An Introduction to Stocks

1
An Introduction to Stocks

2
Stock Basics(What are stocks?)
3
What is the stock market?

• Refers to buying and selling of shares, or stock,
  in all kinds of companies, both in the United
  States and around the world.
• Anyone who owns purchases stock in a company is
  its stockholder (also called shareholder)

4
Stock Market Basics

• Stock Certificates
• A printed legal document showing ownership.
• In our digital age they have become less common

5
What is a stock?

• Stock symbols
• Set of letters that represent a security traded
  on an exchange
• Ex. MSFT, GS, AAPL, MA, BUD, LUV

6
How to Make Money on Stocks

• Dividends
• money given to stockholders by the company from
  company profits
• NOT ALL STOCKS PAY DIVIDENDS
• Stock Sell
• Stock changes value based on what people are
  willing to pay for the stock
• You can sell the stock through a brokerage firm
  and collect the cash value
• You can sell the stock and buy other stocks in
  its place (called a trade)

7
Stock Types

• Preferred Stock ownership in a corporation that
  gives you the first right to dividends
• Common Stock basic form of ownership of a
  corporation

8
Stock Market Terms

• Market Value the price at which a share of
  stock can be bought and sold in the stock market
• Stockbroker a licensed specialist in buying and
  selling stocks and bonds

9
Stock Exchange

• Business organization that accommodates the
  buying and selling of securities Exchanges
• Lists stocks and sets policies for how stocks are
  traded
• Major exchanges
• New York Stock Exchange (NYSE)
• American Stock Exchange (AMEX)
• NASDAQ

10
The Indices (index)

• Imaginary collection of stocks that is supposed
  to represent the stock market
• SP 500
• (500 largest companies on US stock Market)
• Dow Jones
• (30 most significant stocks in the stock market)
• Nasdaq Composite
• (index representing all the stocks on the
  Nasdaq(tech))

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What Causes Stock Prices to Change?

• Supply and Demand
• Earnings (expectations)
• Sentiments, attitudes, sense of greed
• Economic Indicators
• Follow the leader
• Manipulation
• LOTS of different theories

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Economic Factors!

• Inflation/Recession Higher prices can result in
  lower spending by consumers, reducing company
  profits.
• Interest Rates As the cost of money changes,
  company profits can increase or decline.
• Consumer Spending Profits of companies that
  sell products and services to households are
  directly affected by buying habits.
• Employment As people obtain or lose jobs, the
  amount of money they have for spending will
  affect company profits.

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Why invest? Why stocks?(What about my savings
account?)
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Why Invest?

• Opportunity to Make Money!!!
• Short Term vs. Long Term Goals
• Long Term
• Buying a new house, car, etc.
• Short Term
• Buying food, gasoline, books, clothes, etc.

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Determining Your Financial Goals

• Investing is a long car trip. There needs to be a
  lot of planning that goes into it.
• How much money do you want to make? By when?
• Will you need to live off your investments in
  future years?
• What will you be using your money for?
• Having a good understanding of yourself will
  allow you to align your risk tolerance with
  various strategies
• Think about your risk tolerance, time horizons
  for your investments, and your time commitment

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Why the Stock Market?
1976-2000 1976-2000
Investment Average Annual Return Average Annual Return
SP 500 SP 500 11
Small-Company Stocks Small-Company Stocks 12
U.S. Treasury Bonds (short-term) U.S. Treasury Bonds (short-term) 4
U.S. Treasury Bonds (long-term) U.S. Treasury Bonds (long-term) 5
Savings Interest Rate Savings Interest Rate 1-3
Inflation Inflation 2-3
Source The Motley Fool Guide How to Start Investing Source The Motley Fool Guide How to Start Investing Source The Motley Fool Guide How to Start Investing
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You can make good money (But dont forget, you
can lose a lot of it too)
NASDAQ (1999-2001)
50 loss in 1 year
136 Gain in less than 1 year
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Apple Computers (750 in 24 months)
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Urban Outfitters (330 in 23 months)
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Advantages of Stock Market Investing

• You can choose companies in which you want to
  invest money
• Many companies pay a dividend
• Opportunity to make money

• You can track your investment growth on the
  Internet or newspaper
• You can plan your future by investing
• Support our economy

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Disadvantages of Stock Market Investing!

• Not guaranteed to make a profit
• You may lose your future investment plan

• Current events can play a major role in the
  market (September 11, 2001, etc)
• Companies may lie about profits and sales to
  persuade investors (Enron, Martha Stewart, etc)

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Mutual Funds

• Funds in which investment professionals manage
  your money and decide on the investments
• These funds often amount to millions and billions
  of dollars and come in a variety of types
• Advantages
• Simplicity / Professional Management /
  Diversification / Liquidity / Usually Low Risk
• Disadvantages
• Fees (and lots of them)

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The Risk / Return Tradeoff

• principle that potential return rises with an
  increase in risk
• Low risk with lower returns, high risk with high
  returns
• Important to know your personal risk tolerance
  when choosing investments
• Balance between risk and reward

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What is Your Risk Tolerance?
Source Investopedia. Determining Risk and The
Risk Pyramid. May 2 2003