Myths about the Stock Market  Misconception or Truth? You can visit the Toronto Stock Exchange (TSX) and see stocks being traded on the floor. Misconception. There is no trading floor at the TSX. Trading occurs in cyberspace.

Myths about the Stock Market  Misconception or Truth? Stockbrokers handle all aspects of stock trading. Misconception. Stock exchanges manage trading. Stockbrokers carry out the trade.

Myths about the Stock Market  Misconception or Truth? Stock prices are set by companies and regulated by the government. Misconception. Stock prices are determined by the law of supply and demand.

Myths about the Stock Market  Misconception or Truth? Most trading occurs between corporations and investors in primary markets (i.e. – buying/selling of newly issued stock) Misconception. Most trading occurs in secondary markets.

Myths about the Stock Market  Misconception or Truth? Insider trading is illegal. ○ Insider trading is the buying or selling of corporate stock by a corporate officer or other insider using information that has not been made public. (Think – Martha Stewart!) Misconception. Some insider trading is legal but it must be reported. It is the use of information that is not public that is illegal. If an insider trade is reported, the public has access to this information and it is not illegal.

The First Sale of Stock  Called an Initial Public Offering (IPO)  To raise money for growth, expansion, research, etc.  Take place in the primary market Between the company and the shareholder Will not happen again until the company issues more stock

Further Trades of Stock  After the IPO all trading takes place in the secondary market  A shareholder will sell his/her stocks to another buyer  The price the buyer wants to pay must match the price that the seller wants to receive!

How Does it Work?  Price = agreed upon value for the sale of stock  Bid = highest price that a buyer is willing to pay (demand)  Ask = lowest price that a seller will accept (supply)  If demand > supply, stock prices will increase  If supply > demand, stock prices will decline  When bid = ask, a trade will happen!

Who Will Make a Trade? BIDASK BUYERPRICESELLERPRICE A$50E$64 B$54F$62 C G$68 D$57H$69 Buyers want to buy at the lowest price possible. Sellers want to sell at the highest price possible.

Reading Trading Information  Ticker tape is a record of current trading on a stock exchange  Example: CMB Stock Symbol (CMB) Number of Board Lots (20) Share price of the trade ($22.46)

What is a Board Lot?  A standardized number of shares defined by a stock exchange as a trading unit.  100 shares (for shares priced at $1 or more) or 1,000 shares (for shares priced under $1)  Makes trading easier it’s more difficult for a broker to find a buyer for 19 shares, than if everybody agrees to trade in 100 share lots.

Factors Affecting Stock Prices  Supply and demand of the stock Increased demand raises prices Increased supply lowers prices  Investor’s like or dislike of a stock Positive news can increase demand and drive prices up Negative news can decrease demand and increase supply as investors sell and prices decline

And still more...  Stock price is affected by investor’s feeling about future growth potential  A company with no earnings potential now or in the future can’t survive and their stock price will decline

15 (Volume)

What is a Market Index?  The aggregate value of a collection of stocks from various sectors in an economy  A way to measure how the market is doing and where the market is going Compare the value of the index against its base value  If the index goes up, most of the prices of stocks in the index went up  Example – S&P/TSX Composite Index

S&P/TSX Composite Index  “is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Toronto Stock Exchange listed companies in this index account for about 70% of market capitalization for all Canadian-based companies listed on the TSX

Market Capitalization or ‘Market Cap’  is the total dollar market value of the shares outstanding of a publicly traded company; it is equal to the share price times the number of shares outstanding.

Canadian Economic Sectors

Barrick Gold, Potash Corp. Suncor Energy Canadian National Railways BMO, TD Algonquin Power

Why Watch the Index?  You can establish the type of market we are in: Bull market = rising stock prices and higher stock indexes Bear market = declining stock prices and lower stock indexes  Are we in a bear or bull market?

 You can compare how one stock is doing by looking at similar stocks If you hold a stock for company ABC and the price of that stock increased during a period when the index was decreasing, what does that tell you? Why Watch the Index?

Most Active Stocks

Gainers (% change)

Losers (% change)

In-class Activity  Use the business section of the newspaper and find the stock pages  Taking Stock Activity 4.7  Work through questions 1-5.

In-class Activity  Read Activity 4.8  Taking Stock Activity 4.10  Complete questions 1 & 2

Bubbles & Crashes  Stock market bubbles Occur when there too much demand on a stock The stock price is driven up to a level above what is a true reflection of the stock’s worth or value The stock price eventual pops or falls ○ They pop because the prices are not based on reasonable and substantial fact

Bubbles & Crashes  Stock market crashes Occur when there is a significant drop in the value of the entire market Can be related to the popping of a bubble Cause investors to flee the market Investors panic sell in order to minimize losses Panic selling contributes further to the declining market

Bubbles & Crashes  A bubble is necessary to create a crash  Like clouds and rain Can’t have rain without the clouds Stock market bubbles precipitate stock market crashes

Famous Bubbles & Crashes  Tulipomania 1620’s  South Sea Bubble 1710’s  Panic of 1837  Wall Street Crash of 1929  Energy Crisis 1979  Black Monday 1987  Asian Financial Crisis 1990’s  Downturn of 2002 (post 9/11)