The Ohio Stock Market Challenge

New to the Stock Market  For a new investor, the stock market can feel a lot like legalized gambling. "Ladies and gentlemen, place your bets! Randomly choose a stock based on gut instinct and water cooler chatter! If the price of your stock goes up -- and who knows why? -- you win! If it drops, you lose!" Isn't that why so many people got rich during the dot-com boom -- and why so many people lost their shirts (not to mention their retirement savings) in the recent recession?retirement savingsrecession

The Stock Market:  Stock market: or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.stockshares derivativessecurities stock exchange  A share of stock represents fractional ownership of a business.  When you buy shares of stock in a company, you are buying a small fraction of the business and all the profits that go along with it.  For example, if ABC Company needed to raise $1,000,000 they could sell 100,000 shares at $10. Each share that you owned would represent 1/100,000th ownership of the company.

The Stock Market:  Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money (a process known as debt financing) or sell stock (also known as equity financing).  The disadvantage of borrowing money is that the company has to pay back the loan with interest. By selling stock, however, the company gets money with fewer strings attached. There is no interest to pay and no requirement to even pay the money back at all. Even better, equity financing distributes the risk of doing business among a large pool of investors (stockholders). If the company fails, the founders don't lose all of their money; they lose several thousand smaller chunks of other people's moneyloan with interest

Private and Public Companies  Keep in mind that some companies are “public” and some companies are “private”.  Private companies: are smaller companies that have raised money through a small number of investors and their stock does not have an active market where it can be bought and sold.  Public companies: have sold their stock to many investors (shareholders) and have registered their shares with the Securities and Exchange Commission and with an exchange (NYSE, AMEX, or NASDAQ) and hence their shares can be bought and sold with ease on an exchange.

Common vs. Preferred  The two main types of shares are common and preferred stocks.  Common stock: gives the owner the right to vote at shareholder meetings and receive dividends if any are declared.  Preferred shares: typically don't confer voting rights, they have priority over common shares for earnings and assets. This means when a company declares dividends, preferred shareholders are paid before common ones and have a higher claim to assets if the company goes bankrupt and is liquidated.  When you buy stocks on Ohio SMC, they are almost always shares of common stock

How do you decide which stock to buy or sell?  A wise investor will always conduct some type of analysis before making an investment.  Investment: acting on hot tips or blindly following the crowd rarely pays off.  Students can start off by asking their parents and find out what stocks they might be invested in and why.  They should start watching the spending habits of their families, friends and even themselves—what are they buying? Are they buying more than they use to buy? What products do you always use and trust, and which ones don’t you use anymore.  Students should start watching the business channels on TV, and start reading a few of the popular stock market websites like finance.yahoo.com, forbes.com, investors.com, fool.com.  There is also a Research link on the Ohio SMC website that will contain many valuable links.

What does it mean to “Long” or “Short” a stock or the stock market?  Everyone has heard the old adage “Buy low and sell high.”  When a trader buys a stock, he is said to have a “long” position. He is “long” because he believes the stock price is going higher. This is also known as being “Bullish” or a ‘Bull” on the market.  Conversely, a trader can also make money when he thinks a stock is going to decrease in price. Instead of buying low and selling high, a trader can “Sell high and buy low.”  In this instance, a broker will actually loan the trader shares of stock that the trader then sells. At this point, the trader has “sold short” the stock and believes the price is going to be lower. This is also known as being “Bearish” or a ‘Bear” on the market. When the price has fallen, the trader buys the stock at a lower price and “covers” his “short” position. The trader then takes the shares that he just bought and returns them to the broker from whom he borrowed the shares.

What is a bid/ask?  The stock exchanges provide the valuable service of bringing together all of the buyers and the sellers of stocks each day and matching the buyers and sellers that agree on a price.  The exchanges keep track of all of the open orders and show the highest buy order price as the “bid price” and show the lowest sell order price as the “ask price.” The “ask” is the price the person who owns the stock is asking to sell his shares.  On Ohio SMC your buy orders will get filled with the ask price and your sell orders will get filled at the bid price.

What is an Investment Portfolio?  An investment portfolio is a collection of investment assets, such as stocks, bonds, ETF's, mutual funds, derivatives, real estate and commodities.  Investment portfolios should be constructed after carefully assessing the investor's goals, objectives and portfolio, such as age, growth and income requirements, risk tolerance and liquidity needs.  At Ohio SMC, your investment portfolio is comprised entirely of stocks in companies that are publicly traded in the U.S. markets, as well as U.S. mutual funds.

What is a Market Order?  Market order: is an order to buy or sell a specified number of shares (or bonds, etc.) at the best available price when the order is submitted.  All orders that don't bear a specific price are considered market orders.  Market orders placed while the markets are closed or before the market opens will be executed at an appropriate bid/ask price shortly after the market opens and contingent to trading volume on that particular stock.  If the stock requested does not have sufficient volume to execute, then that order will stay pending until filled or canceled.

What is a Limit Order?  Limit order: is an order in which a specific price is set to buy or sell a security. If the price point is hit and there is sufficient volume at that price point or better, your order will be filled.  Limit orders may be placed as "Day" orders which are good for the day only, or as "GTC" orders, which are good until canceled.

What is a Stop Order?  Stop order: is an order to buy or sell a stock when the stock price reaches a specified price, which is known as a stop price. When the specified price is reached, the stop order becomes a market order.  (a) A Sell Stop Order: is used by investors and traders long a stock to protect an existing profit or avoid further losses if the stock price drops.  A stop order to sell must be placed below the current market price.  (b) A Buy Stop Order: is used by investors and traders short a stock to protect a profit or limit a loss if the stock price increases.

What is a Stop Order?  A stop order to buy must be entered at a price above the current market price.  Stop orders may be placed as "Day" orders which are good for the day only, or as "GTC" orders, which are good until canceled.  For example, if you own 100 shares of IBM at $100/share and you want to sell it if the stocks goes up to $110, that would be a limit sell order; but, if you wanted to sell if the stock price drops to $95 so as to limit your losses, that would be a stop sell order.

What is an Open Order?  A market order that was placed when the market was closed and has not filled yet, or a limit/stop order that has been placed but the price has not been met yet and therefore has not executed yet is called an open order.  At the Ohio SMC, all orders are either market orders or GTC orders.

What is buying power?  All Ohio SMC accounts are margin accounts, which mean that we will loan you a certain amount of funds.  The buying power calculation is the amount of stock purchases that you can make if you want to become fully invested and take the full amount of loan that the Ohio SMC is willing to lend you.

What time does the stock market open?  The North-American stock market opens at 9:30AM ET and closes at 4:00PM ET. Any trade made when markets are closed will be processed the next business day.  Markets are CLOSED for these Federal Holidays in the U.S.: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed). On the day following Thanksgiving and frequently the day before Christmas, the market will close at 1:00 pm ET.

Can I place orders after the market has closed?  Yes! You can make a trade after the market has closed. Your trade will be filled at the open price of the stock at market open.make a trade