Getting Started in the Stock Market
Basics of the Stock Market:
1) The Financial Industry:
2) Why does it Exist
a. Financial Industry the way to organize money. They manage our money
i. Invest/Grow/ Save/ Spend
b. Money is the middleman; takes care of the transaction between buyers and sellers.
c. The Stock Market is the Center of the Financial Industry.
3) Why does the Stock Market Exist
a.
4) Stock Exchanges
5) Investors
6) Brokers and Brokerage Firms
7) List of Brokerages
What are stocks?
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Only Companies traded on a stock exchange have shares? (True or False)
The total value of a company is………
Why invest in stocks?
Only novice investors begin picking stocks by investing in what they know?
Investors make money with stocks in the following ways:
How much profit have you made if you bought 100 shares at $10 and sold them all at $20?
Mark Zuckerberg, the founder of Facebook, was guaranteed billionaire status when his company
went public. (True or False)
8) Bob Brilliant owns share in Funky Town records. Funky town pays bob $100 every quarter. What
does Bob receive every quarter?
Reading a Stock Quote:
1) The only information you get from a stock’s quote is the price of the stock. (True or False)
a. This price is one of the main parts of a stock quote, other information includes market
cap, ratios and dividend
b. Today’s Open/ Previous close/ Daily range/ 52 week Range/ market Cap/ P/E Ratio/
Dividend/ Volume/ Average Daily Volume/ Current FY EPS
2) Stock quotes have always been quoted in decimals. (True or False)
a. Prior to 2001 quotes on Wall Street were actually quoted in fractions!
3) In 1869, Thomas Edison invented the….. which was the device used to transmit stock prices until
the mid 20th Century.
a. Universal stock ticker – was in use in different ways until the 1960’s
4) The last price in a stock quote is…..
a. The last price the stock traded at or the last price the stock commanded.
b. Start trading at 9:30 a.m. and close at 4 p.m. (new York time)
5) A gap in the pricing of a stock refers to
a. When there is a big difference between the price the stock closed at and the price it
opened at
b. You will see a green number or red (green is good; red is bad)
c. A big gap means something happened while markets were closed. Check news
6) If the price of a stock is around the 52 week high, I should
a. Be careful as it may be a trend and the price may continue to rise or it may have
reached it’s height and be about to drop.
b. The Daily Range shows two numbers. The lowest price and the highest price.
i. If the daily range is greater than normal, it usually indicates something
extraordinary is going on.
7) This is a list of four companies with four market caps, which has the largest market cap?
a. The Market Cap (capitalization) is a measure of a company’s value at a specific point in
time.
b. Gives an idea of how big a company is.
i. Calculated by multiplying the number of shares in the market by the current
share price.
ii. The cap tells you how much the market would pay for the company. That’s why
its associated with value.
8) Which of the following companies probably trades at a higher price given their P/E ratios, all
else being equal:
a. The company with the highest P/E ratio is probably the most expensive – Company B in
this case.
Understanding Stock Market Indexes’s:
1) What’s a stock index?
a. A sample of stocks that act as a benchmark for either the whole market or a specific
area of the market.
2) What sort of stocks do indexes follow?
a. It depends on what the index follows and what its criteria are for being included in the
index.
3) When reporters claims “the market is up”, which of the following indexes are they most likely
referring to?
a. The S&P 500
4) What type of companies does the Dow Jones Industrial Average mostly include?
a. It includes”blue chip” companies. Blue chip companies are big and well-established,
with high values similar to the high value of blue ships in poker.
5) Buffet vs. The S&P 500: Who usually wins?
a. As of 2012, Warren Buffett’s company Berkshire Hathaway has beaten the S&P 500
return 41 out of 48 years.
6) Stock market Indexes are not only used as benchmarks but can also…..
a. They are used to measure how maket news can affect stock prices.
b. It is also becoming popular to invest in the indexes themselves.
7) What does a composite index follow?
a. A specific stock exchange
8) The NASDAQ Composite Index follows the 5,000 stocks listed on the Nasdaq market. What else
is it a good measure of?
a. There are many tech companies traded on the Nasdaq, and is therefore a good
performance measure of the tech industry.
The Initial Public Offering:
Private Companies:
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Are owned by a relatively small number of people
Are not listed on any major stock exchanges.
Can be any size, from mom and pop stores to billion-dollar companies
o Check out Forbes list of America’s Largest Private Companies
Public Companies:
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Shares are listed on the stock exchange
Anyone can buy and sell
Has to give reports to its investors, hold meetings, and make its accounts public
IPO (Initial Public Offering)
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Offer shares in your company at a particular price
If enough people are interested in investing, you’ll sell the shares and list on a stock exchange
o NYSE or NASDAQ
o Ticker Symbol
Public Companies range in size
o Small are around 5 million
o Large are up to 400 billion
Why give up ownership? MONEY
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Facebook raised $16 billion in its IPO in 2012
VISA raised 18 billion
They also help businesses get to the next level.
Stocks allow you to raise money w/o having to pay it back. And you don’t have to pay
interest
An IPO can give a company a huge injection of money that allows it to grow quickly,
leapfrogging the competition
Process of Going Public:
Steps
1) Decide if you’re ready: the median IPO deal size in 2012 was 124 million
2) Hire an underwriter: they try to sell shares to large investors, and usually guarantee to buy any
unsold shares at an agreed price.
3) File with the SEC: must file a prospectus with SEC. Sets out the details of the IPO. Helps
investors see if they want to invest.
4) Go on a roadshow: Meet with investers
5) Price the IPO: you have to know the demand. Your underwriters will set the final offering price
and decide the number of shares to sell. The idea is to set a price that raises the maximum
amount of money for the company, while also leaving some upside for investors to make a
profit.
a. Try to set price where it will jump 15% when it goes public.
6) Ring the Bell: Start trading on the Exchange
Disadvantages:
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It’s expensive: can cost up 4 million in costs
You lose control
Your stock gets diluted
The P stands for public!