WHAT IS STOCK?

Stock represents ownership in a corporation (unlike bonds, which represent debt)

Stock, also called equity, is bought and sold in portions called shares

Shares represent a percentage of ownership* Most major companies have millions/billions of

shares, so buying 25, 50, 100 shares gives you a very limited slice of the pie!

WHY A STOCK MARKET?

Like other types of markets, the stock market links buyers and sellers

The stock market provides investment opportunities for buyers of stock

The stock market provides businesses with the opportunity to raise capital

Initial Public Offering (IPO): when a company sells stock in itself for the first time

Going Public: term used when a company is planning an IPO

STOCK EXCHANGES

New York Stock Exchange (NYSE)

Oldest, largest, and most influential exchange in U.S.

In general, handles largest and most influential

companies Trading

takes

place on

its floor

NASDAQ Created in 1971 Trading is done

electronically (no face-to-face meeting of representatives of the buyer and seller)

HOW DOES ONE BUY STOCK? Stocks are bought through a stockbroker Brokers charge a fee (%) per transactionTwo ways to earn profits with stocks:1. Dividends – quarterly payments to stockholders from

company’s profits.2. Capital Gains – selling shares at a higher price than you bought them.

What do these 30 companies have in common?3M

American Express

AT&T

Boeing

Caterpillar

Chevron

Cisco Systems

Coca Cola

Dupont

Exxon Mobil

General Electric

Goldman Sachs

Hewlett-Packard

Home Depot

IBM

Intel

Johnson & Johnson

JP Morgan Chase

McDonald’s

Merck

Microsoft

Nike

Pfizer

Proctor & Gamble

United Health Group

United Technologies

Verizon Communications

Visa

Wal-Mart

Walt Disney

THE DOW

The Dow Jones Industrial Average tracks the price changes of 30 of the largest companies in the economy in various industries

It can indicate a “bull market” (average price of stock rising) or a “bear market” (average price dropping)

Using a few representative stocks, it is supposed to measure the market and mirror the economy

Critics of the Dow claim it is not accurate due to only 30 of the strongest (“blue-chip”) stocks being included…but since 1896 it does have a strong track record

Other prominent indexes include the S & P 500 and the NASDAQ Composite

STOCK CAN BE CLASSIFIED BY WHETHER OR NOT IT…PAYS DIVIDENDS… Income Stock: pays

dividends (payments made quarterly – every three months)

Growth Stock: pays no dividends because company reinvests $$$ into itself

…OR GIVES STOCK-HOLDERS A VOTE ON COMPANY POLICY

Common Stock: investors are voting owners

Preferred Stock: investors can’t vote, but get paid before common stockholders

CHARACTERISTICS OF STOCK(abbreviations you’ll find on a stock report)

Ticker symbol: 3-letter company abbreviation Last Trade Price: price at that moment Price change (% price change): amount price has

changed during day (% price change for the day) Previous close: price of stock at end of trading day

before Open: price of stock at beginning of trading day Day’s range: high and low price of stock for the day

 

STOCK CHARACTERISTICS(continued) 52-week range: high and low price of stock for the year Volume: number of shares traded that day Market Capitalization: total value of all shares of that

company’s stock Earnings per share (EPS): annual profits divided by total

# of shares of stock in company Dividend (yield%): annual dividend per share (dividend

divided by share price – use to compare with other investments)

BUYING ON MARGIN (Margin Buying)

Buying on margin is buying stock on credit Investors must start an account with a

minimum balance of $2,000 (they can put in more if they want)

Investors can now borrow as much as the $ amount in their account

Ex.: with $2,000 in their account, investors have $4,000 in purchasing power

BUYING ON MARGIN (example) If you open a margin account with $5,000, you can

purchase $10,000 worth of stock If you buy 500 shares of Coca Cola at $20/share, you

have $5,000 in equity (the part that is yours) and you owe $5,000 to the broker

If the stock increases to $30 (now worth $15,000), you now have $10,000 in equity, while still owing $5,000

If the stock decreases to $10/share (now worth $5,000), you now have no equity, but still owe $5,000

STOCK SPLITS Splits are initiated if a company thinks that its share

price is too high to attract investors Splits occur when a single share is divided up into

more than one share (thus doubling shares in a 2-for-1 split)

At the same time, the share price is cut in half (thus keeping the total value the same as before the split)

Ex: 100 shares @ $50 per share become 200 shares @ $25 per share

After a stock split share prices often rise

STOCK SPLITS

Total Value: 100 x $600 = $60,000

#1.

A. 200

B. $300

C. 200 x 300 = $60,000

D. $320

E. 200 x 320 = $64,000

#2

A. 400

B. $160

C. 400 x 160 = $64,000

D. $180

E. 400 x 180 = $72,000

MUTUAL FUNDS

Mutual funds: professionally managed pools of investors’ money invested according to predetermined investment strategies

“professionally managed”: the mutual fund company makes daily decisions about buying/selling in the fund

“pools of investors’ money”: investors buy individual shares in the funds

“predetermined investment strategies”: each mutual fund focuses on one or more types of stocks (ex: telecommunication stocks), bonds (ex: municipal), or various combinations (ex: “balanced fund” = 60% stocks, 40% bonds)

Advantages of mutual funds:1. instant diversification (one fund can contain hundreds of stocks, bonds, etc.)2. easy to buy and sell (liquid)