chapter 11 powerpoints - day 3

Financial Financial MarketsMarketsChapter 11 Section 3Chapter 11 Section 3

The Stock MarketThe Stock Market

Financial MarketsFinancial Markets

Objectives:Objectives: 1. Understand the benefits and risks of 1. Understand the benefits and risks of

buying stock.buying stock. 2. Describe how stocks are traded.2. Describe how stocks are traded. 3. Identify how stock performance is 3. Identify how stock performance is

measured.measured. 4. Explain the causes and effects of the 4. Explain the causes and effects of the

Great Depression.Great Depression.


New York Stock Exchange is a tangle of New York Stock Exchange is a tangle of telephones, video monitors, computer telephones, video monitors, computer screens, and frantic activity.screens, and frantic activity.

The wrong decision may mean the The wrong decision may mean the difference between gaining or losing difference between gaining or losing thousands of dollars.thousands of dollars.

This is one of the places where stock is This is one of the places where stock is bought and sold – and futures are made bought and sold – and futures are made and lost.and lost.


Buying StockBuying Stock Stock is issued in portions known as sharesStock is issued in portions known as shares By selling shares, corporations raise money By selling shares, corporations raise money

to start, run, and expand their businesses.to start, run, and expand their businesses. Stocks are also called Stocks are also called Equities – claims of Equities – claims of

ownership in the corporationownership in the corporation..


Benefits of Buying StockBenefits of Buying Stock Dividends – are profits by the corporation Dividends – are profits by the corporation

that are paid to the stockholders.that are paid to the stockholders. They are usually paid four times a year.They are usually paid four times a year. The size of the dividend depends on the amount The size of the dividend depends on the amount

of profit that the corporation made. of profit that the corporation made. Capital Gains – the difference between a Capital Gains – the difference between a

higher selling price and a lower purchasing higher selling price and a lower purchasing price.price. You could also have a capital loss You could also have a capital loss


Types of StockTypes of Stock 1. Income Stock – pays dividends at regular times 1. Income Stock – pays dividends at regular times

each year.each year. 2. Growth Stock – pays no or few dividends. Your 2. Growth Stock – pays no or few dividends. Your

earnings are reinvested into the stockearnings are reinvested into the stock 3. Common Stock3. Common Stock

Voting Owners – help elect board of directorsVoting Owners – help elect board of directors

4. Preferred Stock 4. Preferred Stock Nonvoting owners – receive dividends before owners of Nonvoting owners – receive dividends before owners of

common stock – get their investment back before common common stock – get their investment back before common stockholders if company goes out of business.stockholders if company goes out of business.


Stock Splits Stock Splits Stock sometimes will split from a single Stock sometimes will split from a single

share into more than one share.share into more than one share. It can happen at any time.It can happen at any time. Companies seek to split stock when the Companies seek to split stock when the

prices becomes so high that it discourages prices becomes so high that it discourages buyers from buying the stock.buyers from buying the stock.


Risk of Buying StockRisk of Buying Stock Buying stock is a risky business because the Buying stock is a risky business because the

firm selling the stock may earn lower profits firm selling the stock may earn lower profits than expected, or it may lose money. than expected, or it may lose money.

If this happens, the dividends will be smaller If this happens, the dividends will be smaller than expected or nothing at all. The price of than expected or nothing at all. The price of the stock may decrease and investors may the stock may decrease and investors may choose to sell their stock.choose to sell their stock.


Stocks are MORE risky than bondsStocks are MORE risky than bonds.. When a corporation goes bankrupt, it When a corporation goes bankrupt, it

sells its equipment and land to pay back sells its equipment and land to pay back the owners of the corporation.the owners of the corporation.

Creditors, including Bondholders, are Creditors, including Bondholders, are paid first. Then if there is money left over, paid first. Then if there is money left over, the stockholders get paid.the stockholders get paid.


How are Stocks TradedHow are Stocks Traded Stockbrokers is a person who has links to Stockbrokers is a person who has links to

buyers and sellers of stock.buyers and sellers of stock. Brokerage Firms are the people who Brokerage Firms are the people who

specialize in trading stock.specialize in trading stock. They charge a fee to pay for their costs. They charge a fee to pay for their costs.

Each transaction will cost you a fee. Each transaction will cost you a fee.


Stock ExchangesStock Exchanges This is a market for buying and selling stockThis is a market for buying and selling stock.. They are secondary markets.They are secondary markets. Most newspapers publish the results of daily Most newspapers publish the results of daily

activity on the floor of major stock activity on the floor of major stock exchanges.exchanges.


New York Stock Exchange (NYSE)New York Stock Exchange (NYSE) Most powerful in the country.Most powerful in the country. Began in 1972 – New York City/Wall StreetBegan in 1972 – New York City/Wall Street Sell seats on the floor – these seats allow a Sell seats on the floor – these seats allow a

brokerage firm to come onto the floor to buy brokerage firm to come onto the floor to buy and sell stocks or bonds.and sell stocks or bonds.

Cost is around $ 500,000 to $ 1 million/seatCost is around $ 500,000 to $ 1 million/seat Handle only the most established companiesHandle only the most established companies


Over-the-Counter Market (OTC)Over-the-Counter Market (OTC) Electronic marketplace for stocks and bonds.Electronic marketplace for stocks and bonds. Investors may buy directly from a dealer or from Investors may buy directly from a dealer or from

a broker.a broker.

NASDAQNASDAQ – National Association of – National Association of Securities Dealers Automated QuotationsSecurities Dealers Automated Quotations Created in 1971.Created in 1971. Second largest securities market in the US.Second largest securities market in the US. Use Computer terminals to do the trading. Use Computer terminals to do the trading.


Futures – are contracts to buy or sell Futures – are contracts to buy or sell commodities at a specific date in the commodities at a specific date in the future at a price specified today.future at a price specified today.

Mostly for grain or livestock marketsMostly for grain or livestock markets Works like this…. A buyer and seller agree on a Works like this…. A buyer and seller agree on a

price ($ 4.50/bushel for soybeans) six or nine price ($ 4.50/bushel for soybeans) six or nine months down the road. Buyer pays a small fee months down the road. Buyer pays a small fee today and the rest when the grain is delivered to today and the rest when the grain is delivered to him).him).


Options – contracts that give investors Options – contracts that give investors the choice to buy or sell stock and other the choice to buy or sell stock and other financial assets.financial assets.

Call Option – the option to buy shares of Call Option – the option to buy shares of stock at a specified time in the future.stock at a specified time in the future.

Put Option – the option to sell shares of Put Option – the option to sell shares of stock at a specified time in the future.stock at a specified time in the future.

Each option comes with a fee that has to Each option comes with a fee that has to be paid to the other party.be paid to the other party.


Call Option may cost you $ 10/share Call Option may cost you $ 10/share today. It gives you the right, but not the today. It gives you the right, but not the obligation, to purchase a certain stock at obligation, to purchase a certain stock at a price. If the price of stock went up, you a price. If the price of stock went up, you get to buy it at the agreed upon price. If get to buy it at the agreed upon price. If the price goes down, you can use your the price goes down, you can use your call option and cancel the contract.call option and cancel the contract.


Put Option is for the seller.Put Option is for the seller. He pays a $ 5 for the right to sell a He pays a $ 5 for the right to sell a

particular stock that you do not own at a particular stock that you do not own at a price that had been determined. If the price that had been determined. If the price of the stock falls to say $ 40 price of the stock falls to say $ 40 (instead of the $ 50), you can make the (instead of the $ 50), you can make the buyer pay the original price of $50/share. buyer pay the original price of $50/share. IF the price of the shares go up to $ 60 – IF the price of the shares go up to $ 60 – cancel the contract.cancel the contract.


Day-trading – people who buy stock and Day-trading – people who buy stock and try to predict the changes and then sell try to predict the changes and then sell that stock before the end of the day.that stock before the end of the day.

These people usually make dozens of These people usually make dozens of trades a day.trades a day.


Stock Performance Stock Performance Bull MarketBull Market – a steady rise in the stock – a steady rise in the stock

market over a period of time.market over a period of time. Bear MarketBear Market – a steady decline in the stock – a steady decline in the stock

market over a period of time.market over a period of time. The Dow (The Dow Jones Industrial Average) The Dow (The Dow Jones Industrial Average)

Been around since 1896Been around since 1896 They take the 30 most representative companies They take the 30 most representative companies

in each industry and come up with an index # in each industry and come up with an index #


S & P 500 (Standard & Poor 500) S & P 500 (Standard & Poor 500) Look at 500 different companies as a Look at 500 different companies as a

measure of the overall stock market measure of the overall stock market performance.performance.

Come up with an index #Come up with an index #


Great Crash of 1929Great Crash of 1929 Black Tuesday – October 29,1929Black Tuesday – October 29,1929 Causes of the CrashCauses of the Crash

Stock Market had been soaring in the 1920sStock Market had been soaring in the 1920s Few companies and families held majority of the wealth in Few companies and families held majority of the wealth in

country.country. Other people in country were suffering ie. FarmersOther people in country were suffering ie. Farmers Manufacturers producing more goods than consumers were Manufacturers producing more goods than consumers were

using.using. These surpluses led to price decreases These surpluses led to price decreases Investor debt was pilling upInvestor debt was pilling up Speculation was popular Speculation was popular – making high-risk investments with – making high-risk investments with

borrowed money in hopes of getting a big returnborrowed money in hopes of getting a big return


Buying on MarginBuying on Margin – this was done to attract less-– this was done to attract less-wealthy investors. You paid a portion of the stock wealthy investors. You paid a portion of the stock price when you bought it. You would borrow the price when you bought it. You would borrow the rest from the brokerage firm. Paid the difference rest from the brokerage firm. Paid the difference when you sold.when you sold.

September Peak (3September Peak (3rdrd) – prices at an all time high) – prices at an all time high Then prices started to fall.Then prices started to fall. Brokers demanded repayment for the borrowed Brokers demanded repayment for the borrowed

money people had borrowed for the sale of their money people had borrowed for the sale of their stock.stock.

By October 29By October 29thth – everything crashed – everything crashed


Aftermath of the crash – start of The Great Aftermath of the crash – start of The Great Depression.Depression.

After the crash – many people saw the After the crash – many people saw the stock market as too risky of an investment.stock market as too risky of an investment.

Today stock prices have been on the rise Today stock prices have been on the rise since the 1990s (on average).since the 1990s (on average).

Worse time was right after 911 when Worse time was right after 911 when prices dropped considerably prices dropped considerably

chapter 11 powerpoints - day 3

Business

stock stock

stock buying stock

price of stock

stock dividends

shares of stock

trading stock

sellers of stock

certain stock