The Stock Market

What you need to know to begin investing.

How Do Companies Raise Money? Form a partnership Borrow Reinvest profits Issue bonds Sell stocks

We’ll explore selling how businesses sell stocks to raise money

What Is Stock?

Stock represents part ownership in a company

Anyone who owns stock is called a stockholder or shareholder

Companies sell stock to raise money People buy stock hoping the value

will rise and they will make a profit

Corporate Structure Businesses Owners and investors are protected

from any financial claims Financial risk would be limited to the

amount of money invested If the company fails the investors

are not personally responsible for that debt

Who Runs the Corporations? Board of Directors

They oversee all the corporation’s business

They must be elected The Board will vote to “go public”

Sell shares of stock to the public in order to raise money for company expansion

Does not run the day-to-day activities—elects a president and other officers

How Are Stocks Issued?

There are 2 steps to issuing stocks They are initially issued in the primary market After the initial sale, they are thereafter sold on

the secondary market An investment banker will be hired to

study the market and set a fair trading price The investment banker buys all the stock and

resells it to the public (underwriting)

The Secondary Market

The New York Stock Exchange (NYSE) & the American Exchange

Also includes some Regional Stock Exchanges and the Over-the-Counter Market

This the the stock exchange where stocks are bought and sold They do not own stocks They do not influence prices They only function as an auction Buyers & sellers determine prices

Getting Ready to Trade

A company must file a registration statement with the Securities and Exchange Commission This statement contains hundreds of details

about the company’s financial condition A prospectus will be issued which also contains

financial information about the business and is given to all potential investors

There will be an initial public offering (IPO)

What Is an IPO?

The company’s way of telling the world they are ready to sell stock.

The price will be fixed for the IPO After this first sale, the price will fluctuate

depending on supply and demand The company will advertise it’s IPO by

advertising in the Wall Street Journal or other financial papers

Tombstones

These ads are called “Tombstones” Some say because of

the black borders and heavy dark ink they resemble graveyard tombstones

Others say the way the words are arranged are like the format on tombstones

Stock Ownership

Even if you purchased only 1 share of stock in a company, you own part of everything the company owns

To document ownership companies issue a stock certificate to each shareholder which shows the number of shares owned by the person

Stocks may also be held by institutions

There Are Two Kinds of Stock Common

Costs less Do not get preferential treatment

Preferred Stock Costs more Preferential treatment

Common Stock

Owners share profit (if company is profitable) Gain income through dividends and

dividend increases Benefit as the stock increases in price

(capital appreciation) Do not get preferential treatment

like preferred stockholders

Preferred Stock

May be issued after common stock is issued Receive dividends before common

stockholders If company is forced to liquidate preferred

shareholders receive their investment back before common shareholders

Costs more than common stock Get a fixed dividend

Owners Have the Right to Vote Can vote for Board of Directors Annual meetings held where shareholders

vote on issues Any shareholder can make suggestions and ask

questions SEC requires an Annual Report be issued

once per year Yearly record of company’s growth Financial report card

Where Do the Profits Go?

Dividends are paid to shareholders Board decides how much An equal dividend is paid for each share Some corporations don’t pay dividends If dividends are consistently paid the

stock is known as “income stock” Income stocks provide a steady cash

payment to shareholders

Where Do the Profits Go?

Corporations reinvest the money This is called retained money Used to finance expansion and growth Reduces the amount needed to borrow

from a bank Called “internal financing” because the

money comes from inside the company

Stock Splits

Another way to reward stockholders (besides dividends)

Another reason for a stock split would be to reduce the price of the stock

Can split 2:1 or 3:1 or other amounts A stock worth $60 split 2:1 results in

two shares each worth $30

How Did the Stock Market Get Started?

We understand what stocks are and why a company would want to incorporate

How did the stock exchange come into being?