Stocks and Investment

*Stock (Common Stock): A small portion of ownership in a company. -Companies that sell stock are called Public Companies

Basic Stock Facts -Company sell themselves to raise money. -25% of new money for corporations comes from stock sales. -Each major company has millions of shares. McDonalds: 1.06 Billion shares @ $74 ave. price (2010) Google: 318 million @ $484 ave price (2010) -Owning more than 50% of shares gives ownership in a company Greed Speech

*Dividends: Money paid by company to shareholders. -Paid per share. -Not scheduled or guaranteed Example: Walmart: $1.09 annual Google: $0 annual Yum: 21 cents per quarter

Initial Public Offering (IPO): Stock being offered for sale for the first time on a public market http://www.nyse.com/events/1268647197932. html Crude Carriers Celebrates IPO on the NYSE 03/17/2010 Crude Carriers visits (NYSE-Listed CRU) visits the NYSE to mark the company’s recent initial public offering. In honor of the occasion, Chairman and CEO Evangelos Marinakis rings The Opening BellSM.

Ticker Symbol: Shorthand name of a company Examples CO: Coke NKE: Nike ORCL: Oracle Kellogs: K

Investment Methods Buying on Margin: Borrowing money from broker to buy stocks. Hope stocks go up. *Must put a percentage of the money down (50% minimum) *Must pay interest on the loan Long Position: Want stocks to go up in value

Selling Short (Short Position): Way to make money of stocks dropping in value

Short Sale Steps 1. Borrow shares of stock from a broker for a fee. Example 100 shares of IBM 2. Sell shares on the open market for regular price. Example 100 shares of IBM @ $50 per share. 3. Keep money. Example $5000 4. Buy stocks back to give back to broker when price goes down (called short cover). Example IBM is now $20 per share. Pay $2000 5. Keep extra money. Example $5000$2000=$3000

*Short sale can hurt if stock goes up. *Short sale is typically in a set period of time.

Characteristics of Good Companies Makes a product that…… • everyone needs or uses regularly. • that no one has. • cannot be duplicated. • will be needed in the future. • costs little to produce and ship

Major Stock Markets New York Stock Exchange: Oldest (1792) and largest U.S. stock exchange *Worth $11.2 Trillion (2010) *8000 different items traded *Tends to be older and more Valuable companies *U.S. and foreign stocks

NASDAQ (National Association of Securities Dealers Automated Quotations) *Computerized stock exchange founded in 1971. *3,800 Companies that tend to be in the computer or tech. Industry.

American Stock Exchange (AMEX) *A smaller U.S. stock exchange owned by NYSE *Started by street traders

More Vocabulary Penny Stock: Stock that trades for less than $5 per share.

Blue Chip Stock: Stock of wellestablished, usually profitable companies

Bull Market: A market on the rise Bear Market: A market on the decline

Indexes *Way to measure overall market performance Dow Jones Industrial Average (DJIA or DOW) *Average price of 30 stocks on the NASDQ and NYSE *Est. in 1896 and controlled by Wall Street Journal *Originally 12 stocks. (GE only stock on entire time)

DOW Cont.

*Started at 40 points. *Currently over 10,000 points *Supposed to reflect entire stock market

DOW Stocks 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Alcoa American Express AT&T Bank of America Boeing Caterpillar Chevron Corp Cisco Systems Coca-Cola DuPont Exxon Mobil General Electric Hewlett-Packard Home Depot Intel IBM

AA AXP T BAC BA CAT CVX CISCO KO DD XOM GE HWP HD INTC IBM

DOW Stocks Cont. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

Johnson & Johnson JP Morgan Kraft Foods McDonalds Merck Microsoft Pfizer Procter and Gamble Travelers United Technologies Verison Communications Wal-Mart Walt Disney 3M

JNJ JPM KFT MCD MRK MSFT PFE PG TRV UTX VRSN WMT DIS MMM

NASDAQ Composite *Average of all stocks traded on the NASDAQ

Standard and Poor’s 500 (S&P 500) *Average price of 500 large companies on the NASDAQ, AMEX, and NYSE *Better measure of overall economy

General Stock Vocabulary • Portfolio: A collection of investments held by and individual or group. • OTC Market: (Over the Counter Market) A market in stocks that is not part of a “regular” stock market. Tends to be less valuable stocks. Sold directly to buyers.

SEC (Securities and Exchange Commission) *The “stock police” *Regulate the stock market *Established in 1934 after 1929 crash *Companies required to report to SEC certain actions *Look for illegal trade such as insider trading (trade based on non-public info)

• Capital Gains: Profit made from an investment in capital assets (stocks, bonds) • Capital Losses: Loss from an investment in capital assets • Equity: The amount of something you actually own. Example: Your house is worth $200,000. You still owe $70,000. $200,000 -$70,000 Equity is $130,000

Negative Sum Game: A situation where someone must lose in order for someone to gain. Example: Gambling Positive Sum Game: Situation where no one must lose in order for gains to be made. Example: Stock Market

• Day Trading: Trading done based on the short term gain or loss in stock price. Typically done via computer. Not done for long term investment. *Possible to regular person with advent of internet.

Types of Stock and Stock Related Terms Technology (Tech Stocks): Stocks of companies involved in computers or software.

• Preferred Stock: Stocks that are different than regular shares. *Have first dibs on assets of a company if it goes bankrupt *Have first dibs at dividends *Tend not to have rights in voting on company issues at shareholder’s meeting.

• Stock Split: When a company decides to create more stock by splitting up existing shares into equal divisions. Prices decline at same ratio. *Tends to be done to make individual shares more affordable. Example: 1 share of stock @ $50 turns into 2 shares of stock @ $25 *Can be done in reverse “reverse split” -2 shares become one and price doubles

P/E Ratio: The ratio of a stock’s price per share divided by its annual earnings per share. Way to measure the “value” of a stock. *High P/E: 25 or more points. Little money being made per share. *10-17: Fairly average stable P/E Ratio NKE X WMT Goog BRKB

20.6 N/A 13.6 25.9 .91

Measures of Individual Stocks • Volume of Trade: The number of times a stock has been traded over the course of a period of time. *Higher volumes indicates more interest

Investment Techniques • Diversification: Buy stocks in multiple companies to spread out risk. *Can be done by a mutual fund (collection of different stocks in one fund) 2000

2010

Diversification

WMT: $47 NKE: $20 DELL: $25 GE: $50 RE: $50 Total: $192

WMT: $53 NKE: $82 DELL: $14 GE: $18 RE: $80 Total: $247

Non-Diversification

GE: $50

GE: $18

Dollar-Cost Averaging: Buying stocks at regular intervals with set amount of cash. *Evens out lows and highs of market Buy and Hold: Buy stock and hold it for the long term.

Dividend Reinvestment: Take any money made from dividends and buy more of the same stock. Direct Investment: Buying stock directly from company you work for. *Stock Option: Right to buy stock from the company you work for, or get paid in stock

HOW A STOCK TRADE WORKS 1. Investor orders a stock from a broker who will buy the stock for a fee (Commission) Types of Stock Orders A. Market: Buy at current price B. Limit Order: Buy at a set maximum price and not more C. Call Option: Buying the right to buy at a set price. D. Put Option: Buying the right to sell at a set price.

2. Broker places order with a brokerage firm that has a seat (can trade) on a major exchange. 3. Floor trader from brokerage firm goes to buy stock: Goes to Post: Specific place on a sock market where specific types of stocks are traded.

4. Mini-auction takes place monitored by a specialist Bid: Amount of money willing to pay for stock Offer: Amount of money willing to sell something for *Price is agreed to and entered into computer by specialist

Other Types of Investment • Mutual Funds: Multiple stocks in one fund to diversify. *Can have a number of different focuses.

Bonds: Essentially loaning an institution money in return for interest. *Most common way for companies to make money.

Types of Bonds *Treasury Bonds (T-Bills or Notes): Loan the U.S. govt. money, but need to buy $10,000 minimum. -Have always been paid in full *Savings Bond: Loan the U.S. govt. money. -Inexpensive but low interest rates

• Corporate Bonds: Loan corporations money. Higher interest, but may not get paid back. *60% of new money companies raise is from bond sales *Junk Bonds: Risky bonds that pay high interest. Can end up with nothing

• Savings Account: Money put into a bank. Pays low interest but insured up to $250,000’ • Money Market Account: Savings account that pays better interest, but requires more money.

• Certificate of Deposit (CD): Savings deposit for set period for fixed interest. Better interest than savings account, but must keep money in for set period *Good for investment less than 5 years but more than 6 months.

*Commodities: Minerals, gold, silver, wheat, etc. *Real Estate: Invest in property and hope value increases

Retirement Investments *Compound Interest: With regular investment, a small amount of money can grow. Example: $1000 invested every year for 30 years @ 5% will turn into $69,000 Example: $2000 invested every year for 30 years @ 7% will turn into $202,000

401(K) or 403(B): Mutual fund for retirement. *Money goes in tax free, but taxed when taken out. *Must keep money in until retirement or face massive penalties *Can be transferred from job to job. *Sometimes employers match money put into the account by the account holder *Can pick where money is invested

• IRA (Individual Retirement Account) *Mutual fund for retirement *Paid in after tax income, but not taxed when withdrawn. No capital gains tax on IRA *Must keep money in account until retirement or face penalties