unit 1: investing in the stock market

Unit 1: Investing In The Unit 1: Investing In The Stock Market Stock Market

Unit 1: Investing In The Unit 1: Investing In The Stock Market Stock Market

Mr. ElsesserMr. Elsesser

Wall Street IWall Street I

Mr. ElsesserMr. Elsesser

Wall Street IWall Street I

What do you actually What do you actually invest in?invest in?

What do you actually What do you actually invest in?invest in?

Common Stock Common Stock (securities):(securities): Represents ownership in a corporation

that is represented by shares. Each share of stock has a stake in the corporation’s earnings and assets.

Common Stock Common Stock (securities):(securities): Represents ownership in a corporation

that is represented by shares. Each share of stock has a stake in the corporation’s earnings and assets.

Who Are The Investors? Who Are The Investors? Who Are The Investors? Who Are The Investors?

Stockholder (or shareholder):Stockholder (or shareholder): One who owns shares in a corporation.

Stockholder (or shareholder):Stockholder (or shareholder): One who owns shares in a corporation.

Why Invest?Why Invest?Why Invest?Why Invest?

MONEYMONEY : : Money is the primary reason stocks

are bought and sold. Most people invest in stocks to make

money from those investments. Corporations issue stock to raise

money.

MONEYMONEY : : Money is the primary reason stocks

are bought and sold. Most people invest in stocks to make

money from those investments. Corporations issue stock to raise

money.

Two things to keep in mind Two things to keep in mind when investing:when investing:

Two things to keep in mind Two things to keep in mind when investing:when investing:

1.1. Not all stocks make moneyNot all stocks make money

2.2. Timing:Timing: The time you purchase and

then sell a security directly impacts the amount of profit or loss you receive.

1.1. Not all stocks make moneyNot all stocks make money

2.2. Timing:Timing: The time you purchase and

then sell a security directly impacts the amount of profit or loss you receive.

Who is the average Who is the average shareholder?shareholder?

Who is the average Who is the average shareholder?shareholder?

• Some Average Demographics:Some Average Demographics:• Age: 4545• Income: $52,000$52,000• Portfolio Value: $14,000$14,000

• Some Average Demographics:Some Average Demographics:• Age: 4545• Income: $52,000$52,000• Portfolio Value: $14,000$14,000

Historical Look at Percentage Historical Look at Percentage of the Population Owning Stockof the Population Owning StockHistorical Look at Percentage Historical Look at Percentage

of the Population Owning Stockof the Population Owning Stock

YearNumber of

ShareholdersUS Population

Percentage of Population

1952 6,490,000 152,216,000 4.2%

1962 17,010,000 185,206,000 9.2%

1970 30,850,000 204,766,000 15.1%

1983 42,360,000 229,178,000 18.5%

1990 51,440,000 243,680,000 21.1%

Two ways to make Two ways to make money in the market:money in the market:Two ways to make Two ways to make

money in the market:money in the market:

11. . Price Appreciation:Price Appreciation: Occurs when you sell your stock for Occurs when you sell your stock for

more than you paid for the stock.more than you paid for the stock.

11. . Price Appreciation:Price Appreciation: Occurs when you sell your stock for Occurs when you sell your stock for

more than you paid for the stock.more than you paid for the stock.

Two ways to make Two ways to make money in the market:money in the market:Two ways to make Two ways to make

money in the market:money in the market:

22. . Dividends:Dividends: The amount of profit a company pays

to its stockholders. Dividends are like shareholder

“perks.”

22. . Dividends:Dividends: The amount of profit a company pays

to its stockholders. Dividends are like shareholder

“perks.”

Other PERK Examples:Other PERK Examples:Here are some examples of the freebies, goodies, Here are some examples of the freebies, goodies, and so forth, shareholders of certain companies and so forth, shareholders of certain companies

receive as a bonus for owning stock.receive as a bonus for owning stock.

Other PERK Examples:Other PERK Examples:Here are some examples of the freebies, goodies, Here are some examples of the freebies, goodies, and so forth, shareholders of certain companies and so forth, shareholders of certain companies

receive as a bonus for owning stock.receive as a bonus for owning stock.

Company PERKS

Ralston Purina

Discounts on lodging, ski rental at company’s Keystone Resort in Colorado

Wrigley’sEach shareholder gets 20 free packs of gum

every year

Disney30 percent discount at theme parks and on

merchandise if you join the Gold Card Program

Tandy10 percent off at Radio Shack stores during

holiday shopping season

3MFree gift package including tape and Post-It

note paper

Colgate-Palmolive

$15 in discount coupons

Marriott $10 off on weekends at some Marriott hotels

What Happens When you What Happens When you Trade Stock Trade Stock (buy and sell)(buy and sell)??What Happens When you What Happens When you Trade Stock Trade Stock (buy and sell)(buy and sell)??

• A A Capital Gain Capital Gain can occur:can occur:• A Capital gain is when an investor A Capital gain is when an investor

sells his or her stock for more than sells his or her stock for more than what was paid.what was paid.

• The investor must pay taxes on the The investor must pay taxes on the money that is earned on capital gains.money that is earned on capital gains.• http://www.moneychimp.com/features/tax_bra

ckets.htm

• A A Capital Gain Capital Gain can occur:can occur:• A Capital gain is when an investor A Capital gain is when an investor

sells his or her stock for more than sells his or her stock for more than what was paid.what was paid.

• The investor must pay taxes on the The investor must pay taxes on the money that is earned on capital gains.money that is earned on capital gains.• http://www.moneychimp.com/features/tax_bra

ckets.htm

On the other hand...On the other hand...On the other hand...On the other hand...

• A A Capital Loss Capital Loss can occur:can occur:• When a stock sells for less than

the investor originally paid for it.

• A A Capital Loss Capital Loss can occur:can occur:• When a stock sells for less than

the investor originally paid for it.

Again, this is where your TIMING is crucial.

HOW MUCH DO I HAVE HOW MUCH DO I HAVE TO INVEST?TO INVEST?

HOW MUCH DO I HAVE HOW MUCH DO I HAVE TO INVEST?TO INVEST?

•You need to evaluate the following:•Equity CapitalEquity Capital

•The money that an investor uses to buy stocks.

•Risk Capital:Risk Capital:•The amount of money an investor can afford to lose.

•You need to evaluate the following:•Equity CapitalEquity Capital

•The money that an investor uses to buy stocks.

•Risk Capital:Risk Capital:•The amount of money an investor can afford to lose.

Types of Types of BusinessesBusinessesTypes of Types of

BusinessesBusinesses

Sole ProprietorshipSole ProprietorshipPartnershipPartnershipCorporationsCorporations

Sole ProprietorshipSole ProprietorshipPartnershipPartnershipCorporationsCorporations

Purpose of each…Purpose of each…Purpose of each…Purpose of each…

To Conduct Daily Business:To Conduct Daily Business: Conducing activities of creating,

producing, and marketing products for a profit.

Objective to Achieve a Profit-Objective to Achieve a Profit- Amount of money a business

earns in excess of its expenses.

To Conduct Daily Business:To Conduct Daily Business: Conducing activities of creating,

producing, and marketing products for a profit.

Objective to Achieve a Profit-Objective to Achieve a Profit- Amount of money a business

earns in excess of its expenses.

Types of BusinessesTypes of BusinessesTypes of BusinessesTypes of Businesses

Sole Proprietorship:Sole Proprietorship: A business that is owned and

managed by one individual who receives all of the profits and bears all of the losses.

Examples:Examples: Elsesser’s Barber Shop Ray Manzoni Real Estate

Sole Proprietorship:Sole Proprietorship: A business that is owned and

managed by one individual who receives all of the profits and bears all of the losses.

Examples:Examples: Elsesser’s Barber Shop Ray Manzoni Real Estate

Sole Proprietorship Sole Proprietorship BENEFITSBENEFITS

Sole Proprietorship Sole Proprietorship BENEFITSBENEFITS

1. Ease of starting and going out of business.

2. Control over profits and business operations.

3. Pride of ownership

4. Lower taxes (pays no corporate income taxes)

1. Ease of starting and going out of business.

2. Control over profits and business operations.

3. Pride of ownership

4. Lower taxes (pays no corporate income taxes)

Sole ProprietorshipSole ProprietorshipCOSTSCOSTS

Sole ProprietorshipSole ProprietorshipCOSTSCOSTS

1.Unlimited Liability.

2.Difficulty in raising financial capital.

3.Responsible for all losses.

4.Management knowledge may be limited.

1.Unlimited Liability.

2.Difficulty in raising financial capital.

3.Responsible for all losses.

4.Management knowledge may be limited.

Types of BusinessesTypes of BusinessesTypes of BusinessesTypes of Businesses

Partnership:Partnership: A business that is owned and

managed by two or more individuals who receive who receive all of the profits and bears all of the losses.

Examples: Ben & Jerry’s Ice Cream Lacrosse UnlimitedLacrosse Unlimited

Partnership:Partnership: A business that is owned and

managed by two or more individuals who receive who receive all of the profits and bears all of the losses.

Examples: Ben & Jerry’s Ice Cream Lacrosse UnlimitedLacrosse Unlimited

PartnershipPartnershipBENEFITSBENEFITS

PartnershipPartnershipBENEFITSBENEFITS

1. Easier to raise financial capital.

2. Partners may combine managerial skills.

3. Personal satisfaction.

4. Lower taxes. (pays no corporate income taxes)

1. Easier to raise financial capital.

2. Partners may combine managerial skills.

3. Personal satisfaction.

4. Lower taxes. (pays no corporate income taxes)

PartnershipPartnershipCOSTSCOSTS

PartnershipPartnershipCOSTSCOSTS

1.Unlimited Liability.

2.Shared profits.

3.Possible conflicts between partners.

4.Possible instability after death of a partner.

1.Unlimited Liability.

2.Shared profits.

3.Possible conflicts between partners.

4.Possible instability after death of a partner.

TYPES of PARTNERSTYPES of PARTNERSTYPES of PARTNERSTYPES of PARTNERS

1.1. General Partner:General Partner: Partner that is publicly active in the

business

2.2. Limited Partner:Limited Partner: Contributes capital and shares

profits but has limited liability and control

3.3. Silent Partner:Silent Partner: A partner that is known to the

public but is inactive in the business

1.1. General Partner:General Partner: Partner that is publicly active in the

business

2.2. Limited Partner:Limited Partner: Contributes capital and shares

profits but has limited liability and control

3.3. Silent Partner:Silent Partner: A partner that is known to the

public but is inactive in the business

TYPES of PARTNERS TYPES of PARTNERS (cont.)(cont.)

TYPES of PARTNERS TYPES of PARTNERS (cont.)(cont.)

1.1. Secret Partner:Secret Partner: Partner that is not known to the

public but is active in the business.

2.2. Senior and Junior Partner:Senior and Junior Partner: Are distinguished on the basis of

their investment and business experience and share in the firm’s profits.

1.1. Secret Partner:Secret Partner: Partner that is not known to the

public but is active in the business.

2.2. Senior and Junior Partner:Senior and Junior Partner: Are distinguished on the basis of

their investment and business experience and share in the firm’s profits.

Types of BusinessesTypes of BusinessesTypes of BusinessesTypes of Businesses

Corporation:Corporation: A business that is owned by

stockholders and has rights and responsibilities as if it were a person.

Examples:Examples:

Corporation:Corporation: A business that is owned by

stockholders and has rights and responsibilities as if it were a person.

Examples:Examples:

CorporationCorporationBENEFITSBENEFITS

CorporationCorporationBENEFITSBENEFITS

1.Limited liability.

2.Greater financial capital.

3.Unlimited life.

4.Specialized management.

1.Limited liability.

2.Greater financial capital.

3.Unlimited life.

4.Specialized management.

CorporationCorporationCOSTSCOSTS

CorporationCorporationCOSTSCOSTS

1.Increased taxation. (pays corporate income tax)

2.Difficulty in starting. (each state has its own rules for a

corporate charter)

3.May be larger, more bureaucratic that other forms of business.

4.Increased government control.

1.Increased taxation. (pays corporate income tax)

2.Difficulty in starting. (each state has its own rules for a

corporate charter)

3.May be larger, more bureaucratic that other forms of business.

4.Increased government control.

3 Types of Corporations

3 Types of Corporations

1.1. Public CorporationPublic Corporation

2.2. Private CorporationPrivate Corporation

3.3. Subsidiary CorporationSubsidiary Corporation

1.1. Public CorporationPublic Corporation

2.2. Private CorporationPrivate Corporation

3.3. Subsidiary CorporationSubsidiary Corporation

Types of Corporations Types of Corporations Types of Corporations Types of Corporations

• Public CorporationPublic Corporation• Sells shares of its stock on the open Sells shares of its stock on the open

market. market. • Any investor has the opportunity to Any investor has the opportunity to

buy shares of stock in the business buy shares of stock in the business and become a part owner.and become a part owner.

• Examples:Examples:

• Public CorporationPublic Corporation• Sells shares of its stock on the open Sells shares of its stock on the open

market. market. • Any investor has the opportunity to Any investor has the opportunity to

buy shares of stock in the business buy shares of stock in the business and become a part owner.and become a part owner.

• Examples:Examples:

Types of Corporations Types of Corporations Types of Corporations Types of Corporations •Private CorporationPrivate Corporation

• Ownership is usually held by a few owners and no shares of stock are sold on the open market.

• Examples: Examples:

•Private CorporationPrivate Corporation• Ownership is usually held by a few

owners and no shares of stock are sold on the open market.

• Examples: Examples:

Types of Corporations Types of Corporations Types of Corporations Types of Corporations •Subsidiary Corporation:Subsidiary Corporation:

• A Corporation which is owned or partially owned by another corporation which supervises it (called a parent company).

•Examples:Examples:• National Amusements is the parent company of

Viacom, which owns MTV, Paramount Pictures, CBS, Blockbuster and many other entities.

•Subsidiary Corporation:Subsidiary Corporation:• A Corporation which is owned or partially owned

by another corporation which supervises it (called a parent company).

•Examples:Examples:• National Amusements is the parent company of

Viacom, which owns MTV, Paramount Pictures, CBS, Blockbuster and many other entities.

Types of Corporations Types of Corporations Types of Corporations Types of Corporations •Franchise:Franchise:

• A franchise is an agreement or contract that gives an individual the right to won a business while benefiting from the reputation of an established firm.

•Examples:Examples:

•Franchise:Franchise:• A franchise is an agreement or

contract that gives an individual the right to won a business while benefiting from the reputation of an established firm.

•Examples:Examples:

Business Growth and Business Growth and ExpansionExpansion

Business Growth and Business Growth and ExpansionExpansion

Two Ways to Examine this:Two Ways to Examine this:1.Internal Growth2.Mergers or Acquisitions

Two Ways to Examine this:Two Ways to Examine this:1.Internal Growth2.Mergers or Acquisitions

Business Growth and Business Growth and ExpansionExpansion

Business Growth and Business Growth and ExpansionExpansion

Internal Growth:Internal Growth: The company which experiences

internal growth is expanding its business through adding new product lines, opening new branches, etc.

Internal Growth:Internal Growth: The company which experiences

internal growth is expanding its business through adding new product lines, opening new branches, etc.

Business Growth and Business Growth and ExpansionExpansion

Business Growth and Business Growth and ExpansionExpansion

Mergers or Acquisitions:Mergers or Acquisitions: A sale of one company to another

with the result that only one company will now exist.

Example:Example: AOL and Time Warner merged to

form AOL Time Warner

Mergers or Acquisitions:Mergers or Acquisitions: A sale of one company to another

with the result that only one company will now exist.

Example:Example: AOL and Time Warner merged to

form AOL Time Warner

+ =

About About Mergers and Mergers and

DiversificationDiversification

About About Mergers and Mergers and

DiversificationDiversification A motive for a merger can be A motive for a merger can be

diversification.diversification. Diversification:Diversification:

The addition of various lines, products, or services to serve different markets.

A motive for a merger can be A motive for a merger can be diversification.diversification.

Diversification:Diversification: The addition of various lines,

products, or services to serve different markets.

Structure of the CorporationStructure of the CorporationStructure of the CorporationStructure of the Corporation

1. Stockholders : Owners of the corporation whether you hold

one or 100 shares of stock.

2. Board of Directors : Chief governing body of a corporation.

3. Officers : Elected by the Board of Directors and are

directly responsible to the Board for carrying out the business objectives of the firm.

(President, Vice-President, etc.)

1. Stockholders : Owners of the corporation whether you hold

one or 100 shares of stock.

2. Board of Directors : Chief governing body of a corporation.

3. Officers : Elected by the Board of Directors and are

directly responsible to the Board for carrying out the business objectives of the firm.

(President, Vice-President, etc.)

Articles of IncorporationArticles of IncorporationArticles of IncorporationArticles of Incorporation

Papers that state the reason and Papers that state the reason and purpose for incorporation (of the purpose for incorporation (of the company) and the regulations by company) and the regulations by which the corporation will be which the corporation will be governed.governed.

Papers that state the reason and Papers that state the reason and purpose for incorporation (of the purpose for incorporation (of the company) and the regulations by company) and the regulations by which the corporation will be which the corporation will be governed.governed.

LEGAL DOCUMENTS OF LEGAL DOCUMENTS OF CORPORATIONSCORPORATIONS

LEGAL DOCUMENTS OF LEGAL DOCUMENTS OF CORPORATIONSCORPORATIONS

•By-lawsBy-laws : :•The rules & regulations by which a corporation is governed.

•Annual ReportAnnual Report : :•A financial report published once a year by a corporation and distributed to its stockholders.

•By-lawsBy-laws : :•The rules & regulations by which a corporation is governed.

•Annual ReportAnnual Report : :•A financial report published once a year by a corporation and distributed to its stockholders.

•Balance Sheet•Part of an annual report that lists the corporations assets & liabilities.

•Income Statement:

•Part of an annual report that lists revenue, expenses, and profit or loss for the year.

•Shareholder’s letter :

•A letter to stockholders from the chairman of the board of directors summarizing the past year’s performance.