WHAT IS STOCK?

1
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!

2
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

3

• 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

4
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)

5
HOW DOES ONE BUY STOCK?

• Stocks are bought through a stockbroker
• Brokers charge a fee () per transaction
• Two ways to earn profits with stocks
• 1. Dividends quarterly payments to stockholders
  from companys profits.
• 2. Capital Gains selling shares
• at a higher price than you bought
• them.

6
What do these 30 companies have in common?

• 3M
• American Express
• ATT
• 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
• McDonalds
• Merck
• Microsoft
• Nike
• Pfizer
• Proctor Gamble
• United Health Group
• United Technologies
• Verizon Communications
• Visa
• Wal-Mart
• Walt Disney

7
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 includedbut since 1896 it does have a
  strong track record
• Other prominent indexes include the S P 500 and
  the NASDAQ Composite

8
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 cant vote, but get
  paid before common stockholders

9
CHARACTERISTICS OF STOCK(abbreviations youll
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
• Days range high and low price of stock for the
  day
•  

10
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 companys 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)

11
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

12
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

13
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 _at_ 50 per share become 200 shares
  _at_ 25 per share
• After a stock split share prices often rise

14
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

15
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)