G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona The Language of the Stock Market FEFE, adapted by Mr. Page

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Why Learn About Stocks The stock market is a core of America ’ s economic system –Stock is a share of ownership in the assets and earnings of a company –Bond is a type of debt that a company issues to investors for a specified amount of time. –Stock market is a general term used to describe all transactions involving the buying and selling of stocks and bonds issued by a company

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Why Companies Issue Stock A company issues stocks to raise funds to grow and pay for ongoing business activities –The company does not have to repay the money This means what is invested is entirely at risk. –Paying dividends is optional Dividends = Share in the company profit

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Risk vs. Return On average, the stock market has a high rate of return –6-8% since the inception of the market Higher rate of return = greater risk

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 2 Basic Types of Stock Common Stock Vs. Preferred Stock

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Common Stock Common stock – shares or units of ownership in a public corporation –Most basic form of ownership –One vote per share owned to determine company ’ s board of directors Ways the stock value can change –The dollar value increases or decreases –Stock split occurs – shares owned by existing stockholders are divided into a larger number of shares –Dividends are paid

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Preferred Stock Preferred stock – shares which pay fixed dividends and have priority over common stock –Less risk than common stock –Typically only available to employees –No voting rights –Dividends are stated as a percentage known as the par value

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Stock Classifications

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Stock Classifications A variety of type of stocks are necessary for a diversified portfolio Seven basic classifications –Growth, Income, Value, Cyclical, Countercyclical, Speculative, Blue Chip Some stocks can be classified into more than one category

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Growth Stock Growth stocks are from companies who have a consistent record of relatively rapid growth and earnings in all economic conditions –New companies expending product lines –Usually does not pay dividends –Beta is 1.5 or higher –Example: FacebookFacebook

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Income Stock Income stocks pay higher than average dividends –Company only retains small portion of profits –Companies with a steady stream of income such as utility companies –Beta is less than 1.0 –Example: Duke EnergyDuke Energy

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Value Stock Value stocks are from companies which have a low market price considering historical earning records and value of assets –Viewed as investment bargains –Example: Bank of AmericaBank of America

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Cyclical Stock Cyclical stocks are influenced by changes in the economic business cycle –Companies which operate in major consumer dependent industries Automobiles, housing, airlines –Beta is generally 1.0 –Example: FordFord

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Countercyclical Stock Countercyclical stocks are companies which give consistent returns even when the economy is suffering –Products are always in demand –Good for investors who want dividends –Beta is 1.0 or below, even negative –Example: Family Dollars StoresFamily Dollars Stores

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Speculative Stock Speculative stocks are companies with potential for substantial earnings –Very high risk stocks –Examples include internet and video game companies such as ZyngaZynga –Beta is 2.0

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Blue-chip Stock Blue-chip stocks are from nationally recognized companies with long records of profit, dividend payments, and a good reputation for management –Less risky –Grow at a consistent rate –Examples McDonalds, Procter & GambleMcDonaldsProcter & Gamble

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Researching A Stock

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Key Statistics Book value Net worth (assets – liabilities) Earnings Per Share (EPS) (After tax annual earnings/Total number of shares of common stock) Price/Earnings ratio (P/E ratio) The relationship between the price of one share of stock and the annual earnings of the company (Price per share/earnings per share) Beta measures a stocks volatility compared to overall changes in the stock market (1 moves w/market)

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona How Well the Stock Market is Doing Overall

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 3 Basic Indicators Dow Jones Industrial Average ( “ DOW ” ) –Lists the 30 leading industrial blue chip stocks Standard and Poor ’ s 500 Composite Index –Covers market activity for 500 stocks –More accurate than DOW because it evaluates a greater variety of stock National Association of Security Dealers Automated Quotations ( “ NASDAQ ” ) –Monitors fast moving technology companies –Speculative stocks, show dramatic ups and downs

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Ups and Downs The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned

G1 © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Supply vs. Demand The stock exchange is organized based upon the laws of supply and demand –Supply is the relationship of prices to the quantities of a good or service sellers are willing to offer for sale at any given point in time –Demand is the relationship of prices to the quantities and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.