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
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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.
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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