Download - Lecture 02 - Basics of Investing I
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Introduction to StocksBasics of Investing I
Spring 2008Economics 98 / 198 DeCal
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www.ocf.berkeley.edu/~jml/decal
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Schedule Today Administrative Issues Current Events Lecture content: Basics of Investing
– What is a stock?– How are they traded?– What are brokerages?– Different types of orders– What is the market?– Terminology
Learning how to use the simulation; IBD
Assignments / Readings
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Administrative Issues
Attendance & Sign-In
Name Tags
Enrollment
Emails
Webpage
Syllabus Review
News Presentation Sign Ups
Investor’s Business Daily Access
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Current Events
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Current Events Troubled / volatile markets
– Damages from sub-prime mortgages and the housing sector
– Fear of risk of recession Weak job reports
Fed (Federal Reserve) meeting next week– Rate cuts?
Apple releases new lines of iPod
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Current Events
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NASDAQ
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S&P 500
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Lecture Content
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What is a stock?
Common stock – most “common” type
Gives you a “share” of ownership of a publicly traded company
Entitled to a portion of profits – dividends
Stock ownership = claim on assets and earnings– Also something called “preferred
stock”
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What is a stock? Ticker symbols
– Set of letters that represent a security traded on an exchange
– Ex. MSFT, GS, AAPL, MA, BUD, LUV Stock quotes
– List of prices for a stock at a particular point during the trading day
Stock tickers– What do those green and red numbers
mean?
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Different Types of Stock Preferred Stock
– No voting rights to company issues– Issued fixed dividends forever – main form of
return
Common Stock– Majority of stock we see and hear about in the
news– Ownership of the company– Entitled to portion of the earnings– Earn returns mainly through capital gains
What are capital gains?– Increase in asset value relative to the purchases
price– Not realized until asset is actually sold
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Stocks vs. Bonds
Stocks are equity– Generally considered riskier– Quite possible to lose a significant
portion, if not all, of your money– Potential for much higher returns
Bonds are debt– Guaranteed a fixed return– Have a higher claim than
stockholders What does this mean?
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Dividend Debate
Distribution of a portion of a company's earnings to its shareholders (usually cash)
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What Can Cause Stock Prices to Change?
Supply and Demand!(What affects supply / demand of a stock?)
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Two Markets Primary Market – market in which
investors have first opportunity to buy newly issued shares– Initial Public Offering (IPO)
First time that company offers its shares to public markets (securities bought directly from company)
Where private companies become public
Secondary Market – investors trade already-issued shares of companies with each other– Ie. The stock market– Trading of a company’s stock DOES NOT
DIRECTLY involve the company financially
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How Stocks Are Traded
Major exchanges – Lists stocks (and other securities),
sets policies for how stocks are traded
New York Stock Exchange (NYSE) American Stock Exchange (AMEX) National Association of Securities
Dealers Automated Quotation
Only “publicly traded companies” are listed
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Market Indices (Index) Definition
– Aggregate value of combining several stocks together and intended to represent entire or portion of the stock market
S&P 500– 500 stocks chosen by Standard &
Poor to represent US stock market NASDAQ Composite Dow Jones Industrial
Average– 30 most significant stocks traded
S&P 600 Small-Cap Russell 3000
– 3000 of the largest stocks in the US
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Stocks Markets & Animals
Bull Market– When everything in the market is going
great and stocks are generally heading upwards
Bear Market– When everything is NOT GOOD and stocks
are generally headed
NOTE: Nothing lasts forever! Good times and bad times will end at some point
Other animal terms: pigs, chickens
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Brokerages Need a medium to
trade through – this is where brokerages come in
Cash vs. margin account
Choosing a broker– full service vs. discount
Fees (Commission) Services Minimum balance
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Opening an Account Not a hard process- most of it just
some paperwork and mail– Sign-up online and download forms– Mail checks, forms, and copy of ID– Accounts created within a couple of days
Cash accounts usually never turned down– Margin accounts might be a problem if
you have pretty bad credit history
To start investing, won’t need much else other than a computer, some money, and investing know-how
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Brokerages Some links for brokerage comparisons
– Find something that works for what YOU need
– No one broker that is best for all investors
http://www.investingonline.org/gso/broker_ratings.html
http://www.consumersearch.com/www/internet/online-brokers/reviews.html
http://www.stockbrokerguide.com/
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Different types of Orders Market Order Limit Order
An order to buy or sell a set number of shares at specified price of better. Limit orders usually cost more, but useful for getting specified price. By better I mean, lower.
Stop Order An order placed for a security for when
the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits. Many people use this during vacations if they can’t use it.
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Different Types of Orders Stop Limit Order
Executed at a specified price (or better) after a given stop price has been reached. Order becomes then a limit order to buy (or sell) at the limit price or better
Precision purposes
Good Until Cancelled (GTC)
Good Until End of Day
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Things to Internalize Learn the basics!
– Need to know what basic terms mean– Articles should help you
Advantages of starting young
Useful resources for stock tutorials– www.investorwords.com– www.investopedia.com– www.fool.com
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Homework / Reading
Set up your account Online articles (Course website)
– “The Five Biggest Stock Market Myths”
– “Getting Started”– “Brokers and Online Trading”– “Stocks”– Get started on “Investing 101”
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IBD Subscription
Investopedia Simulation