Introduction to the Stock Market

History behind the Stock Market

• During the American Revolution, the colonial government needed money to fund its wartime operations– One way to raise money was by selling bonds

• A piece of paper a person buys for a set price, and after a certain period of time, can exchange their bonds for a profit

– Banks also started to sell parts (shares) of their own companies to raise money• Sold off part of the company to whomever wanted to buy it

= the essence of the modern day stock market

How the Stock Market Works

• Companies let the public buy part of its company by selling shares

• A share is a piece of paper that says you own part of a company– That part is usually extremely small (perhaps thousandths of a

percent of the total company)• Use a brokerage house (think supermarket of stocks) and a

broker to buy stocks– They tell you how much a share in a company costs as well as the

costs for their services, then will tell you how many shares you can buy

– Example: You have $250. 1 McDonalds share costs $20; Broker fee costs $50; Total # of shares you can buy in McDonalds: 10

Broker’s Job

• Broker sends a message to the “Floor Broker” working on the floor of the New York Stock Exchange this is the person that buys stocks for you

• The Floor Broker goes to a part of the NY Stock Exchange that is given to this particular stock (McDonalds). This means they will usually buy and sell from people at the normal price

• The floor broker buys your ten shares from one of these people, reports the trade through computers on the floor, then tells the broker at the brokerage house that he bought the stock.

• Your broker keeps a record that you own the stock– If you want to sell these stocks, your broker will sell them, deduct his

commission, then give you the money

What is a Stock?

• A stock is a representation of the amount of a company that you own.– Certificate shows you own a small fraction of a corporation– You are referred to as a shareholder or stockholder

• Benefits of owning stock in a corporation– When the company profits, you profit– Stocks give you the right to make decisions that may

influence the company (voting power)– The more stocks you own, the more decision making power

you have

Levels of Stocks• 1) Penny Stocks

– Small companies that have no chance of making it big– Little to no value– Local chain of stores

• 2) Growth Stocks– New companies that have potential but are not stable– Not always a safe investment since not well-established

• 3) Secondary Issue Stocks– Well-established businesses that are almost totally insured– Good investment (profit can increase a lot)

• 4) Blue Chip Stocks– Older companies (IBM, AT&T, Coca Cola)– Safest investment, generates more profit – Downsides: size of company and popularity of shares drive up prices & take a lot

more time to profit with

Stock Quotes - Reading