{\text{Earnings per share}}
Dividend Yield:
- \text{Dividend yield} = \frac{\text{Annual dividend amount}}{\text{Price per share}}
Total Return:
- \text{Total return} = \text{Dividends} + \text{Capital gain}
Annualized Holding Period Yield:
- \text{Annualized holding period yield} = (\frac{\text{Total return}}{\text{Original investment}})^{\frac{1}{N}} - 1
  - Where N = Number of years investment is held
Beta:
- Volatility compared to an index (e.g., S&P 500).
- \text{Volatility for a stock} = \text{Increase in overall market} \times \text{Beta for a specific stock}
Book Value Per Share:
- \text{Book value per share} = \frac{\text{Assets – Liabilities}}{\text{Shares Outstanding}}
Market-to-Book Ratio:
- \text{Market-to-Book Ratio} = \frac{\text{Market value per share}}{\text{Book value per share}}

Fundamental Analysis:
- Stock value based on future earnings, financial strength, industry, and economic growth.
Technical Analysis:
- Stock value based on market supply and demand, past trends predict future direction.
Efficient Market Hypothesis:
- Stock prices are random and reflect true value, outperforming the market is impossible without increased risk.

Primary Market:
- New securities purchased from the issuer through an investment bank.
- Initial Public Offering (IPO): First time a corporation sells stock to the public.
Secondary Market:
- Existing securities traded among investors.
- Securities Exchanges: Marketplaces for buying and selling listed securities.
- Over-the-Counter (OTC) Market: Network of dealers for stocks not on exchanges (e.g., Nasdaq).
Account Executives (Stockbrokers):
- Licensed individuals who buy/sell securities for clients.
Order Types:
- Market Order: Buy/sell at current market value.
- Limit Order: Buy/sell at a specified price or better.
- Stop-Loss Order: Sell when price reaches a specified amount.

Long-Term Techniques:
- Buy-and-Hold.
- Dollar Cost Averaging.
- Direct Investment and Dividend Reinvestment Plans.
Short-Term Techniques:
- Day Trading.
- Buying Stock on Margin (borrowing money).
- Selling Short (borrowing stock).
- Trading in Options (predetermined price).