Stock Market Basics

WHAT IS A STOCK? A stock represents partial ownership of a corporation. When you buy shares of a stock, the company gives you a stock certificate which shows that you own a small fraction of that company. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically.

WHY SELL YOUR STOCK? A company sells shares of its stock as one way to raise capital to fund the growth of its business. The BEAUTY of the Deal is that a company does not have to pay the money back.

WHAT DETERMINES A STOCK PRICE? A stock is worth what an investor is willing to pay for it Supply and demand decide a stock's price. Supply = number of shares a company has issued to the public. Demand = investors' desires to buy shares from current owners. Investors will purchase a stock if they think they will make a profit. (BUY LOW – SELL HIGH!)

WHY OWN STOCK? When the company makes money, so do you. Owning a stock means you are a partial owner of the company, and you get voting rights in certain company issues Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer no guarantee of any returns and can lose value, even in the long run Investments in stocks can generate returns through dividends, even if the price stays the same dividends

Stock Example Lets say company X issues 10 shares of stock to raise Capital You buy 1 $10.00 p/s Later this same year the company is doing very well. Lots of people want to invest in this CO. You are able to sell your share for $14.00 p/s. Google Stock 1-Oct-04, | 21-Aug-07,

Why own stock? GOOD INVESTMENT If you invest wisely, over time you will make more money investing in the stock market then putting your money into a savings account

THE DOWNSIDE… When you buy shares of a stock, you get a full share of the risk of an operating business. Owning stock does not guarantee that you make money

EXAMPLE: Theglobe.com –Heard it was a very hot Internet stock. –However, you didn’t do too much research but bought 100 shares at over $100 per share. –A few months later, the share price is less than $10. –Your hard-earned savings are now gone. –Some stocks may even go bankrupt and you could lose even more money.

WHY DO COMPANIES ISSUE STOCK? Primary Reason: to generate $$$$$ that will be used to… develop new products buy more advanced equipment pay for new buildings and inventories hire more employees provide for a merger or acquisition

DIVIDEND A small reward a company pays you for owning shares of its stock. The company takes a portion of its earnings, which it divides and distributes to shareholders. SLOW GROWTH = HIGH DIVIDENDS HIGH GROWTH = NO DIVIDENDS EXAMPLE: MICROSOFT –HIGH GROWTH COMPANY – DOESN’T PAY DIVIDENDS – REINVESTS THOSE DIVIDENDS BACK INTO THE COMPANY (back)back

STOCK SPLIT When a public company issues more shares of stock to existing shareholders. WHY? So that more investors can afford the stock In a 2-for-1 stock split, a company issues another share for every one already sold. EXAMPLE:you own 100 shares of IBM trading at $120. They announce a 2-for-1 split and you now have 200 shares, and the share price is $60.

GROUP QUIZ WHAT IS A STOCK? LIST 2 REASONS WHY YOU WOULD WANT TO OWN STOCK LIST ONE REASON WHY COMPANIES ISSUE STOCK YOU OWN 5 SHARES OF DISNEY CO. at $100 PER SHARE. DISNEY ANNOUNCES A 2 FOR 1 STOCK SPLIT. – HOW MANY SHARES DO YOU NOW OWN? –HOW MUCH IS EACH SHARE NOW WORTH?

MEASURING STOCKS DOW JONES INDUSTRIAL AVERAGE Shows generally how well the market is going Found by averaging the prices of 30 industrial blue-chip stocks trading in the New York Stock Exchange Blue chip stock: are the most valuable, from the largest companies

COMPANIES INCLUDED IN THE DJIA Alcoa Inc – 3.138% American Express – 6.510% At+T – 2.498% Boeing Co. – 1.714% Caterpillar Inc. – Citigroup Inc. – 2.553% Coca-Cola Co. – % DuPont Co. – 2.480% Eastman Kodak Co. – 2.700% Exxon Mobil Corp. – 3.809% General Electric Co. – 6.543% General Motors Corp. – 3.861% Home Depot Inc. – 2.804% Honeywell International Inc. – 2.250% Hewlett-Packard Co. – 6.412% International Business Machines – 5.218% Intel Corp. – 5.885% International Paper Co. – 1.785% J.P. Morgan & Co. – 5.766% Johnson & Johnson – 3.769% McDonald’s Corp. – 1.592% Merck & Co. – 2.930% Microsoft Corp. – Minnesota Mining and Manf. – 4.042% Philip Morris Cos. – 0.982% Procter & Gamble Co. – SBC Communications Inc. – 2082% United Technologies Corp. – 2.688% Wal-Mart Stores Inc. – Walt Disney Co. – 1.711%

STANDARD AND POOR’S 500 INDEX A.K.A. S&P500 A well-known, value-rated index of 500 major US companies: 400 industrial firms, 20 transportation firms, 40 utilities firms, and 40 financial firms Like the Dow Jones Industrial Average, shows how the market is doing by averaging the stock prices of these 500 companies

Where are stocks traded? 2 major U.S. markets: NEW YORK STOCK EXCHANGE (NYSE) NASDAQ STOCK EXCHANGE

HOW ARE STOCKS BOUGHT and sold? BUYERS: Do research on company and price Place an order (either online or with broker)for x amount of shares for x amount of $ Order is sent to NYSE floor Transaction occurs Order confirmation sent Pay for stock and stockbroker commission SELLERS Decide to sell x amount of shares for x amount of $ Place a sell order (either online or with broker) Sell order is sent to NYSE floor Transaction occurs Sell confirmation sent Check sent to seller minus stockbroker commission

A stock portfolio is a collection of stocks that an investor owns at a particular point in time. Information contained in a portfolio: –Parent company name – –(example: Oreo cookies – owned by Nabisco which is now owned by Kraft Foods) –Stock Quote (price that the stock is trading at) –Stock exchange symbol portfolio Owns -