section 3: buying stock - mr. chung u.s. history...
TRANSCRIPT
Chapter 11 Section 3: Buying Stock
Objectives:
o We will identify the benefits
and risks of buying stock.
o We will describe how stocks
are traded
o We will examine how stock
performance is measured.
• “Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the LORD of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.” Malachi 3:10.
Stocks: • Besides, bonds, corporations can
raise funds by issuing stock, which represents ownership in the corporation.
• Stock is issued in portions known as shares
• By selling shares of stock, corporations raise money to start, run, and expand their businesses.
Benefits of Buying Stock: • Dividends: many corporations pay
out part of their profits as dividends to their stockholders.
• Dividends are usually paid four times per year (Quarterly).
• The size of the dividend depends on the corporations’ profit.
• The higher the profit, the larger the dividend per share of stock.
Benefits of Buying Stock: • Capital Gains: A second way an
investor can earn a profit is to sell the stock for more than he or she paid for it.
• The difference between the higher selling price and lower purchase price is called a capital gain.
• An investor who sells at a price lower than the purchase price, however suffers a capital loss.
Types of Stock: o Income Stock: by paying
dividends, this stock provides investors with income.
o Growth Stock: this stock pays few or no dividends.
o Instead, the issuing company reinvests its earning in its businesses.
o The business and its stock thus grows in value over time.
Types of Stock: o Common Stock: Investors who buy
common stock are usually voting owners of the company.
o They usually receive one vote for each share of stock owned.
o They may use this vote for example, to help elect the company’s board of directors.
o In some cases, a relatively small group of people may own enough shares to give them control over the company.
Types of Stock:
o Preferred Stock: Investors who buy preferred stock are usually nonvoting owners of the company.
o Owners of preferred stock, however, receive dividends before the owners of common stock.
o If the company goes out of business preferred stockholders get their investment back before common stockholders.
Types of Stock:
o Stock Splits: Owners of common stock may sometimes vote on whether to initiate a stock split.
o A stock split means that each single share of stock splits into more than one share.
o A company may seek to split a stock when the price of stock becomes so high that it discourages potential investors from buying it.
Types of Stock: o For example you own 200 share of a
company, Each share is worth $100. After 2 for 1 split, you own 400 shares or two shares of stock for every single share you owned before.
o Because the price is divided along with the stock, each share is now worth only $50.
o Thus a stock split does not immediately result in any financial gain.
o Shareholders like splits, because splits usually demonstrate that the company is doing well and the lower stock price tends to attract more investors.
Risks of Buying Stock: o Purchasing stock is risky because
the firm selling the stock may earn
lower profits than expected or it
may lose money.
o If so, the dividends will be smaller
than expected or nothing at all
and the market price of the stock
will probably decrease.
Risks of Buying Stock: o If the price of the stock decreases,
investors who choose to sell their stock will get less than they paid for it, experiencing a capital loss.
o There is a higher return because of the risk.
o If a corporation goes bankrupt, it sells its assets and then pays its creditors including its bondholders first.
o Stockholders receive a share of the assets only if there is money left over after bondholders are paid.
How Stocks Are Traded:
o You could contact a
stockbroker, a person who links
buyers and sellers of stock.
o Stockbrokers usually work with
individual investors, advising
them to buy or sell particular
stocks.
How Stocks Are Traded: o Stockbrokers work for brokerage
firms, or businesses that specialize in trading stocks.
o Stockbrokers and brokerage firms cover their costs and earn a profit by charging a commission or fee, on each stock transaction.
o Sometimes they also act as dealers of stock, meaning that they buy shares at a lower price and sell them to investors at a slightly higher price, profiting from the difference.
Stock Exchanges: o A market for buying and selling
stock is known as a stock exchange.
o Stock exchanges act as secondary markets for stocks and bonds.
o Most newspapers publish data on transactions in major stock exchanges.
Stock Exchanges: o New York Stock Exchange (NYSE)
began in 1792.
o It handles stock and bond transactions for the top companies in the United States in the world.
o The largest, most financially sound, and best-known firms are listed on the NYSE are referred to as blue chip companies.
Stock Exchanges:
o Blue Chips stocks are often in
high demand, because
investors expect the companies
continue to do business
profitably for a long time.
o They are traded on the floor or
on location.
NASDAQ
o National Association of Security
Dealers Automated Quotation).
o Was created in 1971 to help
organize the OTC market
through the use of automation.
o It grew rapidly in the 1990s in
part of focusing on new
technology stocks.
NASDAQ
o Today the NASDAQ is the second
largest securities market in the
country and the largest electronic
market for stocks.
o It handles more trades on average
than any other American market,
o It does not have a physical trading
floor but it is through
telecommunication networks.
Futures and Options:
o Futures are contracts to buy or sell commodities at a particular date in the future at a price specified today.
o For example, a buyer and seller might agree today on a price of $4.50 per bushel for soybeans that would not reach the market until six or nine months from now.
Futures and Options:
o The buyer would pay some
portion of the money today, and
the seller would deliver the
goods in the future.
o Many of the markets where
futures are bought and sold are
associated with grain and live
stock exchanges.
Futures and Options: o The Option are contracts that
give investors the choice to buy or sell stock and other financial assets.
o Investors may buy or sell a particular stock at a particular price up until a certain time in the future.
o Usually three to six months.
Futures and Options:
o The option to buy shares of
stock until a specified time in
the future is known as a call
option.
o The call option gives you the
right, but not the obligation, to
purchase a certain stock at a
price of say $100 per share.
Futures and Options: o If at the end of six months, the
price has gone up to $115 per share, your option still allows you to purchase the stock for the agreed upon $100 per share.
o ($15 minus $10 you paid for the call option).
o If, on the other hand, the price has dropped to $80, you can throw away the option and buy the stock at the going rate.
Futures and Options:
o The option to sell shares of stock at
a specified time in the future is
called a put option.
o Suppose that you as the seller, pay
$5 per share for the right to sell a
particular stock that you do not yet
own at $50 per share.
Futures and Options: o If the price per share falls to $40 you
can buy the share at that price and require the contracted buyer to pay the agreed upon $50.
o You would then make $5 per share on the sale ($10 minus the $5 you paid for the put option).
o If the price rises to $60 however, you can throw away the option and sell the stock for $60.00.
Futures and Options: o Day Trading: Dozens of trades per day,
sometimes holding a stock for just
minutes or even seconds.
o The typical day trader, sitting in front of
a computer, hopes to ride a rising
stock’s momentum for a short time and
then sell the stock for a quick profit.
o This is very risky, almost like gambling.
Measuring Stock Performance: o When the stock market rises steadily over
a period of time a bull market exists.
o On the other hand, when the stock market falls or stagnates for a period of time, people call it a bear market.
o In a bull market, investors expected an increase in profits and therefore, buy stock.
o During a bear market, investors sell stock in expectation of lower profits.
Measuring Stock Performance: o Dow Jones Industrial Average: A
measure of stock performance known simply as the Dow.
o It is the average value of particular set of stocks and it is presorted as a certain number of points.
o The group of stocks listed on the Dow is tended to represent the market as a whole.
Measuring Stock Performance: o The stocks represent 30 large
companies in various industries such as food, entertainment, and technology.
o S & P 500 gives a broader picture of stock performance than the Dow.
o It tracks the price changes of 500 different stocks as a measure of overall stock market performance.
o It mainly reports from the NYSE but some in NASDAQ.
Great Depression: o Wealth concentrated in a few without
distribution to the rest of the society.
o People buying everything on credit and in debt.
o Factories overproducing that caused a surplus and not enough consumer demand to purchase products.
o Speculation: the practice of making high risk investments with borrowed money in hopes of getting a big return.
Discussion Question
What type of companies or businesses would
you consider investing in stocks?
CHAPTER 12:2 Business Cycles
Objectives:
o We will study the phases of
a business cycle and the
four key factors that keep
the cycle going.
• Psa_119:72 The law of thy
mouth is better unto me than
thousands of gold and silver.
Business Cycle: o A business cycle is a period of
macroeconomic expansion followed by a period of macroeconomic contraction.
o Economists also call these periods of change “economic fluctuations.”
o The cycle is major changes in real gross domestic product above or below normal levels.
The typical business cycle consists of four phases:
(1) Expansion: An expansion is a period of economic growth as measured by a rise in real GDP.
o To economists, economic growth is steady long-term increase in real GDP.
o In expansion phase, jobs are plentiful and unemployment rates fall and business prosper.
The typical business cycle consists of four phases:
(2) Peak: When real GDP stops rising,
the economy has reached its peak,
the height of an economic
expansion
The typical business cycle consists of four phases:
(3) Contraction: After reaching its peak,
the economy enters a period of
contraction, an economic decline
marked by falling real GDP.
o Falling output generally causes
unemployment to rise.
The typical business cycle consists of four phases:
(4) Trough: When the economy has
“bottomed out” it has reached the
through the lowest point in an
economic contraction.
o At this point, real GDP stops falling
and a new period of expansion
begins.
The typical business cycle consists of four phases:
o During a contraction, GDP is always falling.
o But other economic conditions, such as price levels and unemployment rates may vary.
o Economists created terms to describe contractions with different characteristics and different levels of severity.
The typical business cycle consists of four phases:
o Recession: If real GDP falls for two consecutive quarters at least six straight months, the economy is said to be in a recession.
o A recession is a prolonged economic contraction.
o Generally lasting six to 18 months, recessions are typically marked by unemployment reaching the range of 6 to 10 percent.
The typical business cycle consists of four phases:
o Depression: If a recession is especially long and severe, it may be called a depression.
o The term has no precise definition but it refers to a deep recession with high unemployment and low economic output.
o Stagflation: The term combines parts of stagnant a word meaning unmoving or decayed and inflation.
o This is a decline in real GDP (output) combined with a rise in the price level (Inflation).
Four Main Factors That Keep Business Cycles Going:
(1) Business investment: When the economy is expanding businesses expect their sales and profits to keep rising.
o Therefore they may invest heavily in building new plants and buying new equipment.
o Or they may invest in the expansion of old plants in order to increase the plants productivity capacity.
Four Main Factors That Keep Business Cycles Going:
o All of this investment spending creates additional output and jobs, help to increase GDP and maintain the expansion.
o At some point firms may decide that they have expanded enough or that demand for their products is dropping.
o They cut back on investment spending as a result, aggregate demand falls.
o The result is a decline in GDP and also in the price level.
o The drop in business spending reduces output and income in other sectors of the economy.
Four Main Factors That Keep Business Cycles Going:
o When this occurs industries that produce capital goods slow their own production and begin to lay off workers.
o Other industries might follow, causing overall unemployment to rise.
o Jobless workers cannot purchase new products.
o This may lead to recession.
Four Main Factors That Keep Business Cycles Going:
(2) Interest Rates and Credit: Consumers often use credit to purchase “big ticket” items from new cars and houses to home electronics and vacations.
o The cost of credit is the interest rate that financial institutions charge their customers.
o If the interest rate rises, consumers are less likely to buy those new cars and appliances.
Four Main Factors That Keep Business Cycles Going:
o Businesses look to interest rates in deciding whether or not to purchase new equipment, expand their facilities or make many other large investments.
o When interest rates are low, companies are more willing to borrow money.
o When interest rates climb, business borrowing falls.
o One result of rising interest rates, then, is less output, such a result may lead to a contraction phase.
Four Main Factors That Keep Business Cycles Going:
(3) Consumer Expectations:
consumer spending is
determined partly by consumer
expectations.
o If people expect the economy to
begin contracting, they may reduce
their spending because they
expect layoffs and lower incomes.
Four Main Factors That Keep Business Cycles Going:
o This reduced spending can actually help bring on a contraction as firms respond to reduce demand for their products.
o Thus consumer expectations become self-fulfilling prophecies, creating the very outcome that consumers fear.
o High consumer confidence has the opposite effect on the economy, they will also expect abundant job opportunities and rising incomes.
o Thus, they will buy more goods and services, pushing up gross domestic product.
Four Main Factors That Keep Business Cycles Going:
o External Shocks: This can affect aggregate supply.
o Examples of negative external shocks include disruptions of the oil supply wars that interrupt trade, and drought that severely reduce crop harvests.
o Also there is positive external shocks.
o Discovery of large deposit of oil, perfect mix of sun and rain that produce a large bountiful harvest.
Four Main Factors That Keep Business Cycles Going:
o External shocks usually come
without much warning.
o The other key factors capable of
pushing an economy from one
phase of the business cycle to
another are more predictable.
Four Main Factors That Keep Business Cycles Going:
o So economists track business investment interest rates, and consumer expectations in order to more accurately forecast new stages of the business cycle.
o Business Cycle Forecasting: Economists have many tools available for making predictions of the business cycles.
o The leading indicators are a set of key economic variables that economists use to predict future trends in business cycle.
• (Isa 46:10) Declaring the end
from the beginning, and from
ancient times the things that
are not yet done, saying, My
counsel shall stand, and I will
do all my pleasure: