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Unformatted text preview: 14 INVESTING IN STOCKS CHAPTER OVERVIEW Initially, this chapter describes both common and preferred stock as investment alternatives. We discuss the topics of why corporations sell common stocks and why investors purchase those stocks. Next, we examine the major differences between common stock and preferred stock. Methods that investors can use to evaluate stock investments are presented. Then the steps involved in buying and selling stocks are described. We also explain the long-term techniques of buy and hold, dollar cost averaging, direct investment plans, and dividend reinvestment plans. Finally, the speculative techniques of day trading, margin transactions, selling short, and stock options are also discussed. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: Obj. 1 Identify the most important features of common and preferred stock. Corporations sell common stock to finance their business expansion. People invest in common stock because of dividend income and appreciation of value. There is also the possibility of gain through stock splits. Dividend payments must be approved by a corporations board of directors. In return for providing the money needed to finance the corporation, stockholders have the right to elect the board of directors. They must also approve changes to the corporate charter that include (1) an amendment to the corporate charter, (2) the sale of certain assets, (3) possible mergers, (4) the issuance of preferred stock or corporate bonds, and (5) changes in the amount of common stock. The most important priority that an investor in preferred stock enjoys is receiving cash dividends before any cash dividends are paid to common stockholders. Still, dividend distributions to both preferred and common stockholders must be approved by the board of directors. To make preferred stock issues more attractive, corporations may add a cumulative feature and/or a conversion feature to these issues. 1 Obj. 2 Explain how you can evaluate stock investments. Depending on specific characteristics associated with a stock, investment, account executives, financial planners, and investors often classify a particular stock investment as blue chip, income, growth, cyclical, defensive, large-cap, mid-cap, small-cap, or penny. A number of factors can make a share of stock increase or decrease in value. When evaluating a particular stock issue, most investors begin with the information contained in daily newspapers or on the Internet. Stock advisory services, annual reports, information contained on the SEC web site, and in business periodicals, can all be used to evaluate potential stock investments. LEARNING OBJECTIVES CHAPTER SUMMARY Obj. 3 Analyze the numerical measures that cause a stock to increase or decrease in value....
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- Spring '06