Introduction to Stocks

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Introduction to Stocks
Spring 2008 Economics 98 / 198 DeCal

• Basics of Investing I

• www.ocf.berkeley.edu/jml/decal

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Schedule Today

• Administrative Issues
• Current Events
• Lecture content Basics of Investing
• What is a stock?
• How are they traded?
• What are brokerages?
• Different types of orders
• What is the market?
• Terminology
• Learning how to use the simulation IBD
• Assignments / Readings

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Administrative Issues

• Attendance Sign-In
• Name Tags
• Enrollment
• Emails
• Webpage
• Syllabus Review
• News Presentation Sign Ups
• Investors Business Daily Access

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Current Events
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Current Events

• Troubled / volatile markets
• Damages from sub-prime mortgages and the housing
  sector
• Fear of risk of recession
• Weak job reports
• Fed (Federal Reserve) meeting next week
• Rate cuts?
• Apple releases new lines of iPod

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Current Events
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NASDAQ
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SP 500
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• Lecture Content

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What is a stock?

• Common stock most common type
• Gives you a share of ownership of a publicly
  traded company
• Entitled to a portion of profits dividends
• Stock ownership claim on assets and earnings
• Also something called preferred stock

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What is a stock?

• Ticker symbols
• Set of letters that represent a security traded
  on an exchange
• Ex. MSFT, GS, AAPL, MA, BUD, LUV
• Stock quotes
• List of prices for a stock at a particular point
  during the trading day
• Stock tickers
• What do those green and red numbers mean?

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Different Types of Stock

• Preferred Stock
• No voting rights to company issues
• Issued fixed dividends forever main form of
  return
• Common Stock
• Majority of stock we see and hear about in the
  news
• Ownership of the company
• Entitled to portion of the earnings
• Earn returns mainly through capital gains
• What are capital gains?
• Increase in asset value relative to the purchases
  price
• Not realized until asset is actually sold

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Stocks vs. Bonds

• Stocks are equity
• Generally considered riskier
• Quite possible to lose a significant portion, if
  not all, of your money
• Potential for much higher returns
• Bonds are debt
• Guaranteed a fixed return
• Have a higher claim than stockholders
• What does this mean?

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Dividend Debate

• Distribution of a portion of a company's earnings
  to its shareholders (usually cash)

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What Can Cause Stock Prices to Change?
Supply and Demand!(What affects supply / demand
of a stock?)
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Two Markets

• Primary Market market in which investors have
  first opportunity to buy newly issued shares
• Initial Public Offering (IPO)
• First time that company offers its shares to
  public markets (securities bought directly from
  company)
• Where private companies become public
• Secondary Market investors trade already-issued
  shares of companies with each other
• Ie. The stock market
• Trading of a companys stock DOES NOT DIRECTLY
  involve the company financially

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How Stocks Are Traded

• Major exchanges
• Lists stocks (and other securities), sets
  policies for how stocks are traded
• New York Stock Exchange (NYSE)
• American Stock Exchange (AMEX)
• National Association of Securities Dealers
  Automated Quotation
• Only publicly traded
• companies are listed

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Market Indices (Index)

• Definition
• Aggregate value of combining several stocks
  together and intended to represent entire or
  portion of the stock market
• SP 500
• 500 stocks chosen by Standard Poor to represent
  US stock market
• NASDAQ Composite
• Dow Jones Industrial Average
• 30 most significant stocks traded
• SP 600 Small-Cap
• Russell 3000
• 3000 of the largest stocks in the US

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Stocks Markets Animals

• Bull Market
• When everything in the market is going great and
  stocks are generally heading upwards
• Bear Market
• When everything is NOT GOOD and stocks are
  generally headed
• NOTE Nothing lasts forever! Good times and bad
  times will end at some point
• Other animal terms pigs, chickens

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Brokerages

• Need a medium to trade through this is where
  brokerages come in
• Cash vs. margin account
• Choosing a broker
• full service vs. discount
• Fees (Commission)
• Services
• Minimum balance

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Opening an Account

• Not a hard process- most of it just some
  paperwork and mail
• Sign-up online and download forms
• Mail checks, forms, and copy of ID
• Accounts created within a couple of days
• Cash accounts usually never turned down
• Margin accounts might be a problem if you have
  pretty bad credit history
• To start investing, wont need much else other
  than a computer, some money, and investing
  know-how

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Brokerages

• Some links for brokerage comparisons
• Find something that works for what YOU need
• No one broker that is best for all investors
• http//www.investingonline.org/gso/broker_ratings.
  html
• http//www.consumersearch.com/www/internet/online-
  brokers/reviews.html
• http//www.stockbrokerguide.com/

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Different types of Orders

• Market Order
• Limit Order
• An order to buy or sell a set number of shares at
  specified price of better. Limit orders usually
  cost more, but useful for getting specified
  price. By better I mean, lower.
• Stop Order
• An order placed for a security for when the price
  surpasses a particular point, which helps buy or
  sell at a particular price. Limiting loss or
  locking profits. Many people use this during
  vacations if they cant use it.

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Different Types of Orders

• Stop Limit Order
• Executed at a specified price (or better) after a
  given stop price has been reached. Order becomes
  then a limit order to buy (or sell) at the limit
  price or better
• Precision purposes
• Good Until Cancelled (GTC)
• Good Until End of Day

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Things to Internalize

• Learn the basics!
• Need to know what basic terms mean
• Articles should help you
• Advantages of starting young
• Useful resources for stock tutorials
• www.investorwords.com
• www.investopedia.com
• www.fool.com

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Homework / Reading

• Set up your account
• Online articles (Course website)
• The Five Biggest Stock Market Myths
• Getting Started
• Brokers and Online Trading
• Stocks
• Get started on Investing 101

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IBD SubscriptionInvestopedia Simulation