The Stock Market

SharesA portion of a stock—aka. Equities (claims of ownership in corporations)Purpose:Corps. Raise $ to start, run and expand

How do Stockholders make a Profit?

• Dividends-Pay out by corporations. Paid in quarters. The higher the profit, the larger the dividend per share of stock

• Capital Gains-Sell the stock for more than he or she paid for it.– Capital Gain-the difference between a higher

selling price and a lower purchase price– Capital Loss-the difference between a lower

selling price and higher purchase price resulting in a financial loss to the seller

Types of Stocks

• Income Stock-Stock pays dividends at regular times during the year– Ex: most commonly found as companies operating

within real estate, energy sectors, utilities, natural resources and financial institutions.

• BP, Exxon, Citigroup

Growth Stock

• Pays few or no dividends• Company reinvests earnings• The business then Increases its value over

time.– Examples: Aeropostale, Urban Outfitters, Panera

Bread

Common Stock

• Investors who are voting owners of the company. One vote for each share.– Fannie Mae, Citigroup, Exxon

Preferred Stock

• Investors who are nonvoting owners of the company.

• Receive dividends before the owners of common stock.

• If the company goes out of business, preferred stockholders get their investments back before common stockholders

Blue-Chip Stock

• Is the stock of a well-established company having stable earnings and no extensive liabilities– Wal-Mart, Coca-Cola, Gillette, Berkshire Hathaway

and Exxon-Mobile.

Risks of Buying Stock

• Purchasing stock is risky because the firm selling the stock may earn lower profits than expected, or it may lose money. If a company goes bankrupt, stockholders receive dividends only if there is money left over after bondholders are paid.

How Are Stocks Traded

• Stockbroker-a person who links buyers and sellers of stock. Advises them to buy or sell particular stocks

• Brokerage Firm-businesses that specialize in trading stocks. Stockbrokers and brokerage firms cover their costs and earn a profit by charging a commission, or fee for each transaction

Options for Buying Stock

• Stock Splits• Owners of common stock may sometimes vote on

whether to initiate a stock split. A stock split means that each single share of stock splits into more than one share. A company may seek to split a stock when the price of stock becomes so high.

Ex: You own 200 shares of GM. Each share is worth $100. After the split, you own 2 shares of GM stock for every single share you owned, so now you have 400 shares. However each share is now worth only $50.

Future and Option Buying• Future and Options• Futures are contracts to buy or sell commodities at a specific date

in the future at a price specified today.• Ex: Buyer and seller agree today at price of $4.50 for a bushel of

soybeans 6 or 9 months in the future. The buyer would pay some portion of the money today, and the seller would deliver the goods in the future.

• Markets in which futures are bough and sold are associated with grain and livestock.

• Markets involved are New York Mercantile Exchange and Chicago Board of Trade

• Options-contracts that give investors the choice to buy or sell stock and other financial assets. Investors may buy or sell a particular stock at a particular price up until a certain time in the future-usually 3 to 6 months

Day Trading

• Try to predict minute-by minute price changes based on computer programs. Very risky!!

Stock Exchanges

• Markets for buying and selling stock• Major US Markets– New York Stock Exchange (NYSE)– NASDAQ-AMEX (National Association of Securities

Dealers’ Automated Quotation system-American Stock Exchange)

– OTC Market

New York Stock Exchange (NYSE)

New York Stock Exchange

– The country’s largest and most powerful exchange– Began in 1792– Handles stock and bond transactions for only the

largest and most established companies (Deals mostly with Blue-Chip Stock)

• Ex: Del Monte, Disney, Nike, Coco Cola, Macy’s etc.• http://www.nyse.com/

NASDAQ-AMEX

• (National Association of Securities Dealers’ Automated Quotation system-American Stock Exchange– 2 merger together in 1998– Sells slightly riskier stocks from less-established

and small companies• Pharmaceutical companies, energy companies• Microsoft, Apple, Intel• http://www.nasdaq.com/

OTC Market

– An electronic marketplace for stock that is not listed or traded on an organized exchange

– New and Growing Companies– Ex: equity securities, corporate bonds,

government securities

How to Read a Stock Table

The Dow Jones Industrial Average

• Has shown how certain stocks have traded on every business day since 1896. Represent 30 large companies in various industries, such as food, entertainment and technology.

• Ex: McDonalds, Microsoft, Coca-Cola, Citigroup, Walt Disney, Continental Airlines, FedEx– Dow Jones

S&P 500

• Standard & Poor’s 500, tracks the price changes of 500 different stocks as a measure of overall stock market performance.

Bull and Bear Markets

• Bull Market-Stocks rise steadily over a period of time

• Bear Market-Market falls for a period of time

The Great Crash of 1929

• 1920’s stocks were soaring• Signs of Trouble• Small number of companies and families held much of the

nation’s wealth, farmers were suffering, many ordinary people went into debt buying refrigerators and radios, industries were producing more than consumer could buy, Buying on margin

• September 3, 1929 Dow had reached an all-time low of 381• October 23, 1929 Dow had dropped 21 points in one hour,

next day investors began to sell and stock prices fell• October 29, 1929 Black Tuesday 16.4 million shares were

sold