Stocks

Corporations Businesses can be publically or privately

owned

Corporation – a company that is publically owned

stocks or bonds are sold to raise money for the company

Stock Basics Share of stock – a unit of ownership in a

corporation Stockholders – the investors who own the

corporation (own shares) Dividend – a share of the corporation’s profit Capital Gain – profit earned from increase in

price of shares Capital Loss – loss due to decrease in price of

shares

How do stockholders make money? The stockholders’ return includes dividend

payments and capital gains.

Stock prices change when: Large profits -> High dividends -> High

demand for stock -> Increase in price of shares -> = lead to

Trading Stocks Transactions – the sale or purchase of a share Stockbroker – a person who handles the

trading of stocks and bonds between buyer and seller

Commission – fee paid to broker for transaction

Brokerage Firm – a company that specializes in helping people trade stocks and bonds

fees: a % of the total value of the transaction ($50 - $100s)

Trading Stocks (cont.)Investors buy and sell stocks through

A) a stock exchange – orders to trade stocks are sent and carried out

- Ex. NYSE (Wall Street)B) NASDAQ – an electronic system used to trade stocks online

- less expensive and operates for longer hours than an exchange, not limited by space

Types of Corporate StockPreferred Stock:- a nonvoting share that pays a fixed dividend- same dividend unless corporation loses- No vote in how corporation is run

Two Types of Corporate Stock (cont.)Common Stock:- a voting share that does not pay set dividend- Board of Directors

- elected by stockholders to oversee operation of company - sets dividend each year depending on profits and need to reinvest

- stockholders have the right to vote on major decisions

Two Classes of StockBlue Chip Stocks:- shares in large, well-established corporations- Lower risk – no rapid change, steady

sales/profit- Much of the return is from dividends- Ex. Walmart, Coke, Gilette

Two Classes of StockGrowth Stocks:- shares in a corporation that is expected to

experience rapid growth- smaller or younger corporations that produce

new products- higher risk = greater chance of failure- Pays little to no dividends, but potential for

high capital gains- Ex. Microsoft, IBM during late 80’s early 90’s

Factors That May Increase Stock Price

Strong Economic Growth

Low Interest Rates

Low Inflatio

n

Strong Industry

Conditions

Proper Decisions

by the firm

Investors

Expect firm to

perform well

Strong demand for firm’s stock’

Low supply of firm’s stock for sale

Factors That May Decrease Stock Price

Weak Econom

y

High Interest Rates

High Inflation

Weak Industry Conditio

ns

Improper

Decisions by the

Firm

Investors Expect firm to

perform poorly

Weak demand for firm’s stock

Large supply of firm’s shares for sale