National Council of Economic Education Carolyn Shirk Vice President 849 Tame Deer Drive Winfield, PA Cell:

Investment Basics

Stock Market IQ Quiz Investment Basics

True or False 1.Stocks are items found in the storeroom of a grocery store. 2.Only rich people invest in the stock market. 3.Most stocks on the stock market are sold by the United States Government. 4.If the stock market goes up 30 percent one year, it will fall by 30 percent in the next year. Investment Basics

5.Any stock that goes up in price must eventually come back down. 6.Bears, Bulls, and Pigs are found in the stock market. 7.Stock prices are set by the Securities and Exchange Commission, a regulatory agency of the U.S. government. 8.Stock markets are open on business days around the clock, around the world. Investment Basics

9.Sometimes companies buy their own stocks on the stock market. 10.It is hard to buy a good stock today because all the good ones have already been purchased. 11.Buying stocks is a sure way to make money. 12.Corporations sell new issues of stock on the New York Stock Exchange. Investment Basics

13.“Insider” stock trading means that trading stocks takes place inside a building. 14.People can buy stocks on the internet. 15.When the stock market goes up, it causes the economy to grow. From Learning from the Market, © National Council on Economic Education, New York, NY Investment Basics

 Insured Savings Accounts  Savings Bonds  Certificates of Deposit  Treasury Bonds  Corporate Bonds  Mutual Funds  Stocks  Collectibles  Commodities Different Types of Investments: Investment Basics

The RISK to RETURN Relationship: The RISKIER the Investment - The HIGHER the Return Investment Basics

The Difference Between Stocks, Bonds, and Mutual Funds Stocks: You own a piece of the company You make money if the company does well Bonds: You loan money to a corporation or government You earn the interest Mutual Funds: You own one portion of a collection of stocks, bonds, or other securities Investment Basics

The Three Main Markets: NYSE: NYSE New York Stock Exchange Oldest, largest, best-known stocks NASDAQ: NASDAQ: Large, mid-sized, and small growth companies AMEX: ASEx American Stock Exchange Mid-sized growth companies Investment Basics

Large:  Often have high prices  Low risk of failure  Usually pay regular dividends Small:  Potential for growth is greater than for larger companies  Generally prices are lower The Difference Between Large and Small Companies: Investment Basics

Common Stocks:  Pay dividends based on performance of the company  Have higher risk but may have higher reward Preferred Stocks:  Dividend amount is preset  Dividends are paid on preferred stocks before common stocks  Have lower risk but may limit reward Investment Basics

Stock Splits:  More shares are created at a lower price per share  Stockholders profit if stocks go up  Indicated with an (s) in the paper Ex: Dell $109  $54 Investment Basics

Other Terminology: Blue Chips Blue Chips the largest and most profitable stocks Bull Market Bull Market a market that is rising Bear Market Bear Market a market that is falling Investment Basics

Why long term investing is the best route? Investment Basics

DJIA over last 33+ years :

PE Ratio or Price-to-Earning Ratio  Market Value Per Share/Earnings per Share If a company is currently trading at $43 a share and the EPS over the last 12 months were $1.95 per share, the P/E ratio for the stock would be $22.05 ($43/$1.95)= $22.05 What stocks should I buy? Investment Basics

 Earnings per Share or EPS is the firm profit divided by number of shares.  Find EPS and PE ratios on the internet & newspaper Earnings Per Share Investment Basics

PE Ratio  More earnings per share given stock price results in a lower PE ratio and a better buy.  PE Ratios show how much an investor is willing to pay per dollar of earnings

PE Ratio  PE Ratios show how much an investor is willing to pay per dollar of earnings  Mattel: An investor is willing to pay $15.81 for every dollar of earnings

 Beta = % change in stock return / % change in market return. Apple Inc. Beta = 1 means that the stock and market change by the same percentage. Larger beta means a larger change than the market on any given day.

Where to get more information  American Stock Exchange-  NASDAQ-  NYSE-  CNNfn-  Google -  Database of Corporate Information-  Yahoo! Finance-

Economics and the Stock Market  Micro vs. Macro economics  Going from a good idea to a corporation

Microeconomics  Scarcity and choice  Utility and profit maximization How do we allocate our budget, time? How do firms allocate resources to produce goods and services?  Efficiency Microeconomics studies the behavior of the consumer, household, or firm. Micro vs. Macro

Micro and the Stock Market  Look at one company: –How does this company make its product? –Who buys this product? –Does the company have good managers?  Look at one industry: –How much competition in the industry? –Is the industry young or old? What stock brokers and mutual fund managers get paid to do! Micro vs. Macro

Macroeconomics Macroeconomics studies the economy as a whole or as aggregates and attempts to predict or forecast changes in national output, unemployment, and inflation. Micro vs. Macro

Macro & the Stock Market  Look at the whole economy: –Inflation: Producer and Consumer Price Indices (PPI & CPI) –Unemployment: Unemployment rate –Interest rates: actions of the Fed –Productivity  Use information to estimate good times to buy and times to sell. Note: an “active” investor thinks about how these indicators will affect the economy in 3 months! Micro vs. Macro

When is the news good?  Example: decrease in the unemployment rate:  Good: sign of a growing economy  increased consumer spending  increased profits.  Bad: indication of future labor shortages  increasing wages  inflation  fed increases interest rates  decrease profits, slow growth.

U.S. Department of Labor Bureau of Labor Statistics “Economy at a Glance”

 Product idea: on-line financial services including banking, investments, retirement planning, estate planning, legal services, etc.  Need funds to start business - find investors “venture capitalists.”  Each investor owns a stake or “share” of the corporation and has limited liability. Going Public: From a Good Idea to a Corporation Going public

 Suppose the company is doing well. You need more money - go public, “initial public offering”  Going public: investment bank creates a prospectus and buys all shares of stock and resells them at a set price to the public  A “tombstone” is the public notice of an IPO Going Public: From a Good Idea to a Corporation Going public

Important to Stress at the End of the Game  Diversification  Mutual Funds  Long-Term Proposition