National Council of Economic Education
Carolyn Shirk
Vice President
849 Tame Deer Drive
Winfield, PA 17889
Cell: 570-975-5149
570-374-9467
Investment
Basics
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
Different Types of Investments:









Insured Savings Accounts
Savings Bonds
Certificates of Deposit
Treasury Bonds
Corporate Bonds
Mutual Funds
Stocks
Collectibles
Commodities
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:
New York Stock Exchange Oldest, largest,
best-known stocks
NASDAQ: Large, mid-sized, and small growth
companies
AMEX:
American Stock Exchange Mid-sized growth
companies
Investment Basics
The Difference Between Large and
Small Companies:
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
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
the largest and most
profitable stocks
Bull Market
a market that is rising
Bear Market
a market that is falling
Investment Basics
Why long term
investing is the
best route?
DJIA over last 33+ years:
Investment Basics
What stocks should I buy?
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
Investment Basics
Earnings Per Share
 Earnings per Share or EPS is the firm profit
divided by number of shares.
 Find EPS and PE ratios on the internet &
newspaper
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
Apple Inc.
Beta = % change in
stock return / % change
in market return.
• 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- www.amex.com
NASDAQ- www.nasdaq.com
NYSE- www.nyse.com
CNNfn- www.cnnfn.com
Google -http://finance.google.com/finance
Database of Corporate Informationwww.sec.gov/edgarhp.htm
 Yahoo! Finance- http://finance.yahoo.com






Economics and the
Stock Market
 Micro vs. Macro economics
 Going from a good idea to a
corporation
Micro vs. Macro
Microeconomics
Microeconomics studies the
behavior of the consumer,
household, or firm.
 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
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!
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”
http://www.bls.gov
Going public
Going Public:
From a Good Idea to a Corporation
 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
Going Public:
From a Good Idea to a Corporation
 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
Important to Stress at the
End of the Game
Diversification
Mutual Funds
Long-Term Proposition