Investing in StocksPersonal FinanceHolmen High School

ObjectivesUnderstand the stock market's

function for both owners and investors

Understand what drives prices up and down

Recognize and apply the concepts of◦Earnings Per Share (EPS)◦Price/Earnings Ratio (P/E) ◦Factoring growth in the valuation of a

company

Meet VelmaVelma owns a small

cupcake shop

Velma makes a profit of $5,000 a year

Business is growing, but she needs cash to expand

Velma’s OptionsLoan from a Bank

Issue Bonds◦Borrow from

Investors

Find Private Investors

Find Public Investors

Velma and DaphneVelma needs to

borrow moneyDaphne has money

to lend

Velma and DaphneVelma Gets a Loan

from a Bank

Pays 7% Business Loan

Daphne Puts Her Money in Checking Account or CD

Earns 1%-3% in Interest

7% 2%

Velma and DaphneVelma Issue

Bonds

Pays 6% to Investors

Daphne Invests in a Bond

Receives 6% Interest

Velma and DaphneVelma seeks

private investors

FamilyFriendsBusiness People

Daphne wants to buy 50% of the company

Velma’s Company makes $5,000 a year

Daphne wants half the profit ($2,500)

How Much Should Daphne Pay?

If Daphne wants 50% of the business, how much should she pay Velma?

What is Velma’s business worth?

Shark Tank

Issuing Stock- Going Public

Allows public to invest in Velma’s company

Issue shares to investors

Profits are shared among investors

Public vs Private

Private Public

Does not need to disclose◦ Revenue◦ Profits◦ Expenses◦ Salary

Kwik TripMenardsFestival

Need to disclose◦ Revenue◦ Profits◦ Expenses◦ Salary

BPHome DepotPublix

What is the Stock Market?Just like a farmer’s

market

Buy and sell shares of stock in public companies

Companies recognized by Ticker Symbols◦SBUX WMT◦MCD MSFT

Benefits of the Stock MarketOwners Raise

Money

Investors become Owners

Allows businesses to grow and expand

Why Go PublicVelma’s

business has grown to 10 stores

Wishes to expand to 200 stores

Needs to raise money to expand

Velma’s CupcakesValue determined by

Wall Street

Issues 500,000 shares at $5/share

Raises $2.5 million to expand her business

Ticker Symbol: VCUP

What causes the price to change?After six months:

Demand for Cupcakes is High

Sales are GrowingProfits are Rising

VCUP Price:$8.00

What causes the Price to Change?After 12 Months:

Demand for Cupcakes is Low

Economy is BadSales are SlowingProfits are Falling

VCUP Price$3.00

What causes the Price to Change?Supply and Demand

High Demand-Low Supply- Price Rises

Low Demand-High Supply- Price Falls

Total ProfitQuarter1 $200,000Quarter 2 $350,000Quarter 3 $150,000Quarter 4 $300,000Total Profit $1,000,000Number of Shares

500,000

Earnings Per ShareQuarter Profit Shares EPS

Quarter 1 $200,000 500,000 $.40

Quarter 2 $350,000 500,000 $.70

Quarter 3 $150,000 500,000 $.30

Quarter 4 $300,000 500,000 $.60

Year 1 $1,000,000

500,000 $2.00

What’s a Fair Price?Is $8.00

Expensive for VCUP

Is $3.00 Cheap for VCUP

We don’t know until we look at the P/E Ratio

Price to Earnings RatioPrice- Current Share

Price

Earnings- Earnings Per Share

VCUP Price- $8.00ESP- $2.00

P/E 4

Price to Earnings RatioNot represented in

dollars

Lower the better

High numbers mean a stock could be expensive

Look at Competitors

Price to EarningsPepsi P/E 20Coke P/E 15

Coke is a better value because the P/E ratio is lower

Ways to Profit from StockCapital GainBuy 1,000 Shares of MSFT @ $20Sell 1,000 Shares of MSFT @ $35

Profit- 1,000 x $15= $15,000DividendsOwn 200 Shares of Nike. Nike

pays a dividend of $3/share.Profit- 200 x $3= $600

Question 1Jerry's Juice Company has 500,000 shares outstanding Listed below are the quarterly EPS for the company.Q1 $.60Q2 $.40Q3 $.75Q4 $.25

What are the total earnings for the past year? A. $125,000B. $1,000,000 C. $2.00 D. $250,000

Question 2All other things being equal, it is best to look for a company with a low P/E.

TrueFalse

Question 3Name one thing that could cause stock prices to fall.

Question 4Calculate the EPS from the following information:

Total Profit: $3,000,000Total # of Shares: 1,000,000

Question 5What is one difference between a privately and publically owned company?