Question

Mr. Marcotte was at Joel’s Little League game last week where he ran into one of the other parents, who seemed to
be in a very upbeat mood. Mr. Richards could not seem to stop talking about his windfall in the past week on some
stocks he had bought in the last month or so. Since Mr. Marcotte is still new to the investing game, he seemed to be
somewhat overwhelmed with some of the terms like stock splits, P/E ratios, dividend payout that Mr. Richards was
using to explain his success story. Moreover, Martin Marcotte has always assumed that one needs to have a sizable
amount to invest in the stock market, not to mention the inherent risk involved in the equities market. It has not
helped that by nature Mr. Marcotte is a risk averse person, he seems to think that if he was to dabble in the stock
market, he will have the same fate as those who invested in Enron, World Com, or some of the other companies
involved in fraudulent practices.
Having the above concerns aside, Martin knows that he will not be able to achieve his financial goals by keeping his
savings in a savings account or having certificates of deposits. Therefore he has decided to research stocks further,
and together with Mrs. Marcotte start a small investment in some well-researched company. Before he does so,
however he still has several questions that he needs answered.

Part 1: The Marcottes are not sure what are the different ways one make money by investing in the stock of a company?
Please list and explain the three ways you can make money with stocks.

Part 2: Given that there are many classifications of stocks to choose from, which ones should the Marcottes invest in
initially? (Remember, their initial goal is to have sufficient funds for their kids’ college education) It may maybe
more than just one class of stock. Explain and support your recommendations for the Marcottes.

Part 3: The Marcottes are not sure if they should use a Full-Service of Discount Brokerage firm, since they feel they
will not be able to spend enough time researching individual stocks. What recommendation would you give them?
Please support your recommendation.

Part 4: What are the long term techniques that the Marcottes can follow when investing in the stock market? List and
explain two methods. Which one do you recommend for this family?

Part 5: What are the short term techniques that the Marcottes can follow when investing in the stock
market? List and explain two of the methods and explain why you would not recommend them to Marcottes.

Answer 1

1]

Three ways to make money with stocks are :

• cash dividends - companies pay cash dividends to shareholders out of their profits
• stock dividends - companies issue additional stock to existing shareholders
• capital gains - the market prices of stocks can appreciate, resulting in price gains

2]

As Marcotte is risk-averse and new to stocks, it is recommended that they initially invest in blue-chip stocks. Blue-chip stocks are stocks of mature and extremely large companies with stable growth and profits over many years. They are less volatile and less risky. They usually pay stable dividends. They are suitable for Marcotte who is new to stocks and is risk-averse.

3]

Discount brokerages charge low commissions, but do not provide any investment advice. They are more suited to investors who place a high number of orders, and are competent to do their own research. In the case of Marcotte, a full-service broker is recommended as Marcotte needs investment advice, and is unlikely to place a high number of orders intially

4]

Two techniques are value investing and growth investing

Value investing is an approach of finding stocks that are undervalued and buying them. Value stocks tend to be companies that are well-established and stable. They are usually large-cap stocks

Growth investing is an approach of investing in companies with high growth potential. Growth investing is more risky, but also potentially more rewarding

For Marcotte, value investing is recommended as it is less risky