understanding buying and selling stocks · imagine you had an account at a major investment bank...

NAME _____________________________________________ DATE __________________ CLASS ___________

Reinforcing Economic SkillsUnderstanding Buying and Selling Stocks

There is a whole host of variables, statistics, and data that are applied to and describe a stock, or a share of a corporation. Some are fairly straightfoward. Others are so complicated a person needs financial expertise (or a financial advisor or stockbroker) to know what they mean, how to interpret them, and especially to comprehend what they tell a potential investor about the stock and the corporation.

Directions: Read the short passage, then look carefully at the graph, which shows the changing price of stock in the corporation Facebook. After studying the graph, answer the questions.

Facebook is a fast-growing social networking site that first issued common stock for sale to the public in May 2012. The initial offering of stock is called an initial public offering, or IPO. Facebook’s website was gaining so many users so fast, its IPO became a major financial event. The stock offered in the IPO was in such demand it was sold almost exclusively to institutional investors, such as investment banks and brokerages. One investment bank that had studied Facebook’s financial condition priced the cost of a single share of Facebook’s stock during its IPO at $38. This price was based on Facebook’s “potential value” (estimated by the investment bank at $104 billion) even though the corporation had zero profits at the time of the IPO. The IPO price did not last long.

Since its IPO, Facebook’s stock has “roller-coastered” up and down, as all stocks do. Even though it now has more than one billion registered users, investors are concerned about how Facebook will make and increase its profits, which it gets mainly through advertising.

Imagine you had an account at a major investment bank and were able to buy Facebook stock at the IPO. You told the bank to buy $5,000 worth of Facebook stock for you at the IPO. Since then, you have carefully followed the value of your Facebook stock. You have wondered when or if you should sell it or buy more of it.

Sep2013

Oct 30,2013

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May2012

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Facebook, Inc.

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Econ16_TX_TC_C08_wsres.indd 1 20/08/15 4:58 PM

NAME _____________________________________________ DATE __________________ CLASS ___________

Reinforcing Economic Skills cont.

Understanding Buying and Selling Stocks

Questions

1. How many shares did your broker buy for you at the IPO when she invested your $5,000 in Facebook stock? Assuming you can only buy “complete” shares (and not a fraction of a share), how much do you have left as “change” afterward?

2. What was the value of a share of Facebook stock a month after its IPO? How much were your shares worth then? How much did you gain or lose on this stock?

3. When did Facebook stock reach its lowest price? How much was it selling for then? If you had sold it then, how much would you have lost? What percentage of your investment would you have lost?

4. If you had bought an additional 100 shares of Facebook stock in early September when it was at its lowest price, how much would profit would you make on those shares if you sold them in October 2013?

5. If you had kept all your IPO shares of Facebook and sold them on the last day shown in this chart, how much would you have gained or lost on your Facebook stock?

6. What is the trend shown in the most recent (far right) part of the chart? Is there any way you can know from the chart whether Facebook’s stock price will go up or go down?

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Econ16_TX_TC_C08_wsres.indd 2 13/08/15 10:57 AM

NAME _____________________________________________ DATE __________________ CLASS ___________

Calculating the Monetary Effects of Mergers

Math Practice for Economics

Different types of mergers can have different effects on the bottom-line profitability of a company. For example, horizontal mergers result in less competition and may lessen the amount a company needs to spend on advertising. Vertical mergers, on the other hand, may result in economies of scale that can lower the cost of production.

Directions: Use the table to compare profit scenarios. Then answer the question that follows.

Step 1: Calculate your company’s profit.

Assume that your business is a retailer that sells a variety of outdoor equipment. Last year, your total yearly sales were $2.6 million. You broke down your operating costs for the year into several categories. Using the table below, which shows your revenue and operating expenses, calculate your company’s profit for the year.

Single Company

Revenue $2,600,000

Costs:

Staff Salaries

Cost of Goods Sold

Advertising

Overhead

Miscellaneous Expenses

$180,000

$1,400,000

$60,000

$25,000

$20,000

Total Costs

Profit

Step 2: Compare revenue and operating expenses against proposed merger offers.

This year, your business received two competing merger offers. One is from a competitor that also sells outdoor equipment. Another is from a tent manufacturer whose products you carry. Each option would have a different effect on your company’s revenue and costs. Using the table below, determine how these mergers would affect the revenue, costs, and profits of your business.

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ECON16_TX_TC_C08_wsmpe.indd 1ECON16_TX_TC_C08_wsmpe.indd 1 8/18/14 11:33 AM8/18/14 11:33 AM

NAME _____________________________________________ DATE __________________ CLASS ___________

Calculating the Monetary Effects of Mergers

Math Practice for Economics cont.

Single Company Horizontal Merger Vertical Merger

Revenue $2,600,000 $5,200,000 $3,000,000

Costs:

Staff Salaries

Cost of Goods Sold

Advertising

Overhead

Miscellaneous Expenses

$180,000

$1,400,000

$60,000

$25,000

$20,000

$1,200,000

$2,800,000

$30,000

$50,000

$40,000

$200,000

$800,000

$60,000

$25,000

$20,000

Total Costs

Profit

On the basis of this information, which merger option, if either, should you accept? Why?

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ECON16_TX_TC_C08_wsmpe.indd 2ECON16_TX_TC_C08_wsmpe.indd 2 8/18/14 11:33 AM8/18/14 11:33 AM

NAME _____________________________________________ DATE __________________ CLASS ___________

Activity GoalThis personal finance activity will help you understand some characteristics applied to stocks that indicate their value and other traits. The table below gives a sampling of some of the most common stock characteristics for four hypothetical stocks.

Stock characteristics shown in the table:

•Price to earnings ratio (P/E): a ratio that compares the price of one share of stock to company earnings. A low P/E is thought to indicate that the stock price is low based on the earnings of the company. A very high P/E is often thought to indicate that the stock is overpriced based on the company’s earnings.

•Earnings Per Share (EPS): the total corporate earnings divided among all the shares of stock issued by the company; how much of the company’s earnings are represented by one share of stock.

•Sales: average number of shares of stock sold each day the stock market is open (in 100s)

•Dividends (DIV): the amount, as a percentage of the value of a share of stock, returned to investors on a regular basis; dividends are one way companies disburse income/profit.

•Cash: Amount of cash the company has available; a company with positive cash has money to expand or to hold for an unexpected downturn. (in 100s)

•Debt: Amount of money the company owes. (in 100s)

•High: the highest price for the stock in the last 52-week period

•Low: the lowest price for the stock in the last 52-week period

•Close: the price of the stock at the last close of the stock market on a trading day

Company P/E EPS Sales (100s)

DIV Cash (100s)

Debt (100s)

High Low Close

ABC 30.12 34.59 1,883 ––––– 58,881 13,613 1,038 635 1,030

DEF 20.04 1.33 35,113 2.9% 749,000 621,000 27 18 26.70

GHI 19.2 6.39 2,419 2.1% 30,150 14,200 124 85 126

JKL 14.3 1.21 13,000 2.3% 29,122 7,800 18.01 10.10 17.20

Directions: Read the definitions of stock characteristics. Study the stock table and then answer the questions.

1. A stock price with a low P/E is often considered a value stock; that is, its earnings should warrant a higher stock price, so the price may increase. If you wanted to buy a value stock, which of the stocks listed above would you buy?

2. Your grandmother is retired and wants to invest some money in a stock that will pay her good dividends. Which stock from the list would you recommend?

Evaluating Stocks

Personal Finance Activity

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ECON16_TX_TC_C08_wspfa.indd 1 28/08/15 11:15 AM

NAME _____________________________________________ DATE __________________ CLASS ___________

Personal Finance Activities cont.

Evaluating Stocks

3. The most basic advice for any stock buyer is “Sell high, buy low.” You make a profit when you buy a stock at a low price and sell it for a high price. Which stock listed above would you NOT buy right now because of its price?

4. Stock ABC is one of the hottest stocks, from one of the hottest companies on the market today. However, its P/E is high, it pays no dividend, and it is selling at near-record highs—at more than $1,000 a share. What characteristic of this stock, as indicated in the chart, might tell you that it is still worth buying this stock?

5. On the basis of the table and all the financial information it contains, is there any way that you can be certain of making a profit by purchasing a particular stock? Why or why not?

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ECON16_TX_TC_C08_wspfa.indd 2ECON16_TX_TC_C08_wspfa.indd 2 8/18/14 11:44 AM8/18/14 11:44 AM

Chapter 8: Business Organizationnetw rks

NAME ________________________________________ DATE _______________ CLASS _________

Lesson 3 Nonprofit Organizations

Reading Essentials and Study Guide

ESSENTIAL QUESTIONHow does a market economy support nonprofit organizations?

Reading HELPDESKAcademic Vocabulary analyze to break down into parts and study how each part relates to one another devote give time or attention

Content Vocabularynonprofit organization economic institution that may operate like a business but does not seek

financial gain; schools, churches, and community-services organizations are examplescooperative nonprofit association performing some kind of economic activity for the benefit of its

memberscredit union nonprofit service cooperative that accepts deposits, makes loans, and provides other

financial serviceslabor union organization that works for its members’ interests concerning pay, working hours,

health coverage, fringe benefits, and other job-related matterscollective bargaining process of negotiation between union and management representatives

over pay, benefits, and job-related matterschamber of commerce nonprofit organization of local businesses whose purpose is to promote

their interestsBetter Business Bureau business-sponsored nonprofit organization providing information on local

companies to consumers

TAKING NOTES: Key Ideas and DetailsUse a graphic organizer below to identify types of nonprofit organizations and the benefits they offer.

Organization Benefits

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ECON16_TX_TC_C08L03_wsresg.indd 1 06/05/15 3:36 PM

NAME ________________________________________ DATE _______________ CLASS _________

Chapter 8: Business Organizationnetw rksReading Essentials and Study Guide

Lesson 3 Nonprofit Organizations, Continued

Community Organizations and Cooperatives Guiding Question Why is the value of community organizations and cooperatives difficult to measure?

Community Organizations Community organizations include schools, churches, hospitals, welfare groups, and adoption agencies. Many of these organizations have chosen to become corporations to get a variety of legal benefits including unlimited life and limited liability. However, they do not issue stock, pay dividends, or pay federal income taxes. Often their activities raise money, so if they end up with extra funds, they invest the surplus in the organization to advance their cause.

Like profit-seeking businesses, community organizations and other nonprofits use scarce factors of production. The value of their contributions is difficult to measure or analyze. However, the large number of nonprofits shows that they are an important part of our economic system.

Cooperatives A common type of nonprofit organization is the cooperative, or co-op, a voluntary association formed to do some kind of economic activity that will benefit its members. Cooperatives fall into three major categories: consumer, service, and producer.

• Consumer cooperative A consumer co-op is a voluntary association that buys bulk amounts of goods such as food or clothing. It can sell these goods to its members at lower prices than the marketplace may demand. Members usually devote several hours of labor each week or month to help keep costs down.

• Service cooperative A service co-op provides services, such as insurance or child care to its members. A credit union, for example, offers credit and other bank services. It accepts deposits and makes loans to employees of a particular organization.

• Producer cooperative A producer co-op is typically made up of producers like farmers. It helps members promote or sell their products directly to markets, consumers, or companies that use those products. The Ocean Spray cranberry co-op markets its products directly to consumers.

Labor, Professional, and Business Organizations Guiding Question How do some nonprofit organizations promote the interests of workers and consumers?Several other kinds of groups set up nonprofits to promote the interests of their members.

Reading Progress CheckExplaining How does a cooperative work?


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Labor Unions One important kind of nonprofit is the labor union, an organization of workers formed to represent their interests at their jobs. These interests include pay, working hours, health-care coverage, and vacations. A union may conduct negotiations, called collective bargaining, with managers who oversee employees on behalf of the company’s owners. Unions also lobby for laws that will benefit and protect their workers.

The largest labor union in the United States is the National Education Association (NEA), which represents public school teachers, administrators, and substitute educators. The NEA is not a member of the American Federation of Labor–Congress of Industrial Organizations (AFL-CIO). Some 57 unions have joined the AFL-CIO, which represents approximately 12 million workers in a variety of different jobs.

Exploring the Essential QuestionA union of public-transportation employees goes on strike for higher wages. People who depend upon buses and trains must find other ways of getting around. The employees don’t return to work until they win a large raise. How does the strike affect the economy?

Professional Associations Some workers belong to professional societies, trade associations, or academies. These groups are made up of people in a specialized occupation. Their goal is improve the working conditions, skills, and public perception of the profession or trade.

The American Medical Association (AMA), for example, serves doctors, and the American Bar Association (ABA) serves lawyers. They influence licensing and training, set standards, and are actively involved in political issues. Professional associations represent bankers, teachers, college professors, police officers, and hundreds of other professions.

Business Associations Businesses also organize to promote their shared interests. Most communities have a chamber of commerce that helps local businesses. The typical chamber sponsors activities ranging from educational programs to lobbying for favorable business legislation.

Industry or trade associations represent specific kinds of businesses. Trade associations may try to influence government policy on issues like imports and tariffs, the minimum wage, or new construction.

Some business associations help protect the consumer. The Better Business Bureau is a nonprofit organization sponsored by local businesses that provides general information on companies and keeps records of consumer inquiries and complaints.

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Government Guiding Question How does the government operate as a nonprofit organization?Although you may not realize it, your local, state, or national government functions as a nonprofit. Many government activities affect the economy indirectly. Governments also sometimes play a “direct” role in the economy, competing with private businesses or filling a need that a business does not meet.

Direct Role of Government Here are three examples of U.S. government organizations that take a direct role in the economy:

• Tennessee Valley Authority (TVA) The TVA supplies electric power for most of Tennessee and parts of Alabama, Georgia, Kentucky, North Carolina, Virginia, and Mississippi. This supplier competes directly with other, privately owned power companies.

• Federal Deposit Insurance Corporation (FDIC) The FDIC insures deposits in our nation’s banks. Privately owned insurance companies do not compete with the FDIC, but they could meet this need if the FDIC did not exist, so the FDIC is an example of direct economic action.

• U.S. Postal Service (USPS) The USPS, originally called the Post Office Department, became a government corporation (rather than a department) in 1970. The USPS competes directly with private firms like Federal Express (FedEx) and the United Parcel Service (UPS).

Many federal agencies are organized as government-owned corporations that charge for their products and put the revenue back into the “business.” Unlike private corporations, however, Congress covers any losses the public corporation may incur.

State and local governments also play a direct role in the economy. State governments provide colleges and universities, retirement plans, and statewide police protection. Local governments provide police and fire protection, rescue services, and schools. All levels of government help develop and maintain roads and parks.

Indirect Role of Government The government plays an indirect role when enforces the rules to help the market economy operate smoothly and efficiently. They may give a group of consumers a boost in purchasing power. These, and other actions, do not put governments in competition with private sector producers. They affect the economy indirectly. Some examples are listed below.

Reading Progress CheckSummarizing How do professional associations help their members?


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Chapter 8: Business OrganizationReading Essentials and Study Guide


• Antitrust laws Congress passed the Sherman Antitrust Act of 1890 to stop monopolies and combinations that limit trade, making them illegal. The law limits the actions of private companies, affecting the economy indirectly, but it does not create competition between the government and private business.

• College scholarships Government grants or scholarships to students may encourage more students to go to college. They affect the economy indirectly by promoting a workforce that will be more productive, earn more income, and pay more taxes. These grants do not compete with private business.

• Social Security payments People who receive Social Security checks get purchasing power that helps keep them out of poverty. The government’s role is indirect because it helps consumers without competing directly with other parts of the economy.

Payments and funds that come from indirect government actions often give recipients more power to “vote” in the economy through their purchases, influencing what is produced. Their choices therefore affect the allocation of scarce resources.

Reading Progress CheckEvaluating Do you think one government role is more important than another? Why?

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ECON16_TX_TC_C08L03_wsresg.indd 5ECON16_TX_TC_C08L03_wsresg.indd 5 8/23/14 9:40 AM8/23/14 9:40 AM

understanding buying and selling stocks · imagine you had an account at a major investment bank...

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