The $tock Market
The stock market is in the news daily, and depending on what is said, investors are
either excited or depressed! So just what is the stock market?
A Simple Example…
You have started your own small company, and things are going well. Your profit
has been about $300,000 per year for the past several years. You would like to raise
some money so that that you can improve your company. An appraiser decides that
your company is worth $5,000,000. This means that:
profit = 300,000 = 3 = 0.06 = 6% rate of return per year
value
5,000,000
50
Since you figure investors would be happy with a 6% rate of return, you decide to divide
the value of your company into 100,000 shares and sell these shares for $30 each, for
a total of $3,000.000. Investors buy shares in your company, and you get the
$3,000,000. Your profit will be divided into 100,000 little pieces; if an investor owns 100
shares of your stock, they will get 100 “little pieces” of your profit.
From that $3,000,000 you must pay your expenses and salaries, but you can do what
you want with the rest of the money. You can give some of the money back to the
investors in the form of dividends and spend the rest to improve your company in the
hopes of making your company even more valuable. It’s really that simple!
So, how does a person go about buying stock? Shares of stock in thousands of
companies are listed on a stock exchange. Investors can use a stock broker to help
them buy shares on the stock exchange, or you can go online and buy them yourself.
It’s sort of like a grocery store full of stocks!
The largest American stock exchange is the New York Stock Exchange (NYSE);
2nd largest is the NASDAQ. Some other phrases you may have heard include:
Dow Jones Industrial Average: the average share price of 30 large industrial
companies
S&P 500: the average share price of 500 large companies
Bull market: when the price of stocks is generally rising
Bear market: when the price of stocks is generally dropping
As companies’ profits rise, people make money in the stock market; as profits fall,
people lose money in the stock market. That is why it is best to invest in a variety of
companies so that you don’t lose all of your money at once if one company’s profits
drop. That’s where the phrase “don’t put all your eggs in one basket” comes from!
Investing in the stock market can be very profitable, but it can also be very risky!!!
Source: http://money.howstuffworks.com/stock.htm
1. Explain this sentence: “I own 200 shares of stock in the Coca-Cola company.”
2. Name two ways you can you go about buying shares of stock in a company?
3. What is the difference between a bull market and a bear market.
Three investors had money in the stock market on March 1, 2001. Use the chart of
Twelve Large Companies to answer the following questions. Show what you put into
your calculator!
4. On March 1, 2001, all three investors owned a portfolio of 100 shares in each of the
twelve companies on the list. What was the value of each investor’s portfolio on that
date?
5. Larry Lazyboy could not be bothered keeping up with what was going on in the stock
market, so he just left his 100 shares of stock where they were – 100 shares in each
of the ten companies on the list.
a. What was the value of his portfolio on March 1, 2011?
b. Compared to March 1, 2001, did Larry show a profit or a loss? How much?
6. Barry Businessman follows the stock market closely. He understood that many
stocks were losing value and the economy was in trouble. He knew that Apple was
making lots of money due to sales of iPods and iPhones, and the health care
industry was still hiring. He decided to sell some stocks and purchase others to
respond to the economy. On March 1, 2011, he owned 400 shares each of AAPL
and UNH, and 200 shares each of MCD and HD.
a. How much was his portfolio worth on March 1, 2011?
b. Compared to March 1, 2001, did Barry show a profit or a loss? How much?
7. Perry Panicker could not stand to see the value of his stocks drop. When he kept
hearing on the news that the “tech stocks” were losing money, he sold all of his
MSFT and AAPL. However, he didn’t read the business section of the paper, so he
really had no idea what was going on in the rest of the stock market. He figured
“everyone loves McDonald’s” so he put more money in MCD. He figured everyone
was trying to save money, so he put extra money in BIG, HD and WMT. He also
figured no one would stop getting sick, so he bought some UNH. On March 1, 2011,
he owned 250 shares each of MCD, BIG, HD, WMT and 200 shares of UNH.
a. How much was his portfolio worth on March 1, 2011?
b. Compared to March 1, 2011, did Perry show a profit or a loss? How much?
Twelve Large Companies
Company
Name
Stock
Type of Business
Symbol
Amazon
AMZN
Apple
Bank of
America
Big Lots
AAPL
BAC
Boeing
BA
CocaCola
KO
Home Depot
HD
McDonald’s
MCD
Microsoft
MSFT
Nike
NKE
BIG
UnitedHealth UNH
Group
Walmart
WMT
On-Line retailer of books,
music, etc.
Computers, iPods, iPhones, etc
The largest consumer bank in the
United States
Nation’s largest close-out
merchandise retailer
Maker of many types of military and
commercial airplanes
Sells 40% of all soft drinks in
the US and 50% world-wide
Largest home-improvement
retailer in the U.S.
Almost 20,000 fast-food
outlets world-wide
Largest software company
in the world
Controls nearly 40% of the
U.S. athletic shoe market
The biggest health insurance
Company in the US
One of the largest discount
department stores in the U.S.
Source: bigcharts.marketwatch.com/historical
Avg
Share
Price
3/1/01
$10.44
Avg
Share
Price
3/1/11
177.24
$18.75
$49.34
$348.16
$14.20
$12.00
$40.71
$59.65
$72.30
$52.70
$64.31
$41.50
$37.08
$29.21
$74.44
$59.36
$26.55
$38.20
$87.98
$58.99
$42.52
$48.34
$51.75