Stock Basics Ms. Zucchero

Stock Basics *Stock prices change every day *Share prices change because of supply and demand *If more people want to buy a stock (demand) price moves up *If more people want to sell a stock than buy it there will be greater supply than demand, price will fall This part is easy, understanding what makes people like or dislike a stock is hard

Stock Basics The Principal Theory - the price movement of a stock indicates what investors feel a company is worth Company’s value - market capitalization – The number of outstanding stocks multiplied by it’s share price $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 per share and has 5 million shares outstanding $100 x 1 million = $100 million $50 x 5 million = $250 million

Stock Basics The most important factor that affects the value of a company is is its earnings *Earnings are the profit a company makes *Public companies are required to report *Better than expected, price of stock will go up *Worse than expected, price of stock will go down

Why do stock prices change - nobody really knows for sure Stock Basics Why do stock prices change - nobody really knows for sure The important things to grasp: Supply and demand in the market determines stock price Price times the # of outstanding shares is the value of the company Comparing just the share price of two companies is meaningless Earnings of company are what affect investor’s valuation of a company There is no one theory that can explain everything

Company ABC Vs. Company XYZ Dividend Yield Dividend Yield – shows how much a company pays out in dividends each year relative to its share price – it is the return on investment for a stock Company ABC Vs. Company XYZ If two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%

Market Value per Share / Earnings per Share (EPS) Price/Earnings Ratio P/E Ratio – a valuation of a company’s current share price compared to its per-share earnings Market Value per Share / Earnings per Share (EPS) If a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95) A high ratio means that investors are anticipating higher growth The average market P/E ratio is 18-25 times earnings Companies that are losing money do not have a P/E ratio

Stock Quote Table Yahoo.finance