the stock market saving & investing. stock shock: understanding the stock market
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The Stock MarketSaving & Investing
Stock Shock:Understanding the Stock Market
The stock market appears in the news every day
You hear about it any time it reaches a new high or a new low
and you also hear about it daily in statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."
The front of the New York Stock Exchange
In your neighborhood, you have a "supermarket" that sells food. The reason you go the supermarket is because you can go to one place and buy all of the different types of food that you need in one stop -- it's a lot more convenient than driving around to the butcher, the dairy farmer, the baker, etc.
The NYSE is a supermarket for stocks. The NYSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can go to do their buying and selling.
Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange is an example of such a market.
Risk and ReturnReturn and LiquiditySavings accounts have greater liquidity, but in general have a lower rate of return.Certificates of deposit usually have a greater return but liquidity is reduced. Return and RiskInvesting in a friends Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved. Return is the money an investor receives above and beyond the sum of money initially invested.
Other Types of Financial AssetsCertificates of DepositCertificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time.CDs have various terms of maturity, allowing investors to plan for future financial needs. Money Market Mutual FundsMoney market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.
What is the FDIC?Ensures customer deposits if a bank failsInsure losses up to $100,000
What is the Federal Reserve?Influences & controls the money supply
The Flow of Savings and InvestmentsFinancial intermediaries accept funds from savers and make loans to investors.
DiversificationSpread your money around to reduce the risk of losing your entire investmentMutual Funds are the best at this, since the investment can buy shares of up to 120 different companies
Investment ConsiderationsRisk v. Return, High Risk= High ReturnObjectives: College, Retire, age
(1) Hi-Lo. The first column is the highest and lowest prices at which the stock traded in the past year (52 weeks). In our example, the highest price was $47 and the lowest was $37
(2) Company Symbol. The second column is the abbreviated name of the firm issuing the stock. The symbol of the company stands next to the abbreviated name. In our case, it is "Z." This symbol is sometimes referred to as the company's "ticker symbol."
3) Dividends. Dividends are the amount a company pays to its stockholders. The third column is the annual dividend paid per share. In our example, it is $2.30
4) Volume. The fourth column, titled "VOL," lists the volume of shares (in hundreds) that were traded that day. In our example, on August 23, 1999, 33,500 shares were traded by XYZ. Volume may give you an indication on the size of the breadth of the market for a company's shares
5) The YLD column approximates the dividend yield. The dividend yield is the current return on invested capital. We can use it to compare dividend returns for firms that have different stock prices. We derive the dividend yield by dividing the current dividend by the closing stock price. In our case the dividend yield is 5%, calculated as follows:
Dividend $2.30 = 5.43% Price (8th column) $42.375
The sixth column is the price to earnings (P/E) ratio. The P/E ratio compares the price per share to the earnings per share. It shows how much an investor is willing to pay for $1 of current earnings per share (EPS). The P/E ratio is calculated by dividing the price by the earnings per share (EPS). Applying this formula to our example we get the following:
Price (8th column) $42.375 = 10 (the stock is selling for 10X the earning ratio) EPS $4.23 (7) The seventh column, titled Hi-
The seventh column, titled Hi-Lo, represents the highest and lowest prices at which trades were completed during the trading day. In our example, the high was at $43 and the low was at $40-
The eighth column, titled Close, is the last price at which a trade was made during the trading day. In our example it is $42 3/8 ($42.375).