Understanding Stocks
What is a stock? A share in the ownership of a company Share, equity, stock ALL SAME THING! When you own stock, you are automatically an “owner”/”shareholder” in that particular company
Being a Shareholder Ownership percentage divide number of shares you have by the total number of shares outstanding/offered by the company Apple 908 million shares Own 10 shares 10/908 million .01%... Can you call Mark Zuckerberg if you own Facebook stock? Institutional investors & billionaires! Does it mean anything else??? Any decision making – can listen to earnings calls – vote on board of directors.. Most do not
Benefits of stock ownership Making Money!! Capital Gains Stock price higher than when you bought it Dividends Percentage of companies profits paid to shareholders, usually each quarter No liability
Risks of Stock Ownership Bankruptcy – you are the last to be paid Stock price can go down Only really gain if you sell
Do all companies offer stock? NO!!! Only incorporated companies (go public) Google inc. Can stay private & ask venture capitalists to invest (risky)
Why would a company incorporate? Raise revenue Take out a loan (debt financing) OR Sell shares (equity financing) Limited Liability
What it means for the company? “Owners” are not the only owners any more might not even own a majority of stock… Warren Buffet could become a majority share holder & make decisions! Could vote to remove management Board of Directors – chosen by shareholders Share in decision making process
How stocks trade A market/exchange where stocks are bought and sold (secondary market) NYSE/New York Stock Exchange Real people on trading floor NASDAQ (OTC) computerized Lots large technology companies AMEX (bought by NASDAQ) Small cap stocks & derivatives Since 1926, the average large stock has returned close to 10% a year. If you're saving for retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash under your mattress. Of course, "over time" is a relative term. As any stock investor knows, prolonged bear markets can decimate a portfolio. Since World War II, Wall Street has endured several bear markets -- defined as a sustained decline of more than 20% in the value of the Dow Jones Industrial Average. Bull markets eventually follow these downturns, but again, the term "eventually" offers small sustenance in the midst of the downdraft. London, hong kong, over the counter bulletin boards (OTCBB) – penny stocks - little to no regulation
How do you buy a stock? Brokerage firm Full service Discount
What determines a stock’s initial price? Initial Public Offering – first time (Facebook) Price determined by owners & investment bank Primary market Bought by investment back then investment bank offers to the public
What determines a stock’s price on the secondary market? Supply & demand Earnings reports P/E Ratio Market value per share/earnings per share Current events *** do not mix up stock’s price with the value of a company *** Market valuation – total shares outstanding X price/share
Market Terms Bull market Bear market All going down All going up Bear market All going down What makes the stock market go up and down? When do you buy? When do you sell? Capital gains tax considerations versus ordinary income tax Consumer confidence; world events; interest rates; success troubles individual companies; competition
How do you buy stock??
Now, the real question…. How do you decide which stocks to buy???