So What is a Stock Market? The DOW demystified

Remember: A stock market is a “store” that sells business. You can buy ownership of businesses when you buy SHARES of stock. – Companies decide on how many pieces (shares) of the company they want to sell.

There are THREE ways stock have VALUE Create DEMAND for the stock. – What happens to price when demand goes up?

The THREE Ways stock have value Keep the SUPPLY of stock low. – What happens when there is more demand than supply? BERKSHIRE HATHWAY

The Third Way that Stocks have value The FUNDAMENTALS.

The Major Markets in the US NYSE

The Major Markets in the US NASDAQ

(kinda) stock market American Stock Exchange AMEX

Chicago Commodities Market Commodities: The raw materials of the earth being traded. – Cocoa – not Hershey’s

What is the DOW? Dow Jones finished up 35 points to close at 10,000. But what does that mean???

The DOW The Dow Jones Industrial Average (DJI), commonly just referred to as "The Dow", is an average of the price of 30 stocks. – The stocks represent 30 of the largest and most widely traded stocks in the United States.

What stocks are on the DOW? 3M, Alcoa, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper

AND … J.P. Morgan Chase, Johnson & Johnson, McDonald's, Merck & Co., Microsoft, Philip Morris, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, and Walt Disney.

The DOW The Dow Jones Industrial Average is computed by taking the average price of the 30 stocks and dividing that figure by a number called the divisor.

The DOW Divisor If the price of International Paper increases by two points, the DJI would increase by 13.7 points assuming none of the other stock values changed (13.7 = 2 / ). – Because of the formula used by the Dow a one point increase or decrease by any stock will have the same affect, which is not the case for all indices.

The DOW So the Dow Jones number you hear in the news each night is simply this weighted average of stock prices. Because of this, the Dow Jones Industrial Average should just be considered a price in itself.

The DOW So when you hear that the Dow Jones went up 35 points, it just means that to buy these stocks (taking into account the divisor) at 4:00pm today (the closing time of the market) it would have cost 35 more dollars than it would have cost to buy the stocks the day before at the same time.

The History of the DOW JONES It was created in 1896 by Mr. Dow and Mr. Jones using 16 common stocks.

The First Dow Jones Companies American Cotton Oil Company, a predecessor of Bestfoods, now part of Unilever American Cotton Oil Company BestfoodsUnilever American Sugar Company, now Amstar Holdings American Sugar CompanyAmstar Holdings American Tobacco Company, broken up in 1911 American Tobacco Company Chicago Gas Company, bought by Peoples Gas Light & Coke Co. in 1897 (now Peoples Energy Corporation) Chicago Gas CompanyPeoples Energy Distilling & Cattle Feeding Company, now Millennium Chemicals, a division of Lyondell Chemical Company Distilling & Cattle Feeding Company Millennium ChemicalsLyondell Chemical Company

The First DOW JONES Laclede Gas Light Company, still in operation as The Laclede Group Laclede Gas Light Company The Laclede Group National Lead Company, now NL Industries National Lead CompanyNL Industries North American Company, (Edison) electric company broken up in the 1950s North American Company Tennessee Coal, Iron and Railroad Company, bought by U.S. Steel in 1907 Tennessee Coal, Iron and Railroad CompanyU.S. Steel U.S. Leather Company, dissolved 1952 U.S. Leather Company1952 United States Rubber Company, changed its name to Uniroyal in 1967, bought by Michelin in 1990 United States Rubber CompanyMichelin

QUICK QUIZ! The Dow Jones measures the performance of which stock market? – NYSE

Historic LOWS of the DOW A CRASH is a sudden dramatic decline of stock prices across a cross-section of the market. – Often panic-driven – Speculative stock market bubble?

Historic Lows of the DOW Crash of 1929 – Followed by the crash of 1930 – Followed by the crash of 1931 – Followed by the crash of 1932

Historic Lows of the Stock Market 1987 ( Black Monday)

Dot.com crash People were – Speculating instead of investing – Borrowing money to invest in the stock market – 9/11 happened too – PANIC!!!!

Think of the historic crashes as percentage losses of value 1929 – – Average investment lost 63.9% value 1987 – – 22.3% loss in value of investments

Since July 2008 Average portfolio (list of stocks) lost 40%

So ….. What’s going to happen? – Is it a good time to invest in the market?

Terms to KNOW: BULL MARKET – Prolonged period where the price of stock is rising BEAR MARKET – Investment prices are falling and there is general pessimism.

Bubbles Wave of public enthusiasm causes an exaggerated bull market. – Stock prices rise dramatically – TEND to be OVERVALUED!

Bubbles At some point – – REALITY HITS – BUBBLE BURSTS – CRASH HAPPENS

NOTE: Some other Indexes NYSE Composite Made of 1750 common stocks listed on the exchange.

NASDAQ Composite Comprised of common stocks organized as industry, bank, insurance, financial institutions, transportation and utilities.

Standard and Poor’s OTC 250 companies averaged. Price weighted and minute by minute. OTC= Over the Counter Small companies

The S & P 500 Includes 400 industrials, 20 transportation and 40 public utilities.

The Wilshire 5000 Index Broadest index available. All stocks for which daily quotations are available.

What do indexes do? Market indicators? Can tell the future trends?

Strategies for the game: Warren Buffett’s advice: “Buy what you know.” Look at the business websites, magazines. Monkey Method

Points to REMEMBER! The stock market is driven by supply and demand. The number of shares of stock dictates the supply The number of shares that investors want to buy dictates the demand. It's important to understand that for every share that is purchased, there is someone on the other end selling that share (or vice versa).

With Supply and Demand and the Market MMore demand than supply – the market indexes go UP. MMore supply than demand – the market index goes DOWN.

Stocks have two types of valuations OOne is a value created using some type of cash flow, sales or fundamental earnings analysis.

The Fundamental Way to Invest TThis is the valuation that people use to justify stock prices. TThe most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio.

This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices.