Companies that serve markets tied to capital equipment spending by business or to consumer spending for big-ticket, durable items like houses and cars typically head the list of cyclical stocks.
Caterpillar, Genuine Parts, and Brunswick are examples.
When the economy is moving ahead and the country is in the early stages of recovery, cyclical stocks do well.
They perform poorly when the economy weakens.
Cyclical stocks are most suitable for investors who are willing to trade in and out of these stocks as the economic outlook dictates and who can tolerate the accompanying expo sure to risk.
Sometimes it is possible to find stocks with stable prices when the economy is doing well.
They are less susceptible to downswings than the average stock.
Many public utilities, industrial and consumer goods companies, and drugs are included in defensive stocks.
Walmart is an excellent example of a defensive stock.
The world's leading retailer is a recession resistant company.
Other examples are Checkpoint Systems, a manufacturer of antitheft clothing security clips, and Extendicare, a leading provider of long-term care and assisted living facilities.
Aggressive investors tend to "park" their funds in defensive stocks while the economy remains soft or until the investment atmosphere improves.
A stock's size is determined by its market value.
The market price is the number of shares outstanding.
75% of the market value of U.S. equities is in common stoCks.
Bigger isn't necessarily better.
The stock market is the most accurate place to say that.
Small-cap stocks tend to have higher returns than large-caps.
They give a lot of sizzle to small-stock returns.
Some of the safety of the big, established stocks can be found in mid-caps, because many of them have been around for a long time.
Dick's Sporting Goods, Wendy's, and Williams-Sonoma are some of the well-known companies in the mid-caps.
Although these securities offer a nice alternative to large stocks without the uncertainties of small-caps, they are most appropriate for investors who are willing to tolerate a bit more risk and price volatility than large-caps have.
The baby blue chip is a type of mid-cap stock.
These companies have the same characteristics of a regular blue chip except for the size.
Like their larger counterparts, baby blues have solid balance sheets, modest levels of debt, and several years of steady profit growth.
Baby blues usually pay a modest level of dividends, but they tend to grow larger.
They're ideal for investors looking for long-term growth.
There are some well-known baby blues.
Small companies are considered to be in a class by themselves by some investors.
This has turned out to be true in many cases.
spurts of growth can have dramatic effects on their earnings and stock prices.
Some of the better-known small-cap stocks are Callaway Golf, MannKind, and Shoe Carnival.
The initial public offering is a special category of small-cap stocks.
Like other small-company stocks, IPOs have capital gains that investors can earn.
To stand a chance of buying some of the better, more attractive IPOs, you need to be either an active trader or a preferred client of the broker.
The investors don't want the ones you're likely to hear about.
IPOs are high-risk investments, with the odds against the investor.
Only investors who know what to look for in a company and who can tolerate substantial risk should buy these stocks.
The trend toward globalization was one of the most dramatic changes in U.S. financial markets over the past 25 years.
The world's equity markets were an example of globalization in action.
The U.S. stock market was twice the size of the rest of the world's stock markets.
According to the World Federation of Exchanges, the US's share of the world equity market value dropped to 40% in 2015.
The world equity markets are dominated by just six markets, which together account for 75% of the global total.
The United States has the biggest equity market with a total value of $27 trillion.
If you include the Hong Kong Exchanges, China's total equity market value is more than $11 trillion.
Euronext is followed by Japan and includes exchanges in Belgium, France, the Netherlands, Portugal, and the United Kingdom.
India has two major exchanges and is the last market worth more than $3 trillion.
Canada, Germany, Switzerland, Australia, and Korea have equity markets worth more than $1 trillion.
The United States dominates the world equity markets.
The U.S. market earned more than 15% in the year, which was a good year for stock returns.
One year is probably not the best way to judge the performance of a country's stock market, so Figure 6.6 plots the average annual return on stocks for 19 countries.
The US stock market earned an average annual return of 9.6% over that period.
In common stoCks returns in other markets around the world.
On a year-by-year basis, we would see that U.S. stocks rarely earn the highest returns.
There are attractive returns waiting for those investors who are willing to venture beyond our borders.
There are two ways to invest in foreign stocks.
Buying shares in foreign markets is the most adventuresome way to do this.
Know what you're doing and be prepared to tolerate market risk.
There are many logistical problems that need to be solved when it comes to buying foreign securities in the U.S. Currency fluctuations can have a big impact on your returns.
That's just the beginning.
You have to deal with different standards.
Most foreign markets are not as closely regulated as U.S. exchanges.
Foreign investors may have to put up with practices that can create disadvantages in foreign markets.
There are obvious language barriers, tax issues, and general "red tape" that plague international transactions.
The returns from direct foreign investments can be substantial.
There is an easier way to invest in foreign stocks, and that is to buy American Depositary Receipts.
American Depositary Shares (ADSs) are dollar- denominated instruments that represent ownership interest.
The number of shares can range from a fraction of a share to 20 shares or more.
The first American Depositary Receipt was created in 1927 by a U.S. bank.
It's great for investors who want to own foreign stocks but don't want the sles that come with them, but it's also great for investors who don't want to own foreign stocks.
Depositary receipts are similar to stocks in U.S. companies.
The prices are quoted in U.S. dollars.
The dividends are paid in U.S. dollars.
More than 3,700 American Depositary Receipts are available in the U.S., representing shares of companies located in more than 100 countries around the world.
The British oil and gas firm has its American Depositary Receipts traded on the New York Stock Exchange.
6 shares of the stock of the company are represented by the company's American Depositary Receipt.
These shares are held in a custodial account by a U.S. bank, which converts the net proceeds to U.S. dollars.
Other foreign stocks that can be purchased as an American Depositary Receipt are Sony, Royal Dutch Shell, Nestle, and Suntech Power.
You can buy American Depositary Receipts on Russian companies that trade on the New York Stock Exchange.
Picking the right stock and the right market is important when investing globally.
Foreign stocks are valued the same way as U.S. stocks.
The same variables that drive share prices in the U.S. drive stock values in foreign markets.
Each market reacts to its own set of economic forces, which set the tone of the market.
Some markets are performing better than others.
The challenge for global investors is to be in the right market at the right time.
Both dividends and capital gains can be found in foreign shares.
Currency exchange rates affect returns to U.S. investors.
As the U.S. dollar weakens against a foreign currency, the returns to U.S. investors from foreign stocks decrease.
The two basic components of total return are generated by the stocks and movements in currency exchange rates.
The following holding period return formula can be used to calculate total return in U.S. dollars when currency exchange rates change.
The "exchange rate" is the value of the foreign currency in U.S. dollars at the beginning of the holding period.
The modified HPR formula is best used over a short period of time.
The first component of Equation 6.6 provides returns on the stock in local currency, while the second component accounts for changes in currency exchange rates.
If you want to see how this works, consider a U.S. investor who buys several hundred shares of the German electrical engineering and electronics company.
The euro is the currency of Germany.
The investor paid a price per share of 90.48 euros for the stock at a time when the exchange rate between the U.S. dollar and the euro was $0.945, meaning one euro was worth almost 95.
The dividends were 5 euros per share.
When the US$/EUR exchange rate was $1.083, the stock was trading at 94.00 euros.
The stock went up in price and so did the euro, so the investor must have done well.
We will have to use Equation 6.6 to find out what kind of return this investment generated.
The investor did well with a return of 25.4%.
Currency movements were the reason for most of the return.
The first part of the equation shows the return on the stock from dividends and capital gains in local currency.
The stock's return was less than 10%.
The rest of the return came from the change in currency values.
The dollar's value against the euro was added to the return.
Exchange rates can have a big impact on investor returns.
They can convert mediocre returns into very attractive returns.
The behavior of the U.S. dollar to the currency in which the security is denominated is the only thing that can determine whether the currency effect is positive or negative.
A stronger dollar has a negative impact on total returns to U.S. investors.
The best time to be in foreign securities is when the dollar is falling.
The challenge for global investors is to find both the best-performing foreign stock and the best-performing foreign currency.
You want the foreign stock and foreign currency to increase in value over time.
This rule applies to both direct investment in foreign stocks and the purchase of American Depositary Receipts.
Common stocks can be used as a storehouse of value, a way to accumulate capital, and a source of income.
Nobody likes to lose money, so storage of value is important.
Safety of principal is their most important criterion.
These investors prefer blue chips and other nonspeculative shares.
Accumulation of capital is an important goal for people with long-term investment horizon.
These investors use capital gains and dividends to build up their wealth.
Some use growth stocks while others use income shares, and still others use a little of both.
Some investors use stocks as a source of income.
A dependable flow of dividends is important to them.
They prefer high-yielding, good-quality income shares.
Individual investors can use different investment strategies.
Buy-and-hold, current income, quality long-term growth, aggres sive stock management, and speculation and short-term trading are included.
Storage of value is important to investors.
Depending on the investor's temperament and the amount of time he or she has to devote to an investment program, any of these strategies may be used to accumulate capital.