FAMILY ECONOMICS & FINANCIAL EDUCATION

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 1Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

The Language of the Stock Market

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Why Learn About Stocks

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

The stock market is the core of America’s economic system Stock is a share of ownership in the assets and

earnings of a company Stock market is a general term used to describe all

transactions involving the buying and selling of stocks by a company

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Why Companies Issue Stock

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

When a company would like to grow, it issues stocks to raise funds and pay for ongoing

business activitiesIt is popular because:

The company does not have to repay the money Paying dividends (profit) is optional

Dividends are distributions of earnings paid to stockholders

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Risk vs. Return

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

On average, stocks have a high rate of return The increase or decrease in the original purchase

price of an investment

Higher rate of return = greater risk Uncertainty about the outcome of an investment

Stocks provide portfolio diversification Money invested in a variety of investment tools

COMMON STOCKVS.

PREFERRED STOCK

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

2 Basic Types of Stock

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Common Stock

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Common stock – shares or units of ownership in a public corporation Most basic form of ownership One vote per share owned to determine

company’s board of directorsWays the stock value can change

The dollar value increases or decreases A merger of two companies Dividends are paid

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Preferred Stock

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Preferred stock – shares which pay fixed dividends and have priority over common stock Less risk than common stock No voting rights Dividends are stated as a percentage known as the

par value Fixed value stated on the stock certificate

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Stock Classifications

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Stock Classifications

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Seven basic classifications Growth, Income, Value, Cyclical, Countercyclical,

Speculative, Blue Chip

Some stocks can be classified into more than one category

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Researching A Stock

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Book Value

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Book value is the net worth of a companyAssets-Liabilities = Book value

Information can be found in the company’s annual report

Indicates what would happen if a company’s assets were sold, debts paid, and proceeds distributed to stockholders

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Earnings per Share

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

How much income a company has available to pay in dividends and reinvest as retained earnings on a per share basis

After tax annual earnings= Earnings per share

Total number of shares of common stock

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Price/Earnings Ratio

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Price/earnings ratio is the relationship between the price of one share of stock and the annual earnings of the company (P/E ratio)

Price per share = P/E ratio

Earnings per share of stock

Most widely used critical measure of a stock’s price

Represents how much an investor is willing to pay for each dollar of a company’s earnings

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P/E Ratio Continued

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Most companies have between a 5-25 P/E ratio 7-10 P/E ratios are financially successful companies 15-25 P/E ratios are rapidly growing companies 40-50 P/E ratios are speculative companies

Lower P/E stocks pay higher dividends and have less risk, lower prices, and slow growth

High P/E ratios indicate the firm is expected to have a lot of growth in the future