WHAT IS STOCK?
Stock represents ownership
in a corporation (unlike bonds,
which represent debt)
 Stock, also called equity, is
bought and sold in portions
called shares
 Shares represent a percentage of ownership
* Most major companies have millions/billions of
shares, so buying 25, 50, 100 shares gives you a
very limited slice of the pie!
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WHY A STOCK MARKET?
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Like other types of markets,
the stock market links
buyers and sellers
The stock market provides investment opportunities
for buyers of stock
The stock market provides businesses with the
opportunity to raise capital
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Initial Public Offering (IPO): when a company sells
stock in itself for the first time
Going Public: term used when a company is
planning an IPO
STOCK EXCHANGES
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New York Stock Exchange
(NYSE)
Oldest, largest, and most
influential exchange in U.S.
In general, handles largest
and most influential
companies
Trading
takes
place on
its floor
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NASDAQ
Created in 1971
Trading is done
electronically (no faceto-face meeting of
representatives of the
buyer and seller)
HOW DOES ONE BUY STOCK?
Stocks are bought through a stockbroker
 Brokers charge a fee (%) per transaction
Two ways to earn profits with stocks:
1. Dividends – quarterly payments to stockholders from
company’s profits.
2. Capital Gains – selling shares
at a higher price than you bought
them.
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What do these 30 companies have in
common?
3M
American Express
AT&T
Boeing
Caterpillar
Chevron
Cisco Systems
Coca Cola
Dupont
Exxon Mobil
General Electric
Goldman Sachs
Hewlett-Packard
Home Depot
IBM
Intel
Johnson & Johnson
JP Morgan Chase
McDonald’s
Merck
Microsoft
Nike
Pfizer
Proctor & Gamble
United Health Group
United Technologies
Verizon Communications
Visa
Wal-Mart
Walt Disney
THE DOW
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The Dow Jones Industrial
Average tracks the price changes of 30 of the largest
companies in the economy in various industries
It can indicate a “bull market” (average price of stock
rising) or a “bear market” (average price dropping)
Using a few representative stocks, it is supposed to
measure the market and mirror the economy
Critics of the Dow claim it is not accurate due to only 30
of the strongest (“blue-chip”) stocks being included…but
since 1896 it does have a strong track record
Other prominent indexes include the S & P 500 and the
NASDAQ Composite
STOCK CAN BE CLASSIFIED BY
WHETHER OR NOT IT…
PAYS DIVIDENDS…
 Income Stock: pays
dividends (payments
made quarterly – every
three months)
 Growth Stock: pays no
dividends because
company reinvests $$$
into itself
…OR GIVES STOCKHOLDERS A VOTE ON
COMPANY POLICY
 Common Stock: investors
are voting owners
 Preferred Stock: investors
can’t vote, but get paid
before common
stockholders
CHARACTERISTICS OF STOCK
(abbreviations you’ll find on a stock report)
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Ticker symbol: 3-letter company abbreviation
Last Trade Price: price at that moment
Price change (% price change): amount price has
changed during day (% price change for the day)
Previous close: price of stock at end of trading day
before
Open: price of stock at beginning of trading day
Day’s range: high and low price of stock for the day
STOCK CHARACTERISTICS
(continued)
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52-week range: high and low price of stock for the year
Volume: number of shares traded that day
Market Capitalization: total value of all shares of that
company’s stock
Earnings per share (EPS): annual profits divided by total
# of shares of stock in company
Dividend (yield%): annual dividend per share (dividend
divided by share price – use to compare with other
investments)
BUYING ON MARGIN (Margin Buying)
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Buying on margin is buying stock on credit
Investors must start an account with a
minimum balance of $2,000 (they can put in
more if they want)
Investors can now borrow as much as the $
amount in their account
Ex.: with $2,000 in their account, investors
have $4,000 in purchasing power
BUYING ON MARGIN (example)
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If you open a margin account with $5,000, you can
purchase $10,000 worth of stock
If you buy 500 shares of Coca Cola at $20/share, you
have $5,000 in equity (the part that is yours) and you
owe $5,000 to the broker
If the stock increases to $30 (now worth $15,000), you
now have $10,000 in equity, while still owing $5,000
If the stock decreases to $10/share (now worth $5,000),
you now have no equity, but still owe $5,000
STOCK SPLITS
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Splits are initiated if a company thinks that
its share price is too high to attract investors
Splits occur when a single share is divided
up into more than one share (thus doubling
shares in a 2-for-1 split)
At the same time, the share price is cut in
half (thus keeping the total value the same
as before the split)
Ex: 100 shares @ $50 per share become
200 shares @ $25 per share
After a stock split share prices often rise
STOCK SPLITS
Total Value: 100 x $600 =
$60,000
#1.
A. 200
B. $300
C. 200 x 300 = $60,000
D. $320
E. 200 x 320 = $64,000
#2
A. 400
B. $160
C. 400 x 160 = $64,000
D. $180
E. 400 x 180 = $72,000
MUTUAL FUNDS
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Mutual funds: professionally managed pools of investors’ money
invested according to predetermined investment strategies
“professionally managed”: the mutual fund company makes daily
decisions about buying/selling in the fund
“pools of investors’ money”: investors buy individual shares in the
funds
“predetermined investment strategies”: each mutual fund focuses on
one or more types of stocks (ex: telecommunication stocks), bonds
(ex: municipal), or various combinations (ex: “balanced fund” = 60%
stocks, 40% bonds)
Advantages of mutual funds:
1. instant diversification (one fund can contain hundreds of stocks,
bonds, etc.)
2. easy to buy and sell (liquid)