Introduction to Stocks Basics of Investing I Spring 2008 Economics 98 / 198 DeCal`

Schedule Today  Administrative Issues  Lecture content: Basics of Investing – What is a stock? – How are they traded? – What are brokerages? – Different types of orders – What is the market? – Terminology  Learning how to use the simulation; IBD  Current Events  Assignments / Readings

Administrative Issues  Attendance & Sign-In  Name Tags  Enrollment  s  Webpage  Syllabus Review  News Presentation Sign Ups  Investor’s Business Daily Access

Lecture Content

What is a stock?  Common stock  Gives you a “share” of ownership of a publicly traded company  Stock ownership – Voting rights – Claim to assets (behind debt holders) and earnings – Potentially entitled to dividends

What is a stock?  Ticker symbols – Set of letters that represent a security traded on an exchange – Ex. MSFT, GS, AAPL, MA, BUD, LUV  Stock quotes – List of prices for a stock at a particular point during the trading day  Stock tickers – What do those green and red numbers mean?

Basic Stock Quote

More Stock Quotes

Different Types of Stock  Preferred Stock – No voting rights to company issues – Issued fixed dividends forever – main form of return  Common Stock – Majority of stock we see and hear about in the news – Ownership of the company – Entitled to portion of the earnings – Earn returns mainly through capital gains  What are capital gains? – Increase in asset value relative to the purchases price – Not realized until asset is actually sold – Example.

Stocks vs. Bonds  Stocks are equity – Generally considered riskier – Quite possible to lose a significant portion, if not all, of your money – Potential for high returns  Bonds are debt – Lower and usually fixed return – Higher claim than stockholders  What does this mean?

Dividend Debate  Distribution of a portion of a company's earnings to its shareholders (usually cash)  Bad or Good? – Why?

What Can Cause Stock Prices to Change? EASY!  Supply and Demand! But…what affects supply / demand of a stock?

What Can Cause Stock Prices to Change?  Earnings & growth expectations  Positive / negative news  Economy sentiment  Investor sentiments & attitudes  Irrational exuberance / behavior

Two Markets  Primary Market – market in which investors have first opportunity to buy newly issued shares – Initial Public Offering (IPO)  First time that company offers its shares to public markets (securities bought directly from company)  Where private companies become public  Secondary Market – investors trade already- issued shares of companies with each other – Ie. The stock market – Trading of a company’s stock DOES NOT DIRECTLY involve the company financially

How Stocks Are Traded  Major exchanges – Lists stocks (and other securities), sets policies for how stocks are traded  New York Stock Exchange (NYSE)  American Stock Exchange (AMEX)  National Association of Securities Dealers Automated Quotation  Only “publicly traded companies” are listed

Market Indices (Index)  Definition – Aggregate value of combining several stocks together and intended to represent entire or portion of the stock market  S&P 500 – 500 stocks chosen by Standard & Poor to represent US stock market  NASDAQ Composite  Dow Jones Industrial Average – 30 most significant stocks traded  S&P 600 Small-Cap  Russell 3000 – 3000 of the largest stocks in the US

Stocks Markets & Animals  Bull Market – When everything in the market is going great and stocks are generally heading upwards  Bear Market – When everything is NOT GOOD and stocks are generally headed  NOTE: Nothing lasts forever! Good times and bad times will end at some point  Other animal terms: pigs, chickens

Brokerages  Need a medium to trade through – this is where brokerages come in  Cash vs. margin account  Criteria – Full service vs. discount – Fees (commission) – Services / tools – Minimum balance

Opening an Account  Not a hard process- most of it just some paperwork and mail – Sign-up online and download forms – Mail checks, forms, and copy of ID – Accounts created within a couple of days  Cash accounts usually never turned down – Margin accounts difficult if you have pretty bad credit history  What you will need: a computer, starting capital, and investing know-how

Brokerages  Some links for brokerage comparisons – Find something that works for what YOU need – No one broker that is best for all investors   brokers/  

Different types of Orders  Market Order  Limit Order  Order executes to buy / sell at specified price of better (lower). Limit orders usually cost more, but useful for getting specified price  Stop Order  Order executes when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits

Different Types of Orders  Stop Limit Order  Executed at a specified price (or better) after a given stop price has been reached. Order becomes then a limit order to buy (or sell) at the limit price or better  Precision purposes  Good Until Cancelled (GTC)  Good Until End of Day

Things to Internalize  Learn the basics! – Need to know what basic terms mean – Articles should help you  Advantages of starting young  Useful resources for stock tutorials – – –

Current Events

Investopedia Simulation

Homework / Reading  Set up simulation account & start trading  Online articles (Course website) – “The Five Biggest Stock Market Myths” – “Getting Started”