The Stock Market & Investing 101

What is financial investing?

Financial investment is putting money into something with the expectation of gain.

Investing requires thorough analysis of the investment opportunities to increase the likelihood of achieving a financial gain within an expected period of time.

Wise investment in the Stock Market (and Stock Market Game) requires study/evaluation/analysis of the corporations and mutual funds that you are considering for investment.

Compounding your earnings

This happens when interest is calculated on the combined amount of your principal (the original sum of money that is invested or loaned) and the interest you’ve already earned.

With compounding, you can calculate how many years it will take to double your money with the Rule of 72. (Calculate the rate of interest and divide it into 72)

Which would you rather have a penny that doubles every day for a month…or $1million at the end of that month?

The power of compounding was said to be deemed the eighth wonder of the world - or so the story goes - by Albert Einstein. 

What are stocks, or “shares” of stocks?

Stocks are shares of ownership in corporations

Shareholders have partial ownership in the corporation

Corporations are permitted to sell stock to raise capital (money) for the corporation

Shareholders may receive dividend payments from the corporation. (Dividends are sums of money paid regularly by a company to its shareholders out of its profits. Also thought of as “divided profits.”

Stocks

◦ Think about it: If there are 100,000 shares outstanding in company, and you own 1,000 shares , then you have 1% ownership in the company. 100,000/1000 = 1%  

◦ Types of Stock Common Stock

Entitles the holder to one vote in the affairs of the company and one vote to elect the board members.

Preferred Stock Usually doesn't come with the same voting rights as common stockholders.  Receive a share of profits before common stockholders.  In the event of company dissolution, preferred shareholders have a prior

claim to assets ahead of common shareholders, but behind creditors.

Blue-Chip Stocks are stocks of large, well-established companies with a reputation for stable earnings and good management.

Growth Stocks are stocks of growth companies that usually spend a lot of money on research and puts all its profits back into the company instead of paying dividends

Income Stocks are stocks of stable companies that pay higher-than-average dividend

Cyclical Stocks are stocks of of companies that move up or down in sync with the business cycle, i.e., automobile, housing, etc.

Defensive Stocks are stocks of companies that are unaffected by changes in the business cycle, i.e. food, utilities, etc.

Value Stocks are stocks of companies that are considered undervalued by

investors Penny Stocks are low-priced, speculative stocks

Stock Classifications

Industries and Sectors

Industries - Companies are grouped by industry, based on the products or services they offer. Companies in the airline industry would be Delta, TWA, Southwest, etc. 

Sectors are broad groupings of similar industries. The airlines industry would be part of the transportation sector.

Industries/sectors are used by investors to compare similar companies

Dividends

        ◦ Offered by well established companies◦ Paid to investors◦ As cash or stock (usually quarterly)◦ Decided by the Board of Directors◦ There will be a “Record Date” in which you

must own the stock. It will be paid to the “owners of record” on the “Distribution Date”

Stock Splits

2 for 1, 3 for 1 Reverse splits, i.e., 1 for 2 Example:

◦ Johnny holds 100 shares of GTD, currently valued at $60/share, so he has a $6,000 investment.

◦ GTD announces a stock split of 2 for 1. ◦ After the stock split, Johnny will hold 200

shares of stock, and those 200 shares will be valued at $30/share. 200 shares X $30 share = $6,000. (Same value!)

IPO – Initial Public Offerings

First sale of stock by a company to the public.

Distributed through investment bankers in the "primary market”

Buyers (usually institutional investors) of these new shares of stock will sell to the public

Mutual Funds

      

Mutual fund company Manager Pooled money of investors Investors buy shares of the mutual fund Good way to get started in investing In the Stock Market Game simulation,

students can buy mutual funds in addition to stocks.   

Bonds

Definition: A debt security, used by governments and corporations to raise money

The investor is the lender The government or company repays principal

plus interest Students cannot invest in bonds in the Stock

Market Game.

Public or Private Company? Private company does not issue stock in the

public stock market. there are a smaller number of shareholders and very little information about the company has to be disclosed by the owners

Public company is a corporation that sells stocks on a public stock exchange.

Three major sources of financial capital for companies◦ Retained earnings◦ Debt (loans, corporate bonds, etc.)◦ Equity (stock)

How do businesses raise capital?

Parent Company - A company that exercises control over one or more subsidiary enterprises.

Subsidiary - a wholly or partially owned company which is part of a large corporation (parent).

Brand - A name, term, symbol, design, or combination of these that identifies a seller's products and differentiates them from competitors' products, i.e., Taco Bell, Lands’ End, etc.

Parent Companies, Brands, Subsidiaries

A merger is a form of corporate acquisition in which one firm absorbs another and the assets and liabilities of the two firms are combined. 

An acquisition is when one business takes possession of another business. This is also called a takeover or buyout.

Mergers are a way for a company to grow faster, to become more efficient, to acquire new product lines, to change its image, or to eliminate a rival.

In many corporate mergers or acquisitions, the shares of one company are converted to shares of the other company.  In other cases, one company simply buys all of the other company's shares. It pays cash for these shares.

Mergers and Acquisitions

The Stock Market’s Purpose The stock market is where shares of stocks, bonds, and

futures are bought and sold (or traded). (Can be electronic.)

The stock exchange is the actual physical location where stocks are listed and traded.

May 17, 1792 Buttonwood Tree Agreement NYSE – 1817 Curb trading – AMEX Securities Exchange Act of 1937

Be sure to read the notes for this page. Go to VIEW NOTES or VIEW NORMAL and scroll to read all notes.

History of Stock Market

Stock Exchanges in the US

New York Stock Exchange NYSE◦ Oldest stock market in US◦ Auction market (with brokers on trading floor)

American Stock Exchange (AMEX)◦ Third largest stock market in the US (read notes with these slides. Go to VIEW

menu and choose NORMAL or NOTES PAGE.)

NASDAQ (National Association of Securities Dealers Automated Quotation System), is an electronic market

Over the Counter Bulletin Board (OTBB) for companies that don't qualify to list on the major market exchanges because they are too small or their stock prices too low.

October 29, 1929 - Black Tuesday Set off the Great Depression

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NPR Audio http://www.npr.org/templates/story/story.php?storyId=4134779

Stock Market Crash

Indices A stock index is a measure of average stock prices in a group of

individual stocks. Indexes are often used to determine the condition of the stock market.

Reflect how the market is doing as a group Examples:

◦ Dow Jones Industrials - which tracks 30 blue chip stocks (of well-known companies)

◦ Standard & Poor's 500- which tracks 500 stocks from industrial, transportation, utility and financial companies

◦ Russell 2000- which tracks 2000 smaller company stocks◦ NASDAQ Composite Index - which tracks all the stocks listed on the

NASDAQ, almost 4,000 in all.

◦ Be sure to read the notes for this page. Go to VIEW NOTES or VIEW NORMAL and scroll to read all notes.

Dow Jones Industrial Average 30 blue chip stocks A stock market index Most-quoted market indicator

Be sure to read the notes for this page. Go to VIEW NOTES or VIEW NORMAL and scroll to read all notes.

The DOW

Factors Affecting the Stock Market Health of:

◦ A company◦ A industry◦ An economy◦ The world monetary system

Good Economic News and Bad Economic News Microeconomic variables - factors that can affect

companies or industries Macroeconomic variables - factors that affect the economy Consumer confidence Investor perception

Impact of the Stock Market

on the Economy Bull Market

◦Stock prices going up or rising

◦Consumers are optimistic and buy stock hoping to earn more money

◦Consumers buy goods and businesses prosper

Bear Market◦Stock prices are going down or falling◦Consumers are pessimistic and

reluctant to buy stock◦Investors sell stock so they won’t lose

more money◦Consumers buy fewer goods and

businesses may lose money. Some workers may lose jobs.

Impact of the Stock Market on the Economy

Diversification "Don't put all your eggs in one basket." 

Strategy of spreading your investment dollars across various types of securities, i.e., ◦ several industry sectors (e.g., transportation, technology,

airlines, retail, etc.) ◦ large and small companies, ◦ growth and income stocks, ◦ cyclical and non-cyclical stocks, ◦ blue chip companies, and ◦ international companies. 

Investing for the Long Term

1) start with a plan2) understand your risk tolerance3) diversify4) keep track of your investments5) invest for the long term

Corporate Annual Reports

What is an Annual Report? A n extensive report on a company's activities throughout the previous year. They are intended to give shareholders and other interested people information about the company's activities and financial performance.

Annual Reports typically include:◦ Chairman of the Board Letter ◦ Sales and Marketing ◦ 10 Year Summary of Financial Figures◦ Management Discussion and Analysis CPA Opinion Letter ◦ Financial Statements ◦ Subsidiaries, Brands and Addresses ◦ List of Directors and Officers ◦ Stock Price History

from Annual Report Library (http://www.zpub.com/sf/arl/)

Stock prices change because of supply and demand

The general rule is:◦ More buyers than sellers – price goes up!◦ More sellers than buyers – price goes down!

Supply and Demand

Other Major Impacts on the US Economy

E-CommerceThe Federal Reserve

What is E-commerce?

E-commerce is the buying and selling of goods and services over the Internet

Impact of E-commerce on the Economy

Because consumers can purchase goods on the Internet they have more choices in goods.

Global competition is increased and US businesses must compete globally.

Fewer salespeople are needed in stores —a shift in jobs is required. More people are needed in order fulfillment and customer service.

Some goods are manufactured just-in-time—as they are needed for distribution.

What is the Federal Reserve? Central Bank of the United States Regulates the money supply in the US

economy◦Raises and lowers the discount interest rate

(rate that member banks may borrow funds from the Federal Reserve.)

◦Puts money into circulation◦Removes money from circulation

Impact of the Federal Reserve If the Federal Reserve raises the discount rate

◦ Consumer credit becomes more expensive◦ Consumers buy fewer large goods—refrigerators, boats, etc.

If the Federal reserve lowers the discount rate◦ Consumer credit becomes less expensive◦ Consumers buy more expensive goods —cars, washing machines,

etc.

Credits: Stock Market Game, teacher resources

http://www.stockmarketgame.org/

NCDPI Exploring Business Technologies Curriculum Resources