Stock Market Investing

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Stock Market Investing

• Advanced

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Proverbs 235

• "Cast but a glance at riches, and they are
  gone, for they will surely sprout wings and fly
  off to the sky like an eagle."

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Proverbs 810

• "Choose my instruction instead of silver,
  knowledge rather than gold, for wisdom is more
  precious than rubies, and nothing you desire can
  compare with her."

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REVIEW

• Stocks (shares) are offered to enable a company,
  that is in need of long-term financing, to sell
  stocks in order to exchange for cash. This is the
  main method of raising business capital. The
  other is bonds.
• When the corporations issue these stocks they are
  said to be publicly held. An IPO is an initial
  public offeringthe first time stocks are issued.
• If you own shares of a company you may be
  entitled to vote, receive dividends, right to
  sell, liquidity or residual rights.

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Stock market investing formula

• Total Investment Value
• (________)(________) ________ ________
• ( of Shares)(Share price) dividend broker
  fee
• Dividend a set price that the company pays its
  shareholders (a of their profits)
• Broker Fee a fee that a stock broker charges for
  buying or selling stocks

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Stock Markets

• To trade stocks (buy or sell), you must purchase
  through a stock-broker who works with a stock
  exchange.

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Bear vs Bull Market
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Bear vs Bull Market

• A market that is RISING is called a Bull Market
• A FALLING market is called a Bear market.
• The markets are bullish on gold means people
  are buying gold stocks because they are
  increasing steadily.

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Learning the Lingo

• In your glossary, define each of the following.
• Examples optional
• Bear vs. Bull market
• Diversification (as in Diversified portfolio)
• Bid (High), Ask (Low) Prices Volume
• Floor Trader vs. Stock Broker
• Blue Chip Stocks vs. Growth Stocks vs. Penny
  Stocks
• Small Cap vs. Large Cap
• Dividend rate vs. Broker Fee
• Common vs. Preferred stock
• P/E Ratio
• Stock splitting
• Liquidity

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High-risk strategies 1) Buy on Margin

• Buying Stock on Margin
• Purchase stock like normal, but you borrow the
  money to make the purchase
• Advantages?
• Get in on a good deal quickly
• Dont need to sell other stock or have money
  up-front
• Disadvantages?
• Charged interest on loan
• If share prices goes down, you still owe original
  amount, plus interest, plus broker fees!

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High-risk strategies 2) Selling Short

• Selling Short is the opposite of the usual buy
  low sell high strategy of buying stocks
• Selling short is a bet by an investor that a
  stock will go down in price. Strategy Look for
  companies that are about to fall in price.
• Advantages?
• Can make money on stocks going down
• Disadvantages?
• If price goes up, you lose double

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High-risk strategies 2) Selling Short

• So how do short sellers make money? Well, they
  are betting that the stock they sell will drop in
  price. If the stock drops, the short sellers buy
  back the stock at a lower price and return it to
  the lender. For example, if an investor thinks
  Ben's Bowling Business (BBB) is overvalued at 25
  and is going to drop in price, he or she may
  borrow the stock and sell it for the 25. If the
  stock goes down to 20, the investor, after
  buying it off the TSX, and returning it, would
  make 5 per share. However, if the stock went up
  to 30, the investor would be at a loss of 5 per
  share.

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High-risk strategies 3) Stock Options

• A privilege, sold by one party to another, that
  gives the buyer the right to buy (call) or sell
  (put) a stock at a set price within a certain
  time period .
• Advantages?
• You have the option of buying more stock in the
  future at a set price, even if the market changes
• Disadvantages?
• It costs money to buy an option, on top of broker
  fee

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High-risk strategies 3a) Call

• An option contract giving the owner the right
  (but not the obligation) to BUY a stock, at a set
  price, within a set time period.
• Advantages?
• Ex XIU trades at 60.00 You can buy a call to
  purchase XIU at 62.00 for 3 months. If it goes
  up to 65.00, you can still buy it at 62.00
  make 3/share
• Disadvantages?
• If the price drops, your money used to buy the
  call option is wasted. You wouldnt want to buy
  it at 62

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High-risk strategies 3b) Put

• An option contract giving the owner the right
  (but not the obligation) to SELL a stock, at a
  set price, within a set time period.
• Advantages?
• Ex ACE.B trades at 35.00 You expect it go
  down, so you buy a put for the right to sell
  ACE.B at 33.00. If it goes down to 30, you can
  still sell it for 33!
• Disadvantages?
• If the price goes up, your money used to buy the
  put option is wasted. You wouldnt want to sell
  it at 33!

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Graphical example

• The possible payoff for a holder of a put option
  is shown by the following diagram

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Strategies when using Options

• Purchase a call when you expect the stock to go
  up in price. Wait, and then
• 1) Exercise the call option. (buy more at a lower
  price!)
• 2) Sell the call option to someone
• Purchase a put when you expect the stock to
  drop in price. Wait, and then
• 1) Exercise the put option. (sell at the higher
  price!)
• 2) Sell the put option to someone

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