Stock Market Basics

                                     

                                         

WHAT IS A STOCK? • A stock represents partial ownership of a

corporation. • When you buy shares of a stock, the

company gives you a stock certificate which shows that you own a small fraction of that company.

• In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically.

WHY SELL YOUR STOCK?

• A company sells shares of its stock as one way to raise capital to fund the growth of its business.

• The BEAUTY of the Deal is that a company does not have to pay the money back.

WHAT DETERMINES A STOCK PRICE?

• A stock is worth what an investor is willing to pay for it

• Supply and demand decide a stock's price.• Supply = number of shares a company has issued

to the public. • Demand = investors' desires to buy shares from

current owners. • Investors will purchase a stock if they think they will

make a profit. (BUY LOW – SELL HIGH!)

WHY OWN STOCK?When the company makes money, so do you. • Owning a stock means you are a partial owner of the

company, and you get voting rights in certain company issues

• Over the long run, stocks have historically averaged about 10% annual returns

• However, stocks offer no guarantee of any returns and can lose value, even in the long run

• Investments in stocks can generate returns through dividends, even if the price stays the same

Stock ExampleLets say company X issues 10 shares of

stock to raise Capital• You buy 1 share @ $10.00 p/s • Later this same year the company is doing

very well. Lots of people want to invest in this CO. You are able to sell your share for $14.00 p/s.

• Google Stock• 1-Oct-04, 132.58 | 21-Aug-07, 506.61

Why own stock?

GOOD INVESTMENT

• If you invest wisely, over time you will make more money investing in the stock market then putting your money into a savings account

                                      

THE DOWNSIDE…

• When you buy shares of a stock, you get a full share of the risk of an operating business.

• Owning stock does not guarantee that you make money

EXAMPLE:

• Theglobe.com – Heard it was a very hot Internet stock.– However, you didn’t do too much research but

bought 100 shares at over $100 per share. – A few months later, the share price is less than

$10. – Your hard-earned savings are now gone. – Some stocks may even go bankrupt and you could

lose even more money.

WHY DO COMPANIES ISSUE STOCK?

• Primary Reason: to generate $$$$$ that will be used to…

develop new productsbuy more advanced equipment pay for new buildings and inventories hire more employees provide for a merger or acquisition

DIVIDEND

• A small reward a company pays you for owning shares of its stock.

• The company takes a portion of its earnings, which it divides and distributes to shareholders.

• SLOW GROWTH = HIGH DIVIDENDS • HIGH GROWTH = NO DIVIDENDS• EXAMPLE: MICROSOFT

– HIGH GROWTH COMPANY – DOESN’T PAY DIVIDENDS – REINVESTS THOSE DIVIDENDS BACK INTO THE

COMPANY (back)

STOCK SPLIT• When a public company issues more shares of

stock to existing shareholders. • WHY? So that more investors can afford the stock• In a 2-for-1 stock split, a company issues another

share for every one already sold. • EXAMPLE:you own 100 shares of IBM trading at

$120. They announce a 2-for-1 split and you now have 200 shares, and the share price is $60.

                                                            

GROUP QUIZ• WHAT IS A STOCK?• LIST 2 REASONS WHY YOU WOULD WANT

TO OWN STOCK• LIST ONE REASON WHY COMPANIES

ISSUE STOCK• YOU OWN 5 SHARES OF DISNEY CO. at

$100 PER SHARE. DISNEY ANNOUNCES A 2 FOR 1 STOCK SPLIT.– HOW MANY SHARES DO YOU NOW OWN?– HOW MUCH IS EACH SHARE NOW WORTH?

MEASURING STOCKS

DOW JONES INDUSTRIAL AVERAGE

• Shows generally how well the market is going• Found by averaging the prices of 30 industrial

blue-chip stocks trading in the New York Stock Exchange

• Blue chip stock: are the most valuable, from the largest companies

COMPANIES INCLUDED IN THE DJIA

• Alcoa Inc – 3.138%• American Express – 6.510%• At+T – 2.498%• Boeing Co. – 1.714%• Caterpillar Inc. – 1.877• Citigroup Inc. – 2.553%• Coca-Cola Co. – 2.330 %• DuPont Co. – 2.480%• Eastman Kodak Co. – 2.700%• Exxon Mobil Corp. – 3.809%• General Electric Co. – 6.543%• General Motors Corp. – 3.861%• Home Depot Inc. – 2.804%• Honeywell International Inc. – 2.250%• Hewlett-Packard Co. – 6.412%

• International Business Machines – 5.218%

• Intel Corp. – 5.885%• International Paper Co. – 1.785%• J.P. Morgan & Co. – 5.766%• Johnson & Johnson – 3.769%• McDonald’s Corp. – 1.592%• Merck & Co. – 2.930%• Microsoft Corp. – 4.672• Minnesota Mining and Manf. – 4.042%• Philip Morris Cos. – 0.982%• Procter & Gamble Co. – 2.866• SBC Communications Inc. – 2082%• United Technologies Corp. – 2.688%• Wal-Mart Stores Inc. – 2.517• Walt Disney Co. – 1.711%

STANDARD AND POOR’S 500 INDEX

• A.K.A. S&P500• A well-known, value-rated index of 500 major

US companies: 400 industrial firms, 20 transportation firms, 40 utilities firms, and 40 financial firms

• Like the Dow Jones Industrial Average, shows how the market is doing by averaging the stock prices of these 500 companies

Where are stocks traded?

2 major U.S. markets:

• NEW YORK STOCK EXCHANGE (NYSE)

• NASDAQ STOCK EXCHANGE

HOW ARE STOCKS BOUGHT and sold?

BUYERS:• Do research on company

and price• Place an order (either online

or with broker)for x amount of shares for x amount of $

• Order is sent to NYSE floor• Transaction occurs • Order confirmation sent• Pay for stock and

stockbroker commission

SELLERS• Decide to sell x amount of

shares for x amount of $• Place a sell order (either

online or with broker) • Sell order is sent to NYSE

floor• Transaction occurs• Sell confirmation sent• Check sent to seller minus

stockbroker commission

• A stock portfolio is a collection of stocks that an investor owns at a particular point in time.

• Information contained in a portfolio: – Parent company name – http://www.google.com/– (example: Oreo cookies – owned by Nabisco

which is now owned by Kraft Foods)– Stock Quote (price that the stock is trading at)– Stock exchange symbol

http://finance.yahoo.com

portfolio

Owns - Owns -