A Study of

Risk&

Reward

Why do companies issue stock?Why do companies issue stock?

• Corporations raise money by selling stockCorporations raise money by selling stock– By selling By selling SHARES, SHARES, corporations can raise corporations can raise

money to:money to:– StartStart– RunRun– Expand their businessExpand their business

STOCK represents ownershipSTOCK represents ownership

There are TWO ways for shareholders to make a profit!

• DIVIDENDSDIVIDENDS– A portion of the corporation’s profits are A portion of the corporation’s profits are

paid to shareholderspaid to shareholders– Higher Profits = Higher Dividends per shareHigher Profits = Higher Dividends per share

• CAPITAL GAINSCAPITAL GAINS– The The differencedifference in the in the purchasing purchasing

price & selling priceprice & selling price– Selling @ a HIGHER price = gainSelling @ a HIGHER price = gain– Selling @ a LOWER price = lossSelling @ a LOWER price = loss

STOCK SPLITTINGSTOCK SPLITTING• A third way investors can increase

the return on their shares is stock splits.– A company doubles the number of

shares you hold, but cuts their price in half.

Stock prices reflect the value of a corporation to buyers. But if prices become too high, buyers

won’t want to buy the company’s stock.

HOW DO I PURCHASE STOCK?• Contact a STOCKBROKERSTOCKBROKER

• This is a person that links potential sellers & This is a person that links potential sellers & buyers.buyers.

• Stockbrokers charge fees for conducting the sale. Stockbrokers charge fees for conducting the sale.

TYPES OF STOCKTYPES OF STOCK

• Income stockIncome stock– Pays dividends. Pays dividends. – These are usually large well-established These are usually large well-established

firms.firms.

• Growth stock Growth stock – Pays few dividends, profits are reinvested in Pays few dividends, profits are reinvested in

the company. the company. – These are new start-up companiesThese are new start-up companies

STOCK EXCHANGESSTOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK

New York Stock Exchange (NYSE)•The oldest, largest and most prestigious exchange in the US•A company must have 300,000 shares of stock that are owned by at least 1,500 people•The largest companies are known as BLUE CHIP stock

STOCK EXCHANGESSTOCK EXCHANGES

Over-the-Counter (OTC) Over-the-Counter (OTC) MarketsMarkets

•Stocks are bought and sold over Stocks are bought and sold over computer terminals, not on the computer terminals, not on the floor of an exchangefloor of an exchange

•Stocks are listed on NASDAQ (the Stocks are listed on NASDAQ (the 22ndnd largest exchange in the US) largest exchange in the US)

MEASURING STOCK PERFORMANCE

• BULL MARKETBULL MARKET– Stock market is rising steadily over a period of Stock market is rising steadily over a period of

time.time.

• BEAR MARKETBEAR MARKET– Stock market is steadily falling over a period of Stock market is steadily falling over a period of

time.time.

MEASURING STOCK MEASURING STOCK PERFORMANCEPERFORMANCE

•Dow-Jones Industrial Average (DIJA)Dow-Jones Industrial Average (DIJA)•Publishes a daily average of the closing prices of 30 stocks listed on the NYSE

Standard and Poor’s 500Standard and Poor’s 500Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

DOW Jones Industrial AverageDOW Jones Industrial Average