Stocks & the Stock Market Personal Finance

What is a stock? A stock is . . . . . . a share of ownership in a company

Common Stock vs. Preferred Stock -Common stockholders can vote on company decisions; such as the board of directors -Generally Common stockholders get one vote per share -Common stockholders get dividend money LAST, should the company go bust common stockholders only get money if there is any left -Common stocks have greater potential to make money, but are associated with more risk

Common Stock vs. Preferred Stock -Preferred stockholders do not have the same voting rights as common stockholders. But . . . -Preferred stockholders are guaranteed a fixed share of the dividend forever -Preferred stockholders get their money before common stockholders -Preferred stocks are associated with less risk and reward

Why do companies sell stocks? Because every company must raise money to operate! There are 2 ways in which they can do this . . . Equity Financing (raise) Debt Financing (borrow) vs.

Equity Financing Equity Financing = Stocks Benefits; -Doesn’t require company to pay back money -Doesn’t require company to make interest payments *** HOPE that shares will one day be worth more than the purchase price

Debt Financing Debt Financing = Loans or Bonds Drawbacks; -Debt financing requires companies to accrue debt -Debt is associated with interest -Debt detracts from earnings

How do stocks become available to the public? Stocks are traded on exchanges or markets . . . Think supermarket Just like a supermarket where you go to buy all of the foodstuffs you need, the stock market or exchange provides stockholder with all the stocks they could need or want.

NYSE ~ New York Stock Exchange -AKA ”Big Board” -Big Companies are found there . . . -Coca Cola, Gillette, WalMart etc. -Trade floor; brokers etc. *Prices are determined by the current highest amount any buyer is willing to pay and the lowest at which someone is willing to sell . . . Sounds like?

NASDAQ -Over the counter stocks -There is no actual central location -Trade is done via computers -Has several big companies -Microsoft, Cisco, Dell etc.

American Stock Exchange =AMEX Generally smaller companies London Stock Exchange

Determining Stock Prices -Stock prices change with. . . -supply and demand -what investors feel a stock is worth -consideration expected growth -Value of a Company = Market Capitalization; -the total amount of money of all outstanding shares at the current market price

So what determines stock price? *On a fundamental level; supply and demand *Market Capitalization; value of company -the share price is meaningless in comparison *Earnings of a company *Investors’ sentiments, values, attitudes and expectations ****No one completely knows or can absolutely predict trends of a stock or the stock market as a whole