What is a Stock?

How Does a Stock Become a Stock?

• Imagine a company called Joe’s Coffee, whose coffee chain is expanding at an alarming rate.

• To meet demand, the company needs to order new coffee beans, build new stores, and hire new employees. But it doesn’t have much cash!

Joe’s Coffee has some options at this point…

•Borrow from a Bank

•Issue Bonds

•Private Investors

•“Go Public” and issue shares of stock!

To Go Public…

•Joe’s Coffee will need to hire an investment banking firm to underwrite the stock offering.

•The bankers study the business and estimate its value.

•In this case the bankers estimate that Joe’s Coffee is worth $15 million.

Issuing Stock• Joe’s Coffee decides to issue 1 million

shares of stock prices at $15 per share.

Number of Shares x Price Per Share

1,000,000 x $15 = $15,000,000

Joe’s Coffee takes this money to expand its business!

What is a Stock?• Each share of stock represents ownership

in a company.

• Each shareholder participates in the success of a company.

• Each shareholder is allowed one vote per share.

Joe’s Coffee StockEach share of Joe’s Coffee Stock represents

a millionth of a share of ownership.

Each share of Joe’s Coffee Stock is entitled to a millionth of the company’s profits

If you owned 10,000 shares of Joe’s Coffee, you would own 1% of the company!

10,000/1,000,000

If you owned 200,000 shares of Joe’s Coffee, you would own 20% of the company

200,000/1,000,000

Earnings Per Share• In 2008, Joe’s Coffee made $3,000,000

after paying all expenses.

• Remember, there are 1,000,000 shares issued!

• Each Share of Joe’s Coffee Stock earned

$3,000,000/1,000,000=

$3.00 per share

Dividends or Growth?

Joe’s Coffee may decide to pay out part of their earnings to shareholders in the form of dividends.

Or, Joe’s Coffee may decide to keep the earnings and reinvest them into the business

Dividend Growth

Bank- Wells FargoOil Company- Exxon Mobile

Coffee Companies- StarbucksTechnology- Microsoft

Example of Dividend• You own 100 shares of Nokia Stock.

Because Nokia has done well this past quarter, the corporation decides to pay a dividend of $2.25 per share. Therefore, Nokia would cut you a check for $________ (100 * $2.25).

$225.00

Example of Growth

• You bought 20 shares of QualComm Stock on September 1 for $60.00/share. One year later, QualComm shares are worth $70.00/share. Therefore, your stock has made a capital gain of $10.00/share (which is $________ capital gain).

Also Known as Capital Appreciation

$200

Board of Directors• A group of people elected by stockholders

to guide the corporation and to make the major in the corporation.

• These people typically own large amounts of stock to ensure they are looking out for shareholders’ best interests!– When workers hold no interest in the

company, it’s called an “Agency Problem.”

Decisions

Blue Chip Stocks Blue Chip Stocks: Stocks of large, well-

established corporations with a ______________ record of profitability. Many have been around for decades, such as IBM and Coca-Cola.

solid

Dividends• Dividends: An amount of money per

share that the Board of Directors decides to be given back to the shareholder when the ____________________ earnings are good! (*optional)

quarterly

What Makes the Prices of Stocks Fluctuate?

• Several factors may occur that make the share price of stock go up and down daily. Some of these factors include: general consumer optimism or _______________ in the market, a new product dispersed by a company, a failed product by a company, a strong or weak __________________ report on net income of a business, and unethical business behavior that leads to _______________ allegations (such as Enron).

Pessimism

Quarterly

criminal

THE SECURITIES MARKET• A securities market is a place where brokers who are

representing investors meet to _________ and __________ securities. The largest organized exchange in the US is the N______ Y_______ S___________ E______________ (NYSE). The size of the NYSE is about two-thirds the size of a football field. Floor brokers buy and sell the stocks on the exchange; only brokers who are members of the exchange may do business there. Therefore, you personally couldn’t buy a stock here, but you can have a stockbroker who is part of an exchange company buy it for you.

BuySell

ew orktock xchange

• The smaller Am_____________ ___________ Ex______________ (AMEX) is also in New York City. Regional exchanges are located throughout the country. To have a stock listed with the NYSE or AMEX, a company must meet a minimum number of market-value requirements. Securities listed with the NYSE are traded only during official trading hours which are from ________ a.m.- ________ p.m. (New York time), Monday through Friday (except holidays).

ericanchange

Stock

9:30 4:00

Bear vs. Bull MarketBEAR MARKET 

• A prolonged period of ________________ stock prices and a general feeling of investor pessimism. It develops when investors become ____________________ about the overall economy and start to ________ their shares of stocks.

falling

sellnegative

Bear vs. Bull MarketBull Market

• A prolonged period of _______________ stock prices and a general feeling of investor optimism. ________________ about how the country is doing also serves to drive up stock prices.

rising

Confidence

STOCK SPLIT An increase in the number of ___________________ shares (number of shares that a company is able to have available for investors) of a company’s stock. When a company increases its shares outstanding, it _______________ the selling price in direct proportion. For example, if there were 1,000 shares outstanding with a market value of $60, then a 2:1 (two for one) stock split would result in 2,000 shares outstanding selling for $30. You still have $________ market value.

 

outstanding

lowers

60,000

Joe’s Coffee Stock Split• Joe’s Coffee decides to split their stock 2

for 1 (2:1).

Before the SplitThere were 1,000,000 shares at $15 per share.$15,000,000

After the SplitThere are 2,000,000 shares at $7.50 per share.$15,000,000

Note that both before and after the split, the company is valued at $15,000,000. The split does not affect the total value of the company!!!

Stock Indexes• A benchmark that investors use to judge the

___________________ of their investments.• The most widely followed stock index is the ___________________

Industrial Average. The _______ is an average of the price movements of _____ major stocks listed on the New York Stock Exchange. This average provides a general overview of what stock prices are doing in the stock market as a whole. Investors compare the price fluctuations of their stocks against this average to judge how well their stocks are performing ________________ to the overall stock market.

• Other commonly used indexes are the Standard & Poor’s ______ and the NASDAQ Composite Index which involves the newest and fastest growing stock market in the U.S.

performance

Dow Jones

index30

compared

500

Dow Challenge• You have 1 minute to write down as many

of the 30 Dow Jones companies that you can think of!!!

•3M•Alcoa•American Express•AT&T•Bank of America

•Boeing•Caterpillar•Chevron•Citi•Coca-Cola

•DuPont•Exxon Mobile•General Electric•General Motors•Home Depot

•Hewlett-Packard•Intel•IBM•JP Morgan•Johnson & Johnson

•Kraft•McDonalds•Merck•Microsoft•Pfizer

•Proctor & Gamble•United Technologies•Verizon•Wal-Mart•Walt Disney

How to Invest• 1. ___________________ Advisers –

Stockbrokers, personal advisers, etc.

• 2. __________________ Investing – Internet Trading including E*Trade, AmeriTrade, etc.

Financial

Self

Investing Tips

• 1. Buy Quality

• 2. Hold for the Long Term

• 3. DiversifyAn investment strategy designed to reduce risk by combining a variety of investments.