Stock
Market
Basics
WHAT IS A STOCK?
• A stock represents partial ownership of a
corporation.
• When you buy shares of a stock, the
company gives you a stock certificate which
shows that you own a small fraction of that
company.
• In today's computer age, you won't actually get to see this
document because your brokerage keeps these records
electronically.
WHY SELL YOUR STOCK?
• A company sells shares of its stock as
one way to raise capital to fund the
growth of its business.
• The BEAUTY of the Deal is that a
company does not have to pay the
money back.
WHAT DETERMINES A STOCK
PRICE?
• A stock is worth what an investor is willing to
pay for it
• Supply and demand decide a stock's price.
• Supply = number of shares a company has
issued to the public.
• Demand = investors' desires to buy shares
from current owners.
• Investors will purchase a stock if they think
they will make a profit. (BUY LOW – SELL
HIGH!)
WHY OWN STOCK?
When the company makes money, so do you.
• Owning a stock means you are a partial owner of the
company, and you get voting rights in certain company
issues
• Over the long run, stocks have historically averaged
about 10% annual returns
• However, stocks offer no guarantee of any returns and
can lose value, even in the long run
• Investments in stocks can generate returns through
dividends, even if the price stays the same
Stock Example
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Lets say company X issues 10 shares of
stock to raise Capital
You buy 1 share @ $10.00 p/s
Later this same year the company is doing
very well. Lots of people want to invest in this
CO. You are able to sell your share for
$14.00 p/s.
Google Stock
1-Oct-04, 132.58 | 21-Aug-07, 506.61
Why own stock?
GOOD INVESTMENT
• If you invest wisely,
over time you will
make more money
investing in the stock
market then putting
your money into a
savings account
THE DOWNSIDE…
• When you buy shares of a stock, you
get a full share of the risk of an
operating business.
• Owning stock does not guarantee that
you make money
EXAMPLE:
• Theglobe.com
– Heard it was a very hot Internet stock.
– However, you didn’t do too much research but
bought 100 shares at over $100 per share.
– A few months later, the share price is less than
$10.
– Your hard-earned savings are now gone.
– Some stocks may even go bankrupt and you could
lose even more money.
WHY DO COMPANIES ISSUE
STOCK?
• Primary Reason: to generate $$$$$ that will
be used to…
develop new products
buy more advanced equipment
pay for new buildings and inventories
hire more employees
provide for a merger or acquisition
DIVIDEND
• A small reward a company pays you for owning
shares of its stock.
• The company takes a portion of its earnings, which
it divides and distributes to shareholders.
• SLOW GROWTH = HIGH DIVIDENDS
• HIGH GROWTH = NO DIVIDENDS
• EXAMPLE: MICROSOFT
– HIGH GROWTH COMPANY
– DOESN’T PAY DIVIDENDS
– REINVESTS THOSE DIVIDENDS BACK INTO THE
COMPANY (back)
STOCK SPLIT
• When a public company issues more shares of
stock to existing shareholders.
• WHY? So that more investors can afford the stock
• In a 2-for-1 stock split, a company issues another
share for every one already sold.
• EXAMPLE:you own 100 shares of IBM trading at
$120. They announce a 2-for-1 split and you now
have 200 shares, and the share price is $60.
GROUP QUIZ
• WHAT IS A STOCK?
• LIST 2 REASONS WHY YOU WOULD WANT
TO OWN STOCK
• LIST ONE REASON WHY COMPANIES
ISSUE STOCK
• YOU OWN 5 SHARES OF DISNEY CO. at
$100 PER SHARE. DISNEY ANNOUNCES
A 2 FOR 1 STOCK SPLIT.
– HOW MANY SHARES DO YOU NOW OWN?
– HOW MUCH IS EACH SHARE NOW WORTH?
MEASURING STOCKS
DOW JONES INDUSTRIAL AVERAGE
• Shows generally how well the market is going
• Found by averaging the prices of 30 industrial
blue-chip stocks trading in the New York
Stock Exchange
• Blue chip stock: are the most valuable, from
the largest companies
COMPANIES INCLUDED IN
THE DJIA
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Alcoa Inc – 3.138%
American Express – 6.510%
At+T – 2.498%
Boeing Co. – 1.714%
Caterpillar Inc. – 1.877
Citigroup Inc. – 2.553%
Coca-Cola Co. – 2.330 %
DuPont Co. – 2.480%
Eastman Kodak Co. – 2.700%
Exxon Mobil Corp. – 3.809%
General Electric Co. – 6.543%
General Motors Corp. – 3.861%
Home Depot Inc. – 2.804%
Honeywell International Inc. – 2.250%
Hewlett-Packard Co. – 6.412%
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International Business Machines –
5.218%
Intel Corp. – 5.885%
International Paper Co. – 1.785%
J.P. Morgan & Co. – 5.766%
Johnson & Johnson – 3.769%
McDonald’s Corp. – 1.592%
Merck & Co. – 2.930%
Microsoft Corp. – 4.672
Minnesota Mining and Manf. – 4.042%
Philip Morris Cos. – 0.982%
Procter & Gamble Co. – 2.866
SBC Communications Inc. – 2082%
United Technologies Corp. – 2.688%
Wal-Mart Stores Inc. – 2.517
Walt Disney Co. – 1.711%
STANDARD AND POOR’S 500
INDEX
• A.K.A. S&P500
• A well-known, value-rated index of 500 major
US companies: 400 industrial firms, 20
transportation firms, 40 utilities firms, and 40
financial firms
• Like the Dow Jones Industrial Average,
shows how the market is doing by averaging
the stock prices of these 500 companies
Where are stocks
traded?
2 major U.S. markets:
• NEW YORK STOCK EXCHANGE
(NYSE)
• NASDAQ STOCK EXCHANGE
HOW ARE STOCKS BOUGHT
and sold?
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BUYERS:
Do research on company
and price
Place an order (either
online or with broker)for x
amount of shares for x
amount of $
Order is sent to NYSE floor
Transaction occurs
Order confirmation sent
Pay for stock and
stockbroker commission
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SELLERS
Decide to sell x amount of
shares for x amount of $
Place a sell order (either
online or with broker)
Sell order is sent to NYSE
floor
Transaction occurs
Sell confirmation sent
Check sent to seller minus
stockbroker commission
portfolio
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A stock portfolio is a collection of stocks that
an investor owns at a particular point in
time.
Information contained in a portfolio:
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Parent company name – http://www.google.com/
(example: Oreo cookies – owned by Nabisco
which is now owned by Kraft Foods)
Stock Quote (price that the stock is trading at)
Stock exchange symbol
http://finance.yahoo.com
Owns -
Owns -