WHY INVEST IN STOCKS?

What does it mean to own stock in a company?

•It means YOU are an OWNER of that company!

You get to vote on company decisions like the members of the board of directors!

I work for

you!

Larry Ellison, CEO, Oracle Corp.

How do shareholders get rewarded for owning stock?Two Ways---1. Rise in Share Price (this one everybody

knows)2. Dividends (don’t forget these!)

What are dividends?When companies have earnings they often pay a portion of them back to their shareholders

These payments are called dividends

Also, don’t take your dividends in cash, but “reinvest” them in stock!!

How does P/E ratio help me pick a stock to buy?

Use the Price to Earnings ratio to pick a cheap or overvalued stock!!

P/E Ratio = Price per share/earnings per share

Stocks with High P/E’s considered overvalued.

Stocks with low P/E’s undervalued

 Charles Schwab Client Centerhttps://client.schwab.com/secure/cc/research/stocks/stocks.html?path=/research/Client/Stocks/Summary&symbol=AAPLScreen clipping taken: 3/31/2014, 3:59 PM  

What are the risks in stock ownership?

1. Companies can go bankrupt.

2. You can buy stocks really high and possible never recover.

How do you protect yourself from picking a really bad stock?

DIVERSIFY Buy A BUNCH OF STOCKS!You can even buy the entire stock market with one trade!!

How??

WITH ETF’s

A golden ETF “GLD”  Charles Schwab Client Centerhttps://client.schwab.com/secure/cc/research/etfs/etfs.html?path=/Research/Client/ETFs/Summary/&symbol=GLDScreen clipping taken: 3/31/2014, 4:26 PM  

Diversify with Mutual Funds and ETF’s Eliminates the

risk of holding too few assets

Eliminates the risk of picking stocks.

You get to “buy the whole market” with one trade.

You can even diversify across regions and assets

You can even bet against the whole market with one trade.

SDS = double SHORT the stock market

This “stock” goes up when the market goes down. (or vice versa)

GAMBLING WITH STOCKS VS.

INVESTING WITH STOCKS“You can win as a bull, win as a bear, but pigs get slaughtered.”

What gamblers do…Gamblers…Buy on margin

Basically your broker lends you money to buy stocks.You can lose more than all your money!

Our trading game allows you to buy on margin!

Gamblers…Sell stocks SHORTYou sell stocks you don’t own (selling short)

If market goes down, you buy them back lower.If market goes up, you lose.You are betting against gravity on this, since it is natural for stocks to gain over time, not to lose!Our trading game allows you to do this, or you can use a short ETF

Gamblers …are constantly buying and selling, trying to TIME the market

What investors do

Investors buy and holdInvestors diversify (hold many different kinds of companies)Investors only buy stocks with money they won’t need for 5 years or so.

Investors don’t try to time the market. They buy when the market goes down. And sell only when they think they will need the money and the market is higher..

“ Be greedy when others are fearful. Be fearful when

others are greedy.” Warren Buffet

Listen to Warren Buffet!!

•Be a Buy and Hold investor.•When the market goes down …BUY•When the market goes up…HOLD•Only sell your investments when you think you are going to need the money  and then, only IF the market is higher.

How the stock market game is NOT like investing

This game only lasts 4 weeks!

You’ll be asked to “TIME” the market!

You won’t be rewarded for being a long-term investor!

Lesson 3: Understand the psychology of investing

Most investors sell when the market is LOW and buy when the market is HIGH. WHY?

We are greedy andPanic!

We stink at investing!Avg. stock market return is 11.9% while the average stock investor only got 4.5%.

How do you avoid buying at the Top?

And Selling at the Bottom?

Questions in review1. How do owners of stock profit?

Increase in share priceReceive dividends

2. What is a dividend?Payout of a portion of earnings to

shareholders

3. How can investors easily “diversify” their stock holdings?

Buy mutual funds and ETF’s

4. How is dividend yield like interest in a savings account?

YOU PAY FOR A STOCK (deposit money in your savings account) AND THE COMPANY PAYS YOU A DIVIDEND 4X PER YEAR (interest)

5.How is dividend yield NOT like interest in a savings account?NOT GUARANTEED