FAMILY ECONOMICS & FINANCIAL EDUCATION © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 1 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

G1 Why Learn About Stocks © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona The stock market is the core of America’s economic system  Stock is a share of ownership in the assets and earnings of a company  Stock market is a general term used to describe all transactions involving the buying and selling of stocks by a company

G1 Why Companies Issue Stock © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 3 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona When a company would like to grow, it issues stocks to raise funds and pay for ongoing business activities It is popular because:  The company does not have to repay the money  Paying dividends (profit) is optional  Dividends are distributions of earnings paid to stockholders

G1 Risk vs. Return © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 4 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona On average, stocks have a high rate of return  The increase or decrease in the original purchase price of an investment Higher rate of return = greater risk  Uncertainty about the outcome of an investment Stocks provide portfolio diversification  Money invested in a variety of investment tools

COMMON STOCK VS. PREFERRED STOCK © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 5 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

G1 Common Stock © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 6 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 – 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  A merger of two companies  Dividends are paid

G1 Preferred Stock © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 7 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 – shares which pay fixed dividends and have priority over common stock  Less risk than common stock  No voting rights  Dividends are stated as a percentage known as the par value  Fixed value stated on the stock certificate

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 8 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 Stock Classifications © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 9 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Seven basic classifications  Growth, Income, Value, Cyclical, Countercyclical, Speculative, Blue Chip Some stocks can be classified into more than one category

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 10 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 Book Value © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Book value is the net worth of a company Assets-Liabilities = Book value  Information can be found in the company’s annual report  Indicates what would happen if a company’s assets were sold, debts paid, and proceeds distributed to stockholders

G1 Earnings per Share © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 12 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona How much income a company has available to pay in dividends and reinvest as retained earnings on a per share basis After tax annual earnings = Earnings per share Total number of shares of common stock

G1 Price/Earnings Ratio © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 13 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Price/earnings ratio is the relationship between the price of one share of stock and the annual earnings of the company (P/E ratio) Price per share = P/E ratio Earnings per share of stock  Most widely used critical measure of a stock’s price  Represents how much an investor is willing to pay for each dollar of a company’s earnings

G1 P/E Ratio Continued © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 14 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona  Most companies have between a 5-25 P/E ratio  7-10 P/E ratios are financially successful companies  P/E ratios are rapidly growing companies  P/E ratios are speculative companies  Lower P/E stocks pay higher dividends and have less risk, lower prices, and slow growth  High P/E ratios indicate the firm is expected to have a lot of growth in the future