Stocks and The Stock Market

STOCKS What is a stock? Why do we need a stock market? Where do stocks come from? Why do people buy and sell it?

Determining Value Let’s say you open up a restaurant Costs you $250,000 At the end of the year, you add all your money and you have $300,000 $300,000(Income) - $250,000(expense)= $50,000 (profit)

Determining Value Second year You bring in $325,000 Profit of $75,000 (325, ,000) Now your restaurant starts to mellow out. You start to make $75,000 consistently.

Determining Value If you were making $75,000 consistently, someone might be WILLING pay $750,000 for your restaurant. Why? With a $750,000 investment, and a restaurant making $75,000/year…You are making a 10% rate of return. $75,000  $750,000

Determining Value Let’s say someone is WILLING to pay you $1,500,000 for your restaurant. What kind of rate of return do they expect? 5% $75,000  $1,500,000

Selling Shares Now that you know what people are WILLING to pay, you can set the price accordingly. You would price the restaurant for $1,500,000

Selling Shares Price of restaurant $1,500, people want to buy the restaurant, but don’t have $1,500,000. This is where SHARES are formed! You divide the company into 10 pieces (shares), and sell each piece for $150,000. ($1,500,000  10)

Selling Shares Since 10 people own all the shares… Each person receives 1/10 of profits. (10%) And each person would have 1 out of 10 votes for business decisions.

Selling Shares DIVIDENDS If the restaurant had the 10 owners and it made $75,000 that year, then each owner would receive… $7,500 in dividends

Selling Shares To make it even more affordable, you could sell 1,500 shares for $1,000 each. (1,500  1,000 = $1,500,000) OR, sell 3,000 shares, keep 1,500 for yourself, and sell the extra 1,500 for $500. (3,000  $500 = $1,500,000) (Or divide shares however you want)

Selling Shares Stocks follow the same guidelines as the restaurant example. The difference…The number of shares Example had ,000 shares, real life it can be in the BILLIONS.

Stock Market Let’s say you have your “share” of the restaurant, and you want to sell it. Instead of going out and finding a buyer, there is THE STOCK MARKET. The buyer is already found and just waiting for you to sell. The New York Stock Exchange (NYSE) is an example of a stock market.

Stock Market In Craig, we have “supermarkets” that sell food. The reason we go to the supermarket is because it’s more CONVENIENT. We shop at supermarkets instead of going to… The butcher, baker, dairy farmer, etc… It’s all in ONE PLACE

Stock Market The NYSE is a supermarket for STOCKS. It’s just like a supermarket, investors go to one place to buy and sell stocks

Stock Market How do you buy and sell stock if it’s in New York? Stock Broker: a stock broker does business with the NYSE and he/she will buy or sell stocks on your behalf.

Stock Market Because all the buying and selling of stocks are in ONE place, it allows the price of the stock to be known every second!

Stock Market Example: If your restaurant announced it was making hamburgers out of rat meat, you could literally watch your stock plummet. It would go down because everyone would be selling it. Why would the price of the stock go down if people were selling it?

Corporations Any company that wants to sell shares of stock to a number of different people must turn itself into a Corporation.

Corporations A corporation is a “virtual person” It has a Social Security Number It can… Own Property Go to court and sue people Be sued Make contracts

Corporations A corporation must have a “Board of Directors.” Board of Directors: the people who make the decisions for the corporation. It also decides on the major positions of the company…CEO, COO, CFO etc… Every year, shareholders meet and vote on the board of directors. (Board of directors are the “brain” of the virtual person.)

Shareholders A corporation is an easy way to gather large amounts of investment capital. Investment Capital: Money from investors

Shareholders Example: A corporation is just formed. It decides to sell 1 million shares Each share is selling for $20 The corporation just raised $20 million They take the $20 million and invest it within the company Buy equipment, hire employees

Shareholders With that new equipment and the better employees, the corporation looks to make a profit. With the profit, shareholders make money by the company paying DIVIDENDS!

Stock Prices How do people make money buying stocks? After the company bought the new equipment and hired the new employees, it made $1 Million.

Stock Prices With that $1 Million the corporation can… 1) It could put it in the bank. 2) Give it back to the shareholders. 3) Expand the company. 4) Combination of the three

Stock Prices If the corporation does option 2, and gives back to shareholders, then this is called Income Stock. The company does NOT grow, it pays all of it’s profits back to shareholders (dividends) If the corporation does option 3, and invests back into the company, then this is called Growth Stock.