Stocks
Cole Boyer,
Channing Bass,
Will Bennett &
Clyde Atkins
What is a Stock?
Markets
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A market is where buyers and sellers come to exchange
goods (in this case stocks).
Supply and demand determine price.
United States is home to the two largest stock exchanges
in terms of Trade Value (NYSE & NASDAQ).
There are over twenty major stock exchanges in the
world.
Going Public
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Going public means releasing ownership of your company
to the general population.
IPO: Initial Public Offering – The company sells ownership
for cash.
Mutually Beneficial Relationship between company and
shareholders:
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Short Term – company may use all the capital raised in stock
sales for growth
Long Term – each shareholder has a claim to a portion of the
company’s profits
Going Public (Example)
Tesla Motors (TSLA) went public on June 29.
Other Reasons for an IPO
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Publicity/exposure for the company
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Attracting better employees and more clients/customers
The prestige of being a public company
Makes acquisitions and partial ownership deals much
simpler
Stock Indices
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A stock index gives a general idea of how a particular
market or sector within a market is doing.
Major US Indices: Dow Jones, S&P 500
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Dow Jones (DJIA): Doesn’t actually pertain to heavy industry.
Comprised of 30 stocks (3M, AT&T, Coca-Cola, Intel, etc.)
S&P 500 (INX): Large-cap common stocks. 50 Stocks.
Trading Mechanisms
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Market Order: Buy/Sell the stock at the current market
price.
Limit Order: Set a limit at which you are willing to
buy/sell. Trade is completed once the price hits the limit.
Stop (Loss) Order: Set a stop price at which you would
like to buy/sell. Once the price is met, trade is entered as
a market order.
Shorting: Selling someone else’s shares temporarily, buy
them back later (hopefully at a lower price)
Trading Mechanisms (cont.)
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Bid-Ask Spread: refers to the amount by which asking
price exceeds the highest bid. As soon as bid-ask
spread=0, the trade is executed.
Margin Account: After buying securities on margin
(borrowed money), the leftover account of debt is called
the margin account. Collateralized by securities purchased
on margin.
Wall Street Trading Floor
→ The New York Stock Exchange (NYSE) is the world's largest
stock exchange by market capitalization of its listed companies
at $12.25 trillion.
→ Provides a means for sellers and buyers to trade shares of
stocks in companies.
→ Open Monday Friday from
9:30am – 4:00pm ET
→Continuous auction
style
Market Makers
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Market makers take ownership of shares, allowing people to
buy and sell those goods from them.
They also can make or lose money from price movements.
The purpose of market makers is to keep the trading floor
competitive and fair for everyone
Known as Market Specialists at the New York Stock Exchange.
Day Trading
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Day Trading refers to buying and selling a stock (or
currencies) all within one market day.
Day Trading has become more popular, since electronic
trading facilitates the process.
Stock Features
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Adjusted Closing Price- accounts for all the actions that
a corporation may take that will affect the price of a
stock, such as stock splits, dividends, and rights offerings.
Split- corporate action in which a company’s existing
shares are divided into multiple shares.
Dividend- the part of the earnings of a corporation that is
distributed to the shareholders
What Makes a Stock a Good Buy?
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Age-old adage: Buy low, sell high
Factors to consider:
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Long-term or Short-term?
What type of analysis?
Age and associated risk?
Level of expertise/education and skill sets?
Numbers to Watch
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P/E Ratio – Price/Earning Ratio
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= (Market Value per Share)/(Earnings per Share)
Quantifies market’s optimism in a companies growth potential
A high P/E could indicate market expects high growth
Problems:
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only useful when comparing companies within industries
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Tech Sector(Apple Inc.) vs. Utilities(Duke Energy)
growth rates of firms
Numbers to Watch
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Trading Volume – the number of contracts of a
security/stock traded in a given timespan
A spike in volume usually has a real-world, event driven
explanation
Fundamental Analysis
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Investing for the Long-term
Theory relies upon the total value of a company over a
given future timespan
This is known as finding a company’s intrinsic value.
This method involves a more in depth look at the inner
mechanics of a firm when making a decision as to
whether or not to buy
Technical Analysis
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Utilizes stock price charts
Short-term!
Day-trading
Requires trading agility
Hundreds of chart patterns and indicators
Becoming more popular as access to internet and
discounted trading platforms increase
Derivative Market Holdings
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Derivative holdings are market holdings not valued
based on the direct worth of a stock or commodity.
Options and futures are examples of derivative market
holdings.
Derivatives Trading
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Derivative trading in the modern market
requires the use of long-term computer
forecasting, along with an instantly updated
system of price recognition and position holding.
The methodology of derivative trading entails
trading based on predicted prices of the holding
in the future. These prices are based on the value
of underlying market terms.
Options
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Stock options are specific market holdings valued
according to the option to trade an underlying holding
at a certain point in the future.
The methodology of options trading is vastly different,
and involves a separate system of market making.
Technology in Market Function
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The advent and increase in the role of technology in
the stock market has lead to a new efficiency in
market-making.
Computers are now used to trade directly, hedge
automatically and instantly to reduce market risk, and
most astoundingly, to function as independent marketmakers themselves.