Grade 12 Unit 8

HISTORY AND GEOGRAPHY 1208 THE STOCK MARKET CONTENTS

I. THE HISTORY AND WORKINGS ........................... The Stock Market: How It Started ......................... The Stock Market: How It Works............................ Selling, Buying, and Brokers................................... II. FROM CHOOSING TO CRASHING ........................ Selecting Stocks.......................................................... What Causes the Stock Market to Crash? ............ III. TYPES AND TRACKING ........................................... Types of Stocks ........................................................... Tracking Stocks in the Newspaper........................

Author: Editor: Illustrations:

2 2 5 8 14 14 18 23 23 26

Brad Zockoll Brian Ring Alpha Omega Staff

804 N. 2nd Ave. E., Rock Rapids, IA 51246-1759 © MM by Alpha Omega Publications, Inc. All rights reserved. LIFEPAC is a registered trademark of Alpha Omega Publications, Inc.

All trademarks and/or service marks referenced in this material are the property of their respective owners. Alpha Omega Publications, Inc. makes no claim of ownership to any trademarks and/or service marks other than their own and their affiliates’, and makes no claim of affiliation to any companies whose trademarks may be listed in this material, other than their own.

HISTORY 1208 THE STOCK MARKET The very first stock exchange was created in 1531 in Antwerp, Belgium and England’s first stock exchange originated in 1773. America created its first stock exchange in New York. With the New York Stock Exchange® dominating the financial pages of the newspaper and causing waves in the financial world every week, it’s almost humorous to hear of its humble beginnings. With billions of dollars moving about daily, you might find it hard to believe the NYSE®’s beginnings were with a handful of men standing in front of a buttonwood tree near the Trinity Church in East Manhattan during the American Revolution. Silver was traded for paper documents, giving “proof” that the bearer now owned stock in the cargo that was moving in to the harbor each day. The goods were available and the business was brisk. Trading in New York had begun.

OBJECTIVES Read these objectives. The objectives tell you what you will be able to do when you have successfully completed this LIFEPAC®. When you have finished this LIFEPAC, you should be able to: 1. Describe in brief the history of the stock market. 2. Explain how the stock market works. 3. Explain the process of buying, selling, and trading stocks; to know the function of a stock broker. 4. Describe what a stock is and explain the process of selecting one. 5. Explain what a stock market crash is, what causes one and when they have happened. 6. Give an explanation of the four different types of stocks and the definitions of “bull” and “bear” market. 7. Identify terms in the newspaper having to do with the tracking of stocks.

Survey the LIFEPAC. Ask yourself some questions about this study. Write your questions here. _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ _________________________________________________________________________________________________ 1

I. THE HISTORY AND WORKINGS SECTION OBJECTIVES Review these objectives. When you have completed this section, you should be able to: 1. Describe in brief the history of the stock market. 2. Explain how the stock market works. 3. Explain the process of buying, selling, and trading stocks; to know the function of a stock broker.

“Money was made, not to command our will, But all our lawful pleasures to fulfill. Shame and woe to us, if we our wealth obey; The horse doth with the horseman away.” - Abraham Cowley

VOCABULARY Study these words to enhance your learning success in this section. American Stock Exchange®

The formal name of the curb traders; the AMEX®, as it is known, began in 1908

bond

Certificate guaranteed that the original investment will be paid with interest at a specified date

curb trading

Trading which began on the street curb because the NYSE® turned down certain stocks

Industrial Revolution

Growth in America in the 19th century; emphasis moved from farming to manufacturing

New York Stock Exchange®

The largest of all American stock exchanges, created in 1792

share

A unit of the equal parts of the capital stock divided by a corporation

stock exchange

A place where financial securities are bought and sold

Wall Street

Where the New York Stock Exchange® originated; still the meeting place of the NYSE®

THE STOCK MARKET: HOW IT STARTED In the early days of our nation, the Colonial government was looking for a way to finance its wartime operations, so it sold bonds. If a person bought a bond, they received a paper for a certain amount of money and period of time. After that time expired, the person turned in the bond and was given the cost of the bond plus a profit. At the same time, the first banks in American history were being created, and once again cash was needed to make the start successful. In addition to bonds, the banks sold little parts of their banks to whoever had the money and the desire to own a share in the business. Once again, the idea was good and the business grew. These transactions were the beginning of the stock market of today. The men would meet on what was once a farmer’s market area known as Wall Street in New York. Desiring better organization, 24 men gathered and initiated the New York Stock Exchange, which is also known by its initials, NYSE®.

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After the Industrial Revolution, Wall Street came to prominence in the 1900s, and the New York Stock Exchange was getting all the business it could use. Some of the stocks that were offered for sale were not reliable enough to be put in the NYSE®, so a brisk business was running outside on the curb of the street. This was called “curb trading” and the business was called “The Curb Exchange.” It continued to grow and was renamed the American Stock Exchange®, also known as AMEX®. Today, there are hundreds of stock exchanges in cities all over the world that work together and play an important part in the economies of America and other countries of the world. From its humble origins of the 1700s, the stock market in America has grown to be an important financial force in the world today. However, as important as the stock market seems, you may not be familiar with some of the terms surrounding it and its activity. Let us take a look at a few important terms: An annual report – This is a document that is issued each year to give details to investors about a company’s financial performance. It is the “homework” done so that you may know if your money is being invested wisely. That is valuable information, as is the Dow JonesSM industrial average which is given every day on many financial networks. The DowSM is a composite index of stock prices representing 30 of the nation’s biggest companies. “Composite” means that the DowSM is a single index which represents the market performance of more than one company—in fact, thirty companies. It is almost as if the DowSM did a day’s long inspection of the “top 30” and wants you to know how they performed. By looking at the chart, you can get an idea of the status (health) of the nation’s top companies. Since these companies are essentially the backbone of the nation’s economy, you get an idea of the financial health of corporate America.When you hear the TV reports on the “NASDAQ®,” you are hearing news about the “National Association of Securities Dealers Automated Quotations®,” a computerized nationwide trading system for over 4,000 companies. Amazon.comSM, Apple® Computer, Microsoft®, and other high-tech companies are listed here. On the NASDAQ® Composite Index you will get an idea of the strength of the high-tech industry.

Fill in the blanks: 1.1

From its humble origins of the __________________________ , the stock market in America has grown to be a financial force in the world today.

1.2

After the __________________________ , Wall Street became much more important and the New York Stock Exchange was getting all the business it could use.

1.3

A unit of the equal parts of the capital stock divided by a corporation is called a __________________________.

1.4

In the 1700s the first banks in American history were being created and once again __________________________ was needed to make the start successful.

1.5

Some of the stocks offered were __________________________ to be put in the NYSE®, so a brisk business was running outside on the curb of the street.

3

Matching: 1.6

_______

share

a. a place where financial securities are bought and sold

1.7

_______

American Stock Exchange®

b. the largest of all American stock exchanges, created in 1792

1.8

_______

stock exchange

c. started in the 19th century; emphasis moved from farming to the factory

1.9

_______

New York Stock Exchange®

d. The formal name of the curb traders; it began in 1908

1.10

_______

Industrial Revolution

e. a unit of the equal parts of the capital stock divided by a corporation

True/False: 1.11

_______

The very first stock exchange was created in 1531 in Antwerp, Belgium.

1.12

_______

“The Curb Exchange” continued to grow and was renamed the American Stock Exchange®, also known as AMEX®.

1.13

_______

New York Stock Exchange® is also known by its initials, NYSE®.

1.14

_______

England’s first stock exchange began in 1873.

Mark the boxes that are TRUE: 1.15

_______

If a person bought a bond, they received a paper for a certain weight of gold.

_______

In the early days of our nation, the Colonial government was looking for a way to finance its wartime operations, so it sold bonds.

_______

Traders would meet on what was once a farmer’s market area known as Wall Street in New York.

_______

The Belgium Stock Exchange began with a handful of men standing in front of a buttonwood tree near the Trinity Church in East Manhattan during the American Revolution.

_______

In addition to bonds, the banks sold little parts of their banks to whomever had the money and the desire to own a share in the business.

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“Never ask of money spent Where the spender thinks it went. Nobody was ever meant To remember or invent What he did with every cent.” - Robert Frost, The Hardship of Accounting

THE NEW YORK STOCK EXCHANGE VOCABULARY Study these words to enhance your learning success in this section. Barron’s®

A financial weekly publication which features information on buying and selling stock

broker

The person who does the actual purchasing of the stocks for you

broker services

Work for the shareholder done by the broker, such as selling and buying stock

prospectus

A plan of a new business or financial endeavor, including capital needed to be a shareholder

receipt

Written proof that a purchase has been made

shareholder

One who owns shares of a business on the stock exchange

stock ticker

A device which gives constant updates on the activity of the New York Stock Exchange®

Wall Street Journal®

Daily newspaper which focuses on stock market activity

THE STOCK MARKET: HOW IT WORKS The stock market is a powerful financial tool in the workings of America and the world. Two men sitting at a lunch table are reading a prospectus about a company and trying to decide if they should put their thousands of dollars into a corporation such as this. People constantly checking a stock ticker to see how their investments fared during the course of the day. Thousands subscribe to publications such as Barron’s® or the Wall Street Journal® to get information on investing more wisely. You see and hear all of the stock market terms but you may not be sure what they have to do with actually making any money! How do you learn about it? One of the easiest ways for us to learn about the working of a stock market is by inventing a little scenario:

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LET’S PRETEND THAT YOU GET TO BUY A PIECE OF A COMPANY... Let’s say that you have been told by a good friend that Mattel® Toys is going to come out with a Christmas toy that is going to be the hottest item of the decade. Your friend tells you that the brand new product is going to be such a hit that it will increase their business by almost three times. You wonder if there could possibly be a way for you to own a part of Mattel® so you could enjoy the benefits of that great new product. Guess what! You can. Mattel® is one of the long list of companies that lets the public buy a part of their company. So you break your piggy bank and find out that you have 100 dollars that you have saved up for an opportunity like this. How do you actually buy a part of Mattel® Toys? Mattel®, as well as thousands of other companies, offers the opportunity to buy a part of their company by selling shares. When you purchase a share, you have purchased a little piece of the company. Even though it is a tiny, tiny part of the whole business, you are venturing into the stock market. You are now a shareholder. Where do you go now? You know you want to buy shares in Mattel® Toys, but you are pretty sure that you can not run down to Toys“R”Us® and tell them you want twenty shares of Mattel®. Instead, you make contact with someone who is called a broker. A broker is the person who will do the actual purchasing of the stocks for you since individuals can not buy stock directly. If you schedule an appointment with a broker and tell him you’d like to buy some stock, he’ll be ready to do business. You contact the broker and tell him, “Sir, I’d like to buy as much Mattel® Toys stock as I can get for $100. That is what I have to spend.” The broker then tells you, “Well, right now a share in Mattel® Toys is going for 10 dollars (not the actual price), but my services will cost you 40 dollars, so you can buy six shares of Mattel®.” You hand the money to the broker and guess what? You now own stock in Mattel®. This can also be done on the Internet through an online broker. The process is similar, you pay a fee to a broker or brokerage firm to process your purchase. You contact them by computer, not by a phone. Now, even though you only got a paper receipt, what actually went on when you made that purchase for Mattel® stock? Of course, the broker did not have the stock at the business place where he worked, but he contacted the Stock Exchange and made the transaction. In our next lesson, you will learn what goes on once you make the purchase.

Fill in the blanks: 1.16

In our story above, the broker tells you, “Well, right now a share in Mattel® Toys is going for 10 dollars (not the actual price), but my __________________________ will cost you 40 dollars, so you can buy six shares of Mattel®.”

1.17

A broker is the person who does the actual __________________________ of the stocks for you.

6

Matching: 1.18

_______

broker services

a. the person who will do the actual purchasing of the stocks for you

1.19

_______

broker

b. work for the shareholder by the broker, such as selling and buying stock

1.20

_______

receipt

c. written proof that a purchase has been made

Matching: 1.21

_______

Barron’s®

a. one who owns shares of a business on the stock exchange

1.22

_______

stock ticker

b. plan of a new financial endeavor, including how much capital is needed in order to be a shareholder

1.23

_______

broker services

c. a financial weekly publication which features information on buying and selling stock

1.24

_______

prospectus

d. work for the shareholder by the broker, such as selling and buying stock

1.25

_______

shareholder

e. a device which gives constant updates on the activity of the New York Stock Exchange®

True/False: 1.26

_______

People will subscribe to publications such as USA Today® or The Baltimore Sun® to get information on investing more wisely.

1.27

_______

Mattel®, as well as thousands of other companies, offer the opportunity to buy a part of their company by selling shares.

1.28

_______

If you want to buy shares in Mattel® Toys, you run down to Toys“R”Us® and tell them you want twenty shares of Mattel®.

1.29

_______

When you purchase a share, you have purchased a little piece of the company.

Which statement is NOT TRUE? 1.30

_______

A broker is the person who will do the actual purchasing of the stocks for you.

_______

A receipt is written proof that a purchase has been made.

_______

The Wall Street Journal® is the daily newspaper which focuses on stock market activity.

_______

AMEX® is another name for the American Stock Exchange®.

_______

The first stock exchange was the New York Stock Exchange®. 7

“If you’d know the value of money, go and borrow some.” - Benjamin Franklin, Poor Richard’s Almanac

VOCABULARY Study these words to enhance your learning success in this section. brokerage house

Initial location where stock transaction takes its first steps. Broker acts as an intermediary in the purchase

commission

An amount given to a broker for his services; sometimes it is a flat fee, other times it is a percentage

dip

A drop in the market which may signify a good time to buy stocks

floor

The place on the exchange where the actual selling and buying is done

floor broker

Person who is actually in the stock exchange and will perform the physical purchase of stock for the buyer

rise

An upturn in the market which may signify a good time to sell stocks

stock certificate

A form of proof of possession of stock; mostly obsolete nowadays

transaction

The financial agreement and exchange of money for shares

SELLING, BUYING, and BROKERS What actually happened with the broker when you bought that Mattel® stock? It seemed simple enough to you, but what went on behind the scenes? A lot of people were involved with your purchase. When you told the broker you wanted to get those six shares of Mattel® stock, he sent a message to a person who is working on the floor of the New York Stock Exchange®. That person is just like the people you see on the news clips of the stock market on television where they show people frantically waving their arms and dropping paper all over the floor. There could be another stock exchange that he could have called, but for this story we will say that he made a call to a person on the floor of the New York Stock Exchange® itself. Your broker tells that person to buy six shares of Mattel® stock for you. The person he is talking to is called the floor broker, and the transaction takes place on the floor of the stock market. The floor broker will go over to a part of the NYSE® floor that has companies that specialize in this type of stock you want to purchase. The floor broker purchases your six shares of Mattel® and then reports the trade to the floor. That means that hundreds of computers all over the NYSE® have recorded your transaction. The floor broker then reports back to the brokerage house that the deal has been completed. It’s done! You have a receipt of your business, but the broker will not send you a paper stock certificate like they used to. The transaction is almost totally electronic. You may buy and trade frequently, and each time the broker charges a service fee. Eventually, most people expect the trading floor to be eliminated and all the transactions will all be done from computers. Say you wanted to sell the stock. Purchasing and selling, as we will learn, should take into account the rises and dips in the market. You would call the broker and the process would go almost the same way. The broker will deduct his commission and then pass the money on to you. In some cases, many discount brokerages are offering significant discounts for conducting purchases over the Internet. 8

THE PROCESS OF PURCHASING STOCK INVOLVES THESE STEPS: a.

You call a broker.

b.

The broker calls a person on the floor of the exchange, probably an employee of his.

c.

The floor broker goes to the area allotted for that particular stock.

d.

He buys the desired amount of stock from the company.

e.

He reports it on the floor and then back to your brokerage house. The stock is yours.

Fill in the blank: 1.31

The floor broker purchases your six shares of Mattel® and then reports the trade to the floor. That means that hundreds of computers all over the NYSE® have recorded your __________________________ .

1.32

After the broker has called the floor broker, the floor broker goes to the area allotted for that particular stock. He buys the amount of stock from the company. He __________________________ it on the floor and then back to your brokerage __________________________ . The stock is yours.

1.33

When selling your stock, you would call the broker and the process would go almost the same way. The broker will deduct his __________________________ and then pass the money on to you.

1.34

In some cases, many __________________________ brokerages are offering significant discounts for conducting purchases over the Internet.

Matching: 1.35

_______

brokerage house

a. a drop in the market which may signify a good time to buy stocks

1.36

_______

stock certificate

b. a form of proof as to the stock transaction; mostly obsolete nowadays

1.37

_______

dip

c. initial location where stock transaction takes its first steps, the broker acts as an intermediary in purchase

True/False: 1.38

_______

Purchasing and selling should take into account the rises and dips in the market.

1.39

_______

When you call a broker and arrange to buy stock, the broker calls a person on the floor of the exchange, probably an employee of his.

1.40

_______

Your broker tells someone to buy six shares of Mattel® stock for you. The person he is talking to is called the sales broker and the transaction takes place on the floor of the stock market.

9

When you told the broker you wanted to get those six shares of Mattel® stock, he sent a message to a person who is working on the: 1.41

_______

top of the New York Stock Exchange®.

_______

office of the New York Stock Exchange®.

_______

floor of the New York Stock Exchange®.

_______

outside of the New York Stock Exchange®.

_______

background of the New York Stock Exchange®.

Adult Check

___________________ Initial Date

Review the material in this section in preparation for the Self Test. The Self Test will check your mastery of this particular section. The items missed on this Self Test will indicate specific areas where restudy is needed for mastery.

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SELF TEST 1 Fill in the blanks: (each answer 3 points) 1.01

When you told the broker you wanted to get those six shares of Mattel® stock, he sent a message to a person who is working on the __________________________ of the New York Stock Exchange®.

1.02

A floor __________________________ is just like the people you see on the news clips on television when they show a bunch of people frantically waving their arms and dropping paper all over the floor.

1.03

The very first stock exchange was created in 1531 in Antwerp, __________________________.

1.04

“The Curb Exchange”continued to grow and was renamed the American Stock Exchange, also known as __________________________.

1.05

In addition to bonds, the banks sold little parts of their banks to whoever had the money and the desire to own a __________________________ in the business.

1.06

After the __________________________, Wall Street became more important and the New York Stock Exchange was getting all the business it could handle.

1.07

A unit of the equal parts of the capital stock divided by a corporation is called a __________________________.

1.08

In the 1700s, the first banks in American history were being created and once again __________________________ was needed to make the start successful.

1.09

Some of the stocks offered to get on the NYSE were __________________________ to be put in the NYSE, so a brisk business was running outside on the curb of the street.

1.010

Jim receives a copy of a new radio station being proposed in his town. Within the information he learns the potential for profits, the risk involved and how much capital is needed in order to become a shareholder. Jim is looking at a __________________________.

1.011

In our story above, the broker tells you, “Well, right now a share in Mattel® Toys is going for 10 dollars (not the actual price), but my __________________________ will cost you 40 dollars, so you can buy six shares of Mattel®.”

1.012

A broker is the person who will do the actual __________________________ of the stocks for you.

1.013

After the broker has called the floor broker, the floor broker goes to the area allotted for that particular stock. He buys the amount of stock from the company. He__________________________it on the floor and then back to your brokerage __________________________. The stock is now yours.

1.014

When you call a broker and arrange to buy stock, the broker calls a person on the floor of the exchange, probably an __________________________ of his.

1.015

When selling your stock, you would call the broker and the process would go almost the same way. The broker will deduct his __________________________ and then pass the money on to you.

Matching: (each answer 2 points) 1.016

_______

stock certificate

a. a drop in the market which may signify a good time to buy stocks

1.017

_______

dip

b. a form of proof of stock ownership; mostly obsolete nowadays

1.018

_______

brokerage house

c. the initial location where the stock transaction takes its first steps; the broker acts as an intermediary

11

Matching: (each answer 2 points) 1.019

_______

stock exchange

a. a place where financial securities are bought and sold

1.020

_______

New York Stock Exchange®

b. the largest of all American stock exchanges, created in 1792

1.021

_______

share

c. started in the 19th century; emphasis moved from farming to manufacturing

1.022

_______

American Stock Exchange®

d. The formal name of the curb traders; it began in 1908

1.023

_______

Industrial Revolution

e. a unit of the equal parts of the capital stock divided by a corporation

Matching: (each answer 2 points) 1.024

_______

shareholder

a. one who owns shares of a business on the stock exchange

1.025

_______

discount brokerage

b. offers significant discounts for conducting purchases over the Internet

1.026

_______

broker services

c. a financial weekly publication which features information on buying and selling stock

1.027

_______

stock ticker

d. work for the shareholder by the broker, such as selling and buying stock

1.028

_______

Barron’s®

e. a device which gives constant updates on the activity of the New York Stock Exchange®

True/False: (each answer 2 points) 1.029

_______

Purchasing and selling should take into account the government trading on the market.

1.030

_______

From its humble origins of the 1700s, the stock market in America has grown to be a major financial force in the world today.

1.031

_______

In the early days of our nation, the Colonial government was looking for a way to finance its wartime operations, so it sold bonds.

1.032

_______

Your broker tells someone to buy six shares of Mattel® stock for you. The person he is talking to is called the floor broker and the transaction takes place on the floor of the stock market.

The floor broker purchases your six shares of Mattel® and then reports the trade to the floor. That means that hundreds of computers all over the NYSE® have recorded your: (each answer 2 points) 1.033

_______

Social Security number.

_______

employment.

_______

trading.

_______

transaction.

_______

background information.

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Mark the statements that are TRUE. (each answer 2 points) 1.034

_______

The New York Stock Exchange® is also known by its initials, NYSE®.

_______

England’s first stock exchange originated in 1773.

_______

Traders would meet on what was once a farmer’s market area known as Fisherman’s Wharf in New York.

_______

The New York Stock Exchange® began with a handful of men standing in front of a buttonwood tree near the Trinity Church in East Manhattan during the American Revolution.

Which statement is TRUE? (2 points) 1.035

_______

A broker is the person who will do the actual purchasing of the stocks for you.

_______

A transaction is written proof that a purchase has been made.

_______

If you want to buy shares in Mattel® Toys, you run down to Toys“R”Us® and tell them you want twenty shares of Mattel®

_______

AMEX® is another name for the Standard & Poor® index.

_______

The Wall Street Journal® is the monthly newspaper which focuses on stock market activity.

Which statements are TRUE? (each answer 2 points) 1.036

_______

When you purchase a share, you have purchased a little piece of the company.

_______

People will subscribe to publications such as Barron’s® or The Wall Street Journal® to get information on investing more wisely.

_______

Mattel®, as well as thousands of other companies, offers the opportunity to buy a part of their company by selling shares.

_______

A prospectus is a plan of a new business or financial endeavor, including how much capital is needed in order to be a shareholder and the profits that an investor may realize.

Score Adult Check

80 100

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_______________________ ___________________ Initial Date