Students will learn and perform the following:
•
•
•
•
•
Learn about stocks and the stock market
How companies borrow money
Building a Investment Portfolio
Make decisions about your investment choices
Explain why you made the choices you did when
creating your portfolio
Table of Contents
Page 3: Pre-Test
Page 14: Risk level
Page 25: diversified – algebraically
Page 4: pre-test answer key
Page 15: Answer key
Page 26: diversified – algebraically
Page 5: What is a Company?
Page 16: Dividends & Earnings
Page 27: Answer key
Page 6: Stock-vocabulary
Page 17: Dividends & Earnings
Page 28: Earnings Per Share EPS
Page 7: Speaking of stocks
Page 18: Dividends & Earnings
Page 29: Price to Earnings P/E
Page 8: answer key
Page 19: Dividends & Earnings
Page 30: Stock Splits
Page 9: stock market calculations
Page 20: Answer key
Page 31: Beta
Page 10: Answer key
Page 21: Diversification
Page 32: Stock Market Glossary
Page 11: Risk
Page 22: Diversification-vocabulary
Page 33: Stock Market Glossary
Page 12: How much risk?
Page 23: How diversified?
Page 34: Stock Market Glossary
Page 13: Answer key
Page 24: Answer key
Page 35: Stock Market Glossary
What is Stock Pre-test
1. The
government owns the stock market. ________
True or False
2. Only the very rich can buy stock. ________
3. There is only one place you can buy stock in the United States. _______
4. Stockholders can only make money by collecting dividends. _______
5. People who invest in the stock market will always make money. ______
6. People can only buy stock in public companies. _______
7. A dividend is a portion of the company’s profits paid to its stockholders. _______
8. Stock can be purchased by any investor. ______
9. A company issues shares of stock in order to raise funds for expansion. _______
10. The New York Stock Exchange is where all stocks are traded. ______
11. Someone who bought a company’s stock for $16.50 and sold it for $23.50, lost
money on the
investment.______
12. An investor takes a risk when buying any stock. ______
Back to Table of Contents
What is a stock Pre-test (answer key)
The government owns the stock market. False
2. Only the very rich can buy stock. False
3. There is only one place you can buy stock in the United States. False
4. Stockholders can only make money by collecting dividends. False
5. People who invest in the stock market will always make money. False
6. People can only buy stock in public companies. True
7. A dividend is a portion of the company’s profits paid to its stockholders. True
8. Stock can be purchased by any investor. True
9. A company issues shares of stock in order to raise funds for expansion. True
10. The New York Stock Exchange is where all stocks are traded. False
11. Someone who bought a company’s stock for $16.50 and sold it for $23.50,
lost money on the investment. False
12. An investor takes a risk when buying any stock. True
Back to Table of Contents
What is a Company?
Read the Chocolate Company (Hershey)
Based on your reading about Hershey, answer the following
1) Why did Milton think his chocolate candy would sell?
2) Where did he get the money to start making chocolate?
3) What type of company did Hershey have before he incorporated?
4) What benefits do you think Milton gained from forming a corporation?
5) Why would people today want to invest in the Hershey Company?
Students handouts: Fact sheet #1 & Activity sheet #1 and Fact sheet 31, A tale of two Chocolate Companies
Back to Table of Contents
What is a Stock (vocabulary)
•
•
•
•
•
•
Common Stock: Shares represent ownership in a corporation and give the right to vote for
the company's board of directors and benefit from its financial success
Dividend: Part of a company’s profits (earnings) that is pays as money or shares to
stockholders. In The Stock Market Game, any dividends received are listed in Transaction
History and are included in the portfolio’s total equity.
Earnings: Whatever profits or net income remains after subtracting the company’s expenses
from its revenue. A company’s profit.
Initial Public Offering (IPO): An IPO is the first issue of stock for public trading made by a
company.
Investor: Someone who purchases stocks, bonds, mutual funds and other financial
instruments in hopes the investments will increase in value over time.
Parent Company: A company that owns enough voting stock in another firm to control
management and operations.
What is a Stock (middle school)
Student handout: Fact sheet #1 What is a stock?
Back to Table of Contents
Back to Table of Contents
handout: Activity sheet #4
Activity Sheet 4: Speaking of Stocks
_________________________ represents shares of ownership in a company.
Only ______________________ traded companies are able to sell ownership in their companies through a
large market place known as a________________________.
People who own shares of a company are called______________________.
Some companies are owned by families or a small number of investors and do not issue stock to the public.
These companies are known as ________________held companies.
Owning stock in a company is one way you can _____________________ your money; you could also
_______________in mutual funds or real estate.
A ________________________ is part of the company’s ____________ that the board of directors decides to
distribute to the_____________________.
If a stockholder sells his/her shares for less than he or she paid for them, the stockholder has experienced a
_____________________.
Stock
Stockholders
Dividend
Profit
Invest
Stock Market
Loss
Public
Private
Activity Sheet 4: Speaking of Stocks (answer key)
•
Stock represents shares of ownership in a company.
•
Only publicly traded companies are able to sell ownership in their companies through a large market place
known as a stock market.
•
People who own shares of a company are called shareholders.
•
Some companies are owned by families or a small number of investors and do not issue stock to the
public. These companies are known as private held companies.
•
Owning stock in a company is one way you can invest your money; you could also invest in mutual funds or
real estate.
•
A dividend is part of the company’s profit that the board of directors decides to distribute to the
stockholders.
•
If a stockholder sells his/her shares for less than he or she paid for them, the stockholder has experienced
a loss.
Back to Table of Contents
Back to Table of Contents
Activity Sheet 3: Stock Market Calculations
•
You purchased 100 shares of Nike at $47.75 per share. A year later you sell your 100 shares for $62 per
share. Did you make a profit or lose money? How much money did you make or lose? Explain how you
calculated your answer.
•
You purchase 259 shares of Sonic Corporation for $24.38 per share. What is the total cost of your
purchase? You later sell your shares at the current market price of $22.12. Did you make a profit or was
this a losing investment? How much money was your profit or loss? Explain how you calculated your
answer.
•
Shares in Starbucks Coffee sold for $57.12 per share eighteen months ago; you purchased 100 shares.
You just sold your shares at $68.38 per share. How much profit did you make on the sale?
•
You own a total of 450 shares in three companies. The number of shares and their current prices are:
175 shares of Gillette—$71.38 per share for shares; 189 shares of General Electric—$34.25 per share;
and 86 shares of Hershey Foods— $52.68 per share. What is the value of your portfolio?
Student handout: Activity sheet #3
www.stockmarketgame.org (Teacher Support Center)
Activity Sheet 3: Stock Market Calculations (Answer Key)
1. You made a profit of $ 1,425.00
Bought 100 X 47.75 = $ 4,775.00
Sold 100 X $ 62.00 = $ 6,200.00
$ 6200 (Sold) – $ 4775.00 (Bought) = $ 1,425.00 (Profit)
2. This investment was a loss of $ 585.34
Total price of purchase:
Bought 259 X $ 24.38 = $ 6,314.42
Sold 259 X $ 22.12 = $ 5,729.08
$ 5,729.08 (Sold) - $ 6,314.42 (Bought) = - $ 585.34
3. You made a profit of $ 1,425.00
Bought 100 X $ 57.12 = $ 5,712.00
Sold 100 X $ 68.38 = $ 6,838.00
$ 6,838.00 (Sold) - $ 5,712.00 (Bought) = $ 1,126.00
4. 175 shares Gillette X $ 71.38 = $ 12,491.50
189 shares General Electric X $34.25 = $ 6,473.25
86 share Hershey Foods X 52.68 = $ 4,530.48
$ 12,491.50 + $ 6,473.25 + $ 4,530.48 = $ 23,495.23
Back to Table of Contents
What is Risk?
•
•
•
•
•
•
•
•
Risk is defined as the “exposure to a chance of loss.” Each investor must decide what level of
risk is acceptable to them. This is called “risk tolerance.” Once a person’s level of risk
tolerance is understood, they can build their portfolios to match their risk level. Most
investments fall into three categories:
Conservative—Investment-grade bonds and preferred stocks are considered conservative.
Moderate—Include growth stocks, which are stocks that pay little or no dividends because
the company is investing all of its earnings in its rapid growth, particularly young companies
with great potential.
Speculative—Stock investments are volatile and can lead to large profits or severe losses.
Vocabulary
Risk: The chance of losing all or part of the value of an investment.
Risk Tolerance: An individual investor’s ability to accept loss of some or all of the money they
have invested. A person’s risk tolerance is based on a number of factors including age,
financial stability, amount of time before the invested funds are needed for other purposes,
etc.
Volatility: Indicates how much and how quickly the value of an investment, market, or
market sector changes
Back to Table of Contents
Back to Table of Contents
Activity Sheet 2: How Much Risk Can You Stand
•
•
•
As we’ve learned, risk is a personal thing. Based on factors such as age, salary, financial obligations, and
family situation, people’s risk tolerances vary greatly.
Below are descriptions of individuals who are thinking about investing in the Stock Market. What do you
think is the risk tolerance of each one?
L=low; M=moderate; H=high
Teddy is 26 and has just gotten a new job at a much higher salary. He is single, has no loans and will get a
raise within six months. He wants to invest some of his newfound wealth. His risk tolerance is __________.
•
Juanita is a single mother with two children, ages 10 and 12. She wants them to go to college and is
putting aside money to help pay for their educations. It will be six years before she needs money to help
her first child with college. Her risk tolerance is __________.
•
Bill is 62. His health is good. His wife has a low paying job, but their children are grown and off on their
own. Bill and his wife will retire in three years. Bill’s risk tolerance is__________.
•
Tasha is 8. Her mother and father want to start a small investment portfolio for her to use for college or to
help buy a home someday. Tasha’s risk tolerance is _____________.
•
Monique and Harrison are in their forties and have three children. They have a mortgage and some credit
card bills, but they have put aside a small amount of money to invest for retirement. They hope to retire
when they are 65. Their risk tolerance is ____________.
Student handout: Activity sheet #2, How much risk can you stand?
Activity Sheet 2: How Much Risk Can You Stand (answer key)
His risk tolerance is H.
Her risk tolerance is L.
Bill’s risk tolerance is L.
Tasha’s risk tolerance is H.
Their risk tolerance is M
www.stockmarketgame.org
Back to Table of Contents
Conservative, Moderate or Speculative?
•
Directions: Decide if the following investments are conservative, moderate or speculative.
Investment 1: Jax Company provides gas and electric to your area. Its stock has risen slowly and
steadily over the last two years. It pays an annual dividend of $4 per share per year. You own 200
shares, so the company pays you a yearly dividend of $800. What type of risk are you taking by
investing in Jax Company? Explain
Investment 2: Watching the news, you learn a new drug is coming out that supposedly makes
children smarter. You’ve never heard of the drug manufacturer, but you decide to invest in this
company. Why wouldn’t we want our children smarter? If you have no other information and
plan to invest in this drug company, what kind of risk are you taking? Explain.
Investment 3: Interior Electric announces it is creating an all-electric car, but it hasn’t come out
yet. Based on the news, its stock price has increased 20% in one month. If you buy the stock now,
what type of risk are you taking? Explain
Back to Table of Contents
Conservative, Moderate or Speculative? (answer key)
•
Investment 1: Low: Utilities are considered lower risk stocks. The current dividend provides
steady gain on the investment. The company has been growing steadily in the past couple of
years and seems to be stable.
•
Investment 2: Without other information this would be a higher risk stock purchase. There is
no way to tell what kind of side affects the drug would have because there is no information
on whether the drug has been tested and there could be seriously harmful effects to the
children who are given the drug. The company doesn’t appear to have a strong, good
reputation as a drug manufacturer because you have never heard of them. The reliability of
the company and the product haven’t been proven so an investment would be risky.
•
Investment 3: This is a moderately risky stock. The product would probably sell very well if
successful but there is a lot of research and testing to be done so the company would be
putting a lot of it’s profit back into research and development for awhile
Back to Table of Contents
Dividends & Earnings
•
Dividends: Part of a company’s profits (earnings) that is pays as money or shares to
stockholders. In The Stock Market Game, any dividends received are listed in Transaction
History and are included in the portfolio’s total equity.
•
•
•
•
•
•
Distribution date: Date on which the dividend payment is made.
Profit: What remains after subtracting a company’s costs from its revenue. Profit is a
company’s reward for taking a risk and successfully producing what people want to buy at
prices they are willing to pay.
Price/Earnings Ratio: A company’s closing price divided by its latest annual earnings per
share. The Price / Earning is the relationship between a company’s earnings and its share
price. It is calculated by dividing the current price per share by the earning per share.
Record Date: Date set by a company on which an individual must own shares to be eligible to
receive dividends.
Stock split: Replacing each share of stock with a larger number of lower-priced shares. A
stock split keeps the shareholders’ total investment value unchanged.
Yield: The rate of return on an investment paid in dividends or interest. It is expressed as a
percent
Back to Table of Contents
Dividends & Earnings
•
•
•
•
•
Investors may make money on their investments through dividends and by selling stocks for a
profit. This lesson involves a guided reading that examines the ways investors profit from their
portfolio, using a newspaper’s daily stock listings and calculating dividends and earnings.
When a company is doing well, it can do a variety of things with its profits:
Reinvest the earnings and use the funds for expansion.
Develop new products.
Give a percentage of the profits to shareholders through dividends.
What kinds of companies do you think will pay a dividend?
Back to Table of Contents
Dividends & Earnings
•
•
•
•
•
•
•
•
As you begin SMG, it is important that you know all the ways to earn money through investing. The two
key ways are: buy stock at a low price and sell shares for a profit and earning dividends from your team’s
stock. Smart investors make money in the market by doing both over a long period of time.
Investors consider two major personal factors in making financial decisions:
Risk Tolerance - Are they willing to risk their principal investment in the hopes of gaining greater profit? As
a rule, the greater the risk the greater potential profit; however, as risk grows, so does the potential for
greater loss.
Stage in Life - Retired people or those close to retirement tend to look for stable investments that pay
dividends. An investor who will not need their money for years may take some risk knowing that over
time, the stock market tends to do better than other financial investments.
As you invest, remember that certain factors such as changes in the economy, tax laws, monetary policy,
war, unemployment, seasonal buying, national disasters such as hurricanes, the avian flu, or even
extended heat waves can impact stock prices.
In addition to buying low and selling high, you can make money in the market in other ways
When a company is doing well, it has several ways it can use its profits. It can:
Invest in itself, using profits to expand, develop new products, modernize or make other improvements.
Give a percentage of its profits to the shareholder through dividends. The company’s board of directors
sets a dollar amount per share distributed to every shareholder on a certain date. For example, if you own
100 shares of XYZ Company and the company declares a $2 annual dividend, you will receive $.50 each
quarter that you own the stock that year. Dividends change over time.
Back to Table of Contents
Dividends & Earnings
•
•
•
•
•
•
•
•
•
•
•
•
SITUATION 1
Company A has 4 investors.
Investor 1 has 100 shares,
Investor 2 has 150 shares,
Investor 3 has 500 shares, and
Investor 4 has 625.
Company A had a good quarter and decides to pay a quarterly dividend of $3 per share.
Calculate the amount of dividend that will be paid to each investor
SITUATION 2
Company B has 2 investors.
Investor 1 has 1000 shares and
Investor 2 has 1500 shares.
Company B had a good year and decides to pay a $1.50 quarterly dividend for each share
owned. Calculate the amount of dividends the company will pay to each investor by the
end of the year.
Student handout: Activity sheet #2, Calculating Dividends.
Back to Table of Contents
Dividends & Earnings (answer key)
•
•
•
•
•
SITUATION 1
Investor 1: $300
Investor 2: $450
Investor 3: $1,500
Investor 4: $1,875
•
•
•
SITUATION 2
Investor 1: $6,000
Investor 2: $9,000
For more on Dividends and Earnings log on to: www.stockmarketgame.org
Dividends and Earnings (In The Classroom)
Back to Table of Contents
Diversification
Diversifying investments is a widely used and highly successful way to reduce risk. Most
financial planners agree with the admonition “don’t put all your eggs in one basket. By
investing in different types of stocks, bonds, and/or mutual funds, the value of your entire
portfolio should not be wiped out if one investment fails.
•
Because it is very difficult to accurately predict how any one company will perform over
time, diversification is a strategy that helps to protect your portfolio.
•
The Stock Market Game is a great way for students to learn about diversifying by analyzing
the stocks in their portfolio. In this lesson students learn to diversify their SMG portfolios
by investing in companies from different industries. Students will use a financial website to
complete this lesson.
Back to Table of Contents
Back to Table of Contents
Diversification (vocabulary)
•
•
•
•
•
•
•

Diversification: an investment strategy in which you spread your investment dollars among
different markets, sectors, industries, and securities. The goal of the strategy is to protect the
value of your overall portfolio in case a single security or market sector takes a serious
downturn and drops in price.
Index: An index reports changes, usually expressed as a percentage, in a specific financial
market, in a number of related markets, or in an economy as a whole. Each index — and
there are a large number of them — measures the market or economy it tracks from a
specific starting point, which might be as recent as the previous day or many years in the
past.
Industry: A group of companies producing similar products or services.
Portfolio: A collection of investments owned by one individual or organization.
Risk: The chance of losing all or part of the value of an investment.
Risk Tolerance: An individual investor’s ability to accept loss of some or all of the money they
have invested. A person’s risk tolerance is based on a number of factors including age,
financial stability, amount of time before the invested funds are needed for other purposes,
etc.
Sector: A group of stocks, often in one industry. The performance of any single stock in a
sector can be measured against the performance of the group. Pharmaceutical companies,
for example, are part of the health care sector.
For more on diversification log on to: www,stockmarketgame.org and go to In the Classroom
Back to Table of Contents
Diversification - How diversified are these portfolios?
Student handout: activity sheet #1, How diversified are these portfolios?
Portfolio A
Symbol/
Quantity
FISV (100)
TD (100)
ADES (100)
TRB (100)
TW (100)
ESRX (100)
Rail (100)
Industry
Business
Software
Bank
Publishing
Insurance
Health
Railroads
Portfolio B
Symbol/
Quantity
JPM (100)
AAPL (150)
INTC (200)
Portfolio C
Industry
Bank
P.C.
Semi Conductors
GOOG (100) Internet info provider
Ebay (100)
DELL (300)
Ebay
P.C.
Symbol/
Quantity
SBUX (500)
TIF (200)
BK (100)
Industry
Specialty Eateries
Jewelry
Banks
GOOG (100) Internet info provider
CSK (100)
NCC (100)
UNS (700)
Paper products
Banks
Electric Utilities
Teacher Support Center –
In the Classroom
Diversification – How diversified are these portfolios?
(answer key)
All three have some diversification. Portfolio C
has a diverse range of companies from different
Industries and is considered to be more
diversified.
Back to Table of Contents
•
Diversification – thinking algebraically
To calculate the percentage of a given investment category in a portfolio, divide the money in
that category (for example, all the money invested in small cap firms) by the total amount of
money in the portfolio, and multiply by 100%.
% of portfolio invested in a sector = money invested in a sector / total value of investment x 100
Questions for this table are on the next page.
Company
Size
Sector
Value
A
Small
Tele-comm
$1,500.00
B
Large
Industrial Goods
$31,000.00
C
Small
Health
$15,500.00
D
Mid
Energy
$5,000.00
E
Large
Energy
$27,000.00
F
Mid
Utilities
$19,000.00
Learn more about InvestWrite at www.investwrite.info
Back to Table of Contents
Student handout: Thinking Algebraically
Diversification – thinking algebraically
• What is the total value of the investment portfolio above?
• Using the portfolio above, calculate the percentage of the total investment
in each sector.
• Using the portfolio above, calculate the percentage of the total investment
in each sector.
Back to Table of Contents
Diversification – thinking algebraically
(answer key)
1.What is the total value of the investment portfolio above?
Answer: The total value of this portfolio is $99,000.00.
2. Using the portfolio above, calculate the percentage of the total investment in each sector.
Answer: Telecommunications: ($1,500 ÷ $99,000) x 100% = 1.52%
Industrial Goods: ($31,000 ÷ $99,000) x 100% = 31.31%
Health: ($15,500 ÷ $99,000) x 100% = 15.66%
Energy: ($32,000 ÷ $99,000) x 100% = 32.32%
Utilities: ($19,000 ÷ $99,000) x 100% = 19.19%
3. Calculate the percentage of the investment in each size company.
Answer: Small Cap: [($1,500 + $15,500) ÷ $99,000] x 100% = ($17,000 ÷ $99,000) x 100% = 17.17%
Miid Cap: [($5,000 + $19,000) ÷ $99,000] x 100% = ($24,000 ÷ $99,000) x 100% = 24.24%
Large Cap: [($31,000 + $27,000) ÷ $99,000] x 100% = ($58,000 ÷ $99,000) x 100% = 58.59%
Back to Table of Contents
Earnings Per Share (EPS)
The Earnings Per Share (EPS) ratio is one of the most widely used measures of a stock's
evaluation. At face value, the EPS ratio is a good measure of the stock, but if you are unaware
of its limitations, it can be greatly misleading.
•
FORMULA: NET INCOME ÷ TOTAL SHARES OUTSTANDING = EARNINGS PER SHARE (EPS)
The higher the EPS, the better; thus, it might be a good tool to use when evaluating a
company. Most investor's view EPS as an important tool in evaluating stocks. Most financial
papers and journals report the EPS daily. It is also found in the company's annual reports (10-K
& 10-Q).
Back to Table of Contents
Price-to-Earnings ratio [P/E]
A company’s net earnings are important, of course, since the figure represents how much money a company
is making. A company can borrow money when times are lean or if the business needs to expand, but over a
sustained period of time, the company must have earnings in order to remain a viable business. As such,
earnings represent one of the main numbers to which an investor might pay attention, when analyzing a
company’s stock.
One tool for looking at earnings is a company’s P/E ratio (price to earnings ratio). Simply, this P/E figure
answers the question “How expensive is this stock in regard to what this company earns? Here’s how the P/E
ratio works:
FORMULA: Per share price of stock / Earnings per share (EPS) = P/E ratio (price-to-earnings ratio)
The P/E ratio is important to investors, because the higher the number, the more expensive the stock is in
terms of earnings. Most healthy companies whose stock is in good demand will have P/E ratios in the range of
perhaps 8 to 22. While there are not hard and fast boundaries, the P/E ratio is one of several factors investors
use to gauge a stock’s underlying value.
Example:
The Bunker Hill Shipwrecks and Salvage Claims Corporation had earnings of $1.88 in the previous year and
expects the same for the coming year. The price of this stock is $30 per share. What is the company’s P/E ratio?
Answer:
$30 / $1.88 = 15.95
Lessons for P/E ratio can be found in the Teacher Support Center. Once you log in scroll down “In The
Classroom” and click on Lesson Sequence. Click on Show all lessons. Scroll down the list of lessons until you
find P/E ratio
Back to Table of Contents
Stock Splits
•
Take, for example, a company with 100 shares of stock priced at $50 per share. The market
capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200
shares of stock and each shareholder holds twice as many shares. The price of each share is
adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.
•
Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible.
Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will
sometimes receive cash payments in lieu of fractional shares
Back to Table of Contents
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the
market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that
calculates the expected return of an asset based on its beta and expected market returns.
Beta is calculated using regression analysis, and you can think of beta as the tendency of a
security's returns to respond to swings in the market. A beta of 1 indicates that the security's price
will move with the market. A beta of less than 1 means that the security will be less volatile than the
market. A beta of greater than 1 indicates that the security's price will be more volatile than the
market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks
have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more
risk.
Source: www.investopedia.com
• Switch to Student Research (PowerPoint)
Back to Table of Contents
Glossary of Terms
Acquisition: the process by which one company buys most or all of the shares of another company in order to take control of it.
Annual report: a report that publicly held companies are required to issue each year. The annual report includes all of the company’s
activities and financial information for the past year compared to previous years and explanations of any major changes that did not result
from the regular business of the company.
Appreciation: an increase in the value of an asset ove3r time. the opposite of depreciation.
Ask: the price oat which a seller is willing to sell a security; also known as the offer price. It usually includes the number of shares the seller
is willing to sell at that price. The opposite of bid.
Asset: something that has value to a person or company. Assets can include stocks, bonds, real estate, or raw materials, such as oil, gold or
silver.
Average: the mathematical number that represents what is typical for a group of numbers, balancing out the highs and lows.
Bank run: a situation in which many people try to withdraw all of their money from a bank at the same time because they are afraid that
the bank will not have enough money to their deposits. Since the creation of the FDIC, bank runs no longer happen.
Bear market: a period during which prices of most investments decline, usually for a period of at least two months.
Bid: the price an investor is willing to pay for a security. It usually includes the number of shares the investor wants to buy. The opposite of
ask.
Blue chips: the largest, most well established, most consistently profitable companies.
Board of directors: a group that is elected or appointed to approve all major decisions of a company. it usually hires (or fires) the top-level
managers of the company and may have legal responsibility for corporate activities.
Bonds: a way for companies or governments to borrow money. Bonds usually specify when the lender will be paid to the lender.
Bond rating: an estimate made by financial experts of how likely it is that the borrower will be able to make interest payments and pay back
the money borrowed on time.
Broker: a person who handles customer orders to buy and sell securities.
Brokerage house: a company that employs stockbrokers to make trades for investors.
Bull market: a period during which there is a steady increase in stock prices.
Buying on margin: purchasing stock by paying for a portion of it and borrowing the rest from a bank or broker.
Back to Table of Contents
Glossary of Terms
Back to Table of Contents
Capitol: the cash that a company has available to it.
Certificate of deposit (CD): an agreement with a bank to leave money deposited there for a specific interest rate and length of
time. In exchange for that promise, the bank pays a higher interest rate than it does for a regular savings account.
Commission: the money a person is paid to buy or sell something for someone else.
Compound interest: money that is paid on the original amount invested and also on any interest that has already been earned.
Corporate bond: a way for companies to raise money by borrowing from investors. Corporate bonds usually have a higher interest
rate than a government bonds because they have a higher risk.
Coupon rate or yield: the interest rate that the borrower is paying on a bond, based on the bond’s face value.
Credit: the amount of money that a person or company is able to borrow.
Discount rate: the interest rate that banks pay to borrow money from a Federal Reserve Bank.
Diversification: a way for investors to lower their risk by choosing different types of investments.
Dividend: a portion of a company’s profits that is distributed to its shareholders, usually quaterly.
Dividend Reinvestment Plan (DRIP): an investment plan in which dividends are automatically put toward the purchase of more
stock in the company. No brokers or broker fees are involved.
Dow Jones Industrial Average (the Dow): an average of thirty blue-chip stocks that is used as a daily indication of how well the
stock market is doing.
Equity: in the stock market, ownership in a corporation in the form of stock; in a home, the difference between the mortgage and
the values of the home.
Expenses: the things that a company has to pay for in order to get revenue. Expenses can include salaries, rent, or the materials to
make the things the company sells.
Face value or Par: the amount of money that will be paid to an investor when a bond matures.
Federal Deposit Insurance Corporation (FDIC): a federal agency that insures that depositors will not lose their money in a
member bank if the bank fails.
Fiscal year: the twelve month period a company chooses to use for its financial reporting. It is not necessarily the same as a
calendar year.
Floor broker: a person who makes the actual trades for people or companies on the floor of the stock exchange. They may be
house brokers (employed by a brokerage house) or independent brokers (employed by a company that helps house brokers or
other large traders.
Foreclosure: the process by which a lender can take ownership of a house if the borrower stops making mortgage payments.
Glossary of Terms
Going public: the process of changing from a private company owned by a few people to a public company owned by many investors.
The Great Depression: the period between 1929 and the late 1930s during which many people lost all of their investments,
unemployment was very high, and practically all businesses were struggling.
Growth stock: stock in a company whose earnings are growing faster than average. Growth stocks usually pay little or no dividends
because they reinvest all of their profits in order to grow.
Income stock: a stock offering dividends that are higher than average.
Inflation: the general increase in the cost of everything, form cars and houses to burgers and fries.
Insider trading: the illegal purchase or sale of stock by someone who has knowledge about the company that is not available to the
public, and therefore has an advantage.
Interest: the fee paid for the use of money. Borrowers pay interest; lenders earn interest.
Interest rate: the rate of interest paid as a percentage of the principal.
Investment banker: a special kind of banker who works with a company to issue its stock.
Investor: an individual or organization who gets paid for the use of their money.
Issue: the process of selling stocks or bonds to the public.
Junk bond: a bond with a low rating. Issuers of junk bonds often pay a high interest rate because there is a high risk that they may not
be able to pay back the money that they borrowed.
Liquidity: the ability of an investment to be sold or converted back into cash very quickly and easily.
Market order: an instruction form investor to broker to buy or sell stock immediately at the best current price.
Maturity date: the date that money borrowed for a bond is due to be repaid.
Merger: a process in which two companies are combined into one.
Municipal bond: a way for counties, cities, and states to borrow money to pay for local improvements, such as roads, schools, and
hospitals.
Mutual funds: an investment that allows many small investors to combine their funds so they can buy and sell a variety of stocks and\or
bonds. Mutual funds also give small investors the advantage of professional management.
Back to Table of Contents
Glossary of Terms
Nasdaq: previously an acronym for National Association of Security Dealers Automated Quotations, it is a system that allows brokers to
buy and sell stocks through telephone and computer networks rather than in a physical place.
New York Stock Exchange (NYSE): the oldest and largest physical stock exchange in the United States. It is located on Wall Street in New
York City and is part of the NYSE Euronext.
Odd lot: a purchase or sale of stocks that is not a round lot (an even number of hundreds) of shares.
Offer price: the amount a seller is willing to accept for each share of stock; also known as ask.
Ponzi scheme: an illegal investment scam that lets people think they are making money by paying old investors with money from new
investors.
Portfolio: a collection of investments all owned by the same person or organization.
Prime rate: the interest rate that banks charge their best customers, usually large companies.
Principal: the amount invested in a stock or the amount that is still owed on a bond.
Privately held company: a company whose shares are not bought or sold on public exchanges. A private company may have stock and
shareholder, but it does not have to follow SEC regulations.
Profit: the money a company earns, equal to revenue minus expenses.
Publicly traded company: a company that has issued shares of stock that are traded on at least one stock exchange.
Pump and dump: an illegal way to make money in the stock market by manipulating the price of a stock to rise and then selling shares at a
higher price.
Retained earnings: the portion of the profit a company keeps after paying dividends and taxes.
Revenue: the amount of money a company receives for its products or services before costs are deducted; also known as income.
Back to Table of Contents