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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.