Transcript Stocks
Stocks WHAT, WHERE, WHY, AND HOW ANSWERS TO STOCKS CH 12 IN TEXTBOOK Companies Type of Companies Sole-proprietorship Partnership Corporations Private No trading on the open market Ex: M&M Mars Public Stock traded on open stock market Ex: Hershey We will be talking about publicly traded companies! IPO: Initial Public Offering vs Trading on the Secondary Market IPO Also known as Primary Market Where securities are created IPO occurs when a private company sells stocks to the public for the first time. Company needs to file with SEC (Securities Exchange Commission) to go public Secondary Market Known as “the market” defining characteristic is that investors trade among themselves. investors trade previously issued securities without the issuing companies' involvement. Ex: if you buy Microsoft stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft (the company) is in no way involved with the transaction Stock Exchanges NYSE--oldest in world Human component as well as computer Historically was an open auction: buy low and sell high is goal NASDAQ--—Nat’l Association of Securities Dealers Automated Quotations. Second largest stock market in dollar volume in the United States behind the New York Stock Exchange. It is a completely electronic stock exchange Composite of many stocks—many tech stocks Stocks traded Mon-Fri 9:30-4:00 (EST) Stock Indexes A benchmark to judge performance of investments Dow-Jones 30 blue-chip stocks Representative of the US economy as a whole (less the transportation and utility sectors ) S&P 500 500 large companies many consider it the best representation of the U.S. stock market Nasdaq often used to judge the progress of the technology sector, since NASDAQ has so many tech stocks Factors that Influence the Market The company itself When co. is doing well, profits are up, debt is down, stock is attractive Interest Rates When interest rates are low, savings acc’ts aren’t profitable, return on investment not keeping pace with inflation, so people look to stock to increase their returns The Market The demand (and supply) of a product or service can determine a co.’s ability to make a profit. Demand high = increase stock value Non-market risks: unpredictable & uncontrollable, such as natural disaster Industry risk: events that effect single industries, such as fads, trends Political risk: taxes & gov’t regs make investments less attractive (environmental regs) Bear vs Bull Market Bear Market Downward turn in stock market Usually swift and savage Bull Market Upward trend Usually lasts longer than Bear market Types of Stock Income Pay high dividends (give earnings to stockholders) Growth Money re-invested to grow company Earn money as stockholder when you sell….price of stock appreciates (goes up) Types of Stock Cyclical Perform in relation to the economy Do well in good economy, bad in bad economy (luxuries) Defensive Stable in good and bad times Provide basic needs via product or service—if people need it, it will do well. Types of Stock Blue Chip Nationally known High price/low yield Low risk/safe investments Ex: Coke, Ford, Exxon O-T-C/Risky Traded on lesser known (pink) markets Inexpensive/risky Earning Money: Dividend Common (there is also preferred) Stockholders have voting rights Board of directors elected by stockholders Can vote on major issues: issue more stock, sell co, etc. More stock you own, more votes you have—more votes = more influence on corporate policy May or may not pay dividend Share profits with stockholders quarterly, semi or annually Many people Re-invest their dividends— this means the money earned on dividends automatically buys more shares of stock No commission is paid for re-investing dividends Earning Money Selling—you only make or lose money when you sell your stock. Capital Gain (make money)/Loss (lose money) Return on Investment (ROI) ROI = (Selling Price – Cost)/Cost To calculate it, you simply take the gain of an investment (Selling Price – Cost), and divide by the cost of the investment. Investing in Joe's Pizza For example, if you buy 20 shares of Joe's Pizza for $10 a share, your investment cost is $200. If you sell those shares for $250, then your ROI is ($250-200)/$200 for a total of 0.25 or 25%. EPS: Earnings per share & Stock Split Your personal piece of a company’s net income Ex: co profit/# of outstanding shares $100,000/ 100,000 shs = $1.00 $100,000/ 1,000,000 shs = 0.10 Stock split Increase in number of shares of a stock Value of stock still same Usually done to make stock more affordable—more people will buy, stock will increase in value Long-term Techniques Buy and Hold Most investors purchase stocks as long-term investments Stock go up and down, but over the years, overall trend of nonspeculative stock is moderately up. You ride out the down times Earning income through dividends while holding stock Long-term Techniques Dollar-Cost Averaging Equal dollar amount of the same stock at regular intervals Result is usually a lower average cost per share Avoid buying at the highest price—don’t have to worry about timing investments perfectly Direct Investment Buying directly from a corporation (no brokerage fees) May get for below market value price Reinvesting Dividends Using dividends earned to buy more shares (avoids fees) Short term Techniques “Playing the Market” 1. Buying on Margin Borrow money from broker to buy stock Open a Margin account and sign contract Deposit min. $2,000.00 This is called leverage: use of borrowed money to buy securities Betting the stock will rise When you sell the stock you pay interest on the borrowed money plus a commission If stock goes down, you make up the difference If market value decreases to ½ of original purchase, the broker can “call the margin” You need to put up more money in margin account or sell stock Selling Short 2. Short selling borrowing stock from the broker and sell borrowed stock Betting stock will go down in value Must replace stock you borrowed—so you want stock to go down. This allows you to buy it back at lower rate and make a profit If stock rises, you lose. You need to buy it back at higher price than you borrowed it.