Smart DirectionsEmmet O’Neal LibraryMountain Brook, AL

Understanding the Stock Market

Disclaimer• Andreas Rauterkus is not a registered

investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Andreas Rauterkus does not purport to tell or suggest which investment securities attendants should buy or sell for themselves. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision.

Objectives

• What are stocks and stock markets• How to pick stocks• What are the risks?• What are your rights?

– As a shareholder– As an investor

Stocks• Stocks represent a partial ownership of a company• Common stocks versus preferred stocks

– Common stock carries a voting right– Preferred stock does not carry a voting right, but normally

receives a fixed dividend– Preferred shareholders need to be paid before common

shareholders• Stock price

– Amount paid for one share of stock• Dividends

– Distribution of a company’s profit– Generally paid quarterly

What Do You Need to Know• Have the right information and know how to interpret it• Invest for growth and value• Things to look at:

– Earnings per share– Price-earnings ratio– Dividend yield– Book value– Return on equity– Debt equity ratio– Price volatility

Where to Get InformationSOURCE WHAT’S IN IT AND WHERE TO GET IT COMPANY’S ANNUAL REPORT

Basic information about the company, including audited financial data for the most recent year and summaries of prior years is available from brokers and the investor relations office of the company.

FORM 10-K Extensive financial data, required to be filed annually with the Securities and Exchange Commission. Includes two years‘ worth of detailed, audited financial balance sheets, plus a five-year history of the stock price, earnings, dividends and other data. You can view the forms online (www.sec.gov ) or order copies by contacting the Public Reference Branch at: U.S. Securities and Exchange Commission, 450 5th St., N.W., Room 1300, Washington, DC 20549-0102; phone 202-551-8090;. email publicinfo@sec.gov.

ANALYSTS’ REPORT Commentaries by brokerage firms‘ research departments, containing varying amounts of hard data to accompany the analysts‘ recommendations to buy, sell or hold stocks followed by the firm. Available from brokers.

VALUE LINE INVESTMENT SURVEY

A vast collection of data, including prices, earnings and dividends, stretching back many years, along with analysis and several unique features, such as a ―timeliness‖ rating for each stock. Follows approximately 1,700 stocks. Available from libraries, or from Value Line ($598 a year, 13-week trial subscriptions are $75 for the print version; 800-634-3583; www.valueline.com.)

STANDARD & POOR’S S&P Stock Reports offer a wealth of current and historical data covering the three major exchanges (NYSE, AMEX and Nasdaq) in three volumes that are updated every six weeks. The monthly S&P Stock Guide is a compendium of similar data on more than 7,500 stocks, but with no analysts‘ commentary. The guide provides most of the hard data you need to check out a company. Available from libraries, brokers or by subscription from S&P (55 Water Street, New York, NY 10041; 800-221-5277; www.standardandpoors.com ).

MERGENT PUBLICATIONS (formerly Moody’s Investors Service)

Mergent publishes eight Mergent‘s Manuals containing current and historical data on thousands of companies. The Handbook of Common Stocks covers approximately 900 stocks, and the Dividend Record keeps track of current dividend payments of 30,000 U.S., Canadian and significant global securities. The Dividend Achievers guide is widely used by individual investors. Available from Mergent Inc. (Customer Care Center-Consumer Accounts, 10475 Crosspoint Blvd., Indianapolis, IN 46256; phone: 877-762-2974; fax: 800-597-3299; www.mergent.com ).

FINANCIAL NEWSPAPERS

The stock listings of the Wall Street Journal, Barron‘s and Investor‘s Business Daily contain current information on prices, dividends, yields and price-earnings ratios, as do the stock listings of most daily newspapers. What sets these three apart is the accompanying depth of coverage of the investment markets. Available from libraries, at newsstands, online or by subscription.

COMPUTER ONLINE DATA BASES

America Online , CompuServe, MSN, Yahoo finance (finance.yahoo.com) and other dot-com portals offer plenty of stock and investment information, as do countless Internet sites, including www.kiplinger.com.

When To Sell Stocks

• Fundamentals change

• The dividend is cut

• You reach your target price

• Return on your stock investment includes increases in the price and any dividend payments

Avoid Common Mistakes

• Acting on tips• Getting sentimental• Forgetting taxes and commissions• Failing to diversify• Losing patience• Buying a penny or microcap stock

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Read stock quotes

Open $26.11 High: $26.39 Low: $25.45 52-Wk

Rng $ 25.60 - $ 37.50 P/E Ratio 15.13Volume 71,527,599

• 52-Wk Rng – Highest and lowest share

price achieved by the stock over the past 52 weeks.

• P/E Ratio Price-Earnings Ratio =

(Current stock price)/(Current annual earnings per share)

• Volume Volume of shares traded

yesterday (in 100s)

Microsoft Corporation (MSFT) NASDAQ $26.03    $

+0.05   +0.19%

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Alternative views of stock pricing

• Fundamental Finance View: – Stock prices are largely determined by the true

financial conditions of firms, as reflected in their profits, market power, R&D prospects, etc.

• Behavioral Finance View: – Stock prices are strongly affected by market

psychology: 1. “irrational exuberance” or pessimism;2. “beauty contest” guesses about the most attractive

stocks to buy based on what other people are buying or selling (fads, herd following, …).

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Stock exchanges

• New York Stock Exchange (NYSE, "Big Board" )• NASDAQ (National Association of Securities Dealers

Automated Quotation System) electronic trading system

• Dow Jones and S&P 500 indexes• listed companies

– When a firm go public, it does not add to its debt. Instead, it brings in additional “owners” who supply it with funds.

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Rights of shareholders• Shareholders (stockholders) have ownership

interest in the company proportional to shares owned.– Large shareholder vs. small shareholders

• Rights include:1. rights to be ‘residual claimants’ 2. voting rights influence management

Investment Scams, Schemes and Swindles• Financial swindles cost $40 billion each year

• Nobody is immune

• Spot and avoid scams

• Most often greed and fear are appealed to

Types of Investment Fraud• Pyramid schemes

– Receive money for recruiting new members• Ponzi scheme

– Money from new investors is used to pay off earlier investors

– Madoff scandal• Precious medals• Stock swindles

– “penny stock” investments• Phony international investments• Affinity fraud• Bogus franchise and business opportunities

How Do Regulators Help?• Report scam attempts to the proper authorities

• How to report investment fraud schemes:– Financial Industry Regulatory Authority (FINRA)

» www.finra.org» http://brokercheck.finra.org/

– US Securities and Exchange Commission (SEC)» www.sec.gov

– State securities commissions