stock market investing

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Stock Market Investing Advanced

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Page 1: Stock Market Investing

Stock Market InvestingAdvanced

Page 2: Stock Market Investing

Proverbs 23:5

"Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle."

Page 3: Stock Market Investing

Proverbs 8:10

"Choose my instruction instead of silver, knowledge rather than gold, for wisdom is more precious than rubies, and nothing you desire can compare with her."

Page 4: Stock Market Investing

REVIEW Stocks (shares) are offered to enable a company, that

is in need of long-term financing, to sell stocks in order to exchange for cash. This is the main method of raising business capital. The other is bonds.

When the corporations issue these stocks they are said to be publicly held. An IPO is an initial public offering—the first time stocks are issued.

If you own shares of a company you may be entitled to vote, receive dividends, right to sell, liquidity or residual rights.

Page 5: Stock Market Investing

Stock market investing formula Total Investment Value = (________)(________) + ________ – ________ (# of Shares)(Share price) + dividend – broker fee

Dividend: a set price that the company pays its shareholders (a % of their profits)

Broker Fee: a fee that a stock broker charges for buying or selling stocks

Page 6: Stock Market Investing

Stock Markets To trade stocks (buy

or sell), you must purchase through a stock-broker who works with a stock exchange.

Page 7: Stock Market Investing

Bear vs Bull Market

Page 8: Stock Market Investing

Bear vs Bull Market A market that is RISING is

called a Bull Market; A FALLING market is called a

Bear market. “The markets are bullish on

gold” means people are buying gold stocks because they are increasing steadily.

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Learning the Lingo… In your glossary, define each of the following.

Examples optional Bear vs. Bull market Diversification (as in ‘Diversified portfolio’) Bid (High), Ask (Low) Prices & Volume Floor Trader vs. Stock Broker Blue Chip Stocks vs. Growth Stocks vs. Penny Stocks Small Cap vs. Large Cap Dividend rate vs. Broker Fee Common vs. Preferred stock P/E Ratio Stock splitting Liquidity

Page 12: Stock Market Investing

High-risk strategies: 1) Buy on Margin Buying Stock on Margin Purchase stock like normal, but you borrow the

money to make the purchase Advantages?

Get in on a good deal quickly Don’t need to sell other stock or have money up-front

Disadvantages? Charged interest on loan If share prices goes down, you still owe original amount, plus

interest, plus broker fees!

Page 13: Stock Market Investing

High-risk strategies: 2) Selling Short Selling Short is the opposite of the usual ‘buy

low sell high’ strategy of buying stocks Selling short is a bet by an investor that a

stock will go down in price. Strategy: Look for companies that are about to fall in price.

Advantages? Can make money on stocks going down

Disadvantages? If price goes up, you lose double

Page 14: Stock Market Investing

High-risk strategies: 2) Selling Short So how do short sellers make money? Well, they are betting

that the stock they sell will drop in price. If the stock drops, the short sellers buy back the stock at a lower price and return it to the lender.

For example, if an investor thinks Ben's Bowling Business (BBB) is overvalued at $25 and is going to drop in price, he or she may borrow the stock and sell it for the $25. If the stock goes down to $20, the investor, after buying it off the TSX, and returning it, would make $5 per share. However, if the stock went up to $30, the investor would be at a loss of $5 per share.

Page 15: Stock Market Investing

High-risk strategies: 3) Stock Options A privilege, sold by one party to another, that

gives the buyer the right to buy (call) or sell (put) a stock at a set price within a certain time period .

Advantages? You have the option of buying more stock in the

future at a set price, even if the market changes

Disadvantages? It costs money to buy an option, on top of broker fee

Page 16: Stock Market Investing

High-risk strategies: 3a) Call An option contract giving the owner the right

(but not the obligation) to BUY a stock, at a set price, within a set time period.

Advantages? Ex: XIU trades at $60.00 You can buy a call to

purchase XIU at $62.00 for 3 months. If it goes up to $65.00, you can still buy it at $62.00 & make $3/share

Disadvantages? If the price drops, your money used to buy the call

option is wasted. You wouldn’t want to buy it at $62

Page 17: Stock Market Investing

High-risk strategies: 3b) Put An option contract giving the owner the right

(but not the obligation) to SELL a stock, at a set price, within a set time period. Advantages?

Ex: ACE.B trades at $35.00 You expect it go down, so you buy a put for the right to sell ACE.B at $33.00. If it goes down to $30, you can still sell it for $33!

Disadvantages? If the price goes up, your money used to buy the put

option is wasted. You wouldn’t want to sell it at $33!

Page 18: Stock Market Investing

Graphical example The possible payoff for a holder of a put

option is shown by the following diagram:

Page 19: Stock Market Investing

Strategies when using Options

Purchase a ‘call’ when you expect the stock to go up in price. Wait, and then 1) Exercise the call option. (buy more at a lower price!) 2) Sell the call option to someone

Purchase a ‘put’ when you expect the stock to drop in price. Wait, and then 1) Exercise the put option. (sell at the higher price!) 2) Sell the put option to someone

Page 20: Stock Market Investing