A Study of Risk & Reward

Why do companies issue stock? Corporations raise money by selling stockCorporations raise money by selling stock –By selling SHARES, corporations can raise money to: –Start –Run –Expand their business STOCK represents ownership

There are TWO ways for shareholders to make a profit! DIVIDENDSDIVIDENDS –A portion of the corporation’s profits are paid to shareholders –Higher Profits = Higher Dividends per share CAPITAL GAINSCAPITAL GAINS –The difference in the purchasing price & selling price a HIGHER price = gain a LOWER price = loss

STOCK SPLITTING A third way investors can increase the return on their shares is stock splits. –A company doubles the number of shares you hold, but cuts their price in half. Stock prices reflect the value of a corporation to buyers. But if prices become too high, buyers won ’ t want to buy the company ’ s stock.

HOW DO I PURCHASE STOCK? STOCKBROKERContact a STOCKBROKER This is a person that links potential sellers & buyers.This is a person that links potential sellers & buyers. Stockbrokers charge fees for conducting the sale.Stockbrokers charge fees for conducting the sale.

TYPES OF STOCK Income stockIncome stock –Pays dividends. –These are usually large well-established firms. Growth stockGrowth stock –Pays few dividends, profits are reinvested in the company. –These are new start-up companies

STOCK EXCHANGES STOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK New York Stock Exchange (NYSE) The oldest, largest and most prestigious exchange in the US A company must have 300,000 shares of stock that are owned by at least 1,500 people The largest companies are known as BLUE CHIP stock

STOCK EXCHANGES Over-the-Counter (OTC) Markets Stocks are bought and sold over computer terminals, not on the floor of an exchangeStocks are bought and sold over computer terminals, not on the floor of an exchange Stocks are listed on NASDAQ (the 2 nd largest exchange in the US)Stocks are listed on NASDAQ (the 2 nd largest exchange in the US)

MEASURING STOCK PERFORMANCE BULL MARKETBULL MARKET –Stock market is rising steadily over a period of time. BEAR MARKETBEAR MARKET –Stock market is steadily falling over a period of time.

MEASURING STOCK PERFORMANCE Dow-Jones Industrial Average (DIJA)Dow-Jones Industrial Average (DIJA) Publishes a daily average of the closing prices of 30 stocks listed on the NYSE Standard and Poor’s 500 Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

DOW Jones Industrial Average