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/ /ranking-cute-animals-a-stock- market-experiment conomics-experiment-pick-the-cutest-animal How the Stock Market Works Animal Videos Podcast on NPR
PLAYING THE STOCK MARKET
DOW JONES INDUSTRIAL AVERAGE- AVERAGE OF 30 STOCKS IN THE MARKET The DJIA is an index of “blue chip” U.S. stocks. It is called an “average” because it originally was computed by adding up stock prices and dividing by the number of stocks. The 30 companies that make up the DJIA are all major players in their industries; these stocks are widely held by individuals and institutional investors. These 30 stocks represent about 1/5 of the $8 trillion-plus market value of all U.S. stocks.
BULL TRADER- Example: Stock ABC sells for $20 a share You purchase 100 shares of ABC stock, it costs? $____________ (hint: 100x20) Four months later ABC is now trading for $30 per share. What is the value of your stock? $________________ (hint: 100x30) If you sold the stock, what would your profit be? $______________ 2, , , ANTICIPATES INCREASE IN THE PRICE OF STOCKS
HINTS TO FIND STOCK AS A BULL TRADER- 2.) The stock should be near the end of that range WIDE LOW HEAVILY 1.) The stock should have a range in its 52-week high and low 3.) The stock should be traded 4.) The stock should have a P-E ratio below 5.) The stock should be trading for less than $ a share
P/E RATIO: If a companies stocks are selling for $40/share and each share is earning a dividend of $2, the P/E Ratio is /2=20
BEAR TRADER- Example: Stock ABC sells for $40 a share 1.You sell 100 shares short. To do this your broker “lends” you 100 shares 2.You would those shares. How much is your investment worth? $____________ (hint: 100x40) 3.Four months later ABC is trading for $20 per share. How much would it cost you to pay for the 100 shares of stock? $____________ (hint: 100x20) 4.By paying for the stock at a lower price then you “short sold” it. How much is your profit? $______________ 4, , SHORT SELL SOMEONE WHO BORROWS STOCKS FROM A BROKER EXPECTING THE STOCK TO DROP IN THE HOPES OF MAKING A SHORT SALE—RISKY!!! 2,000.00
DAY TRADER: CONSTANTLY TRADING ONLINE FOR A LIVING Even though this form of trading has become extremely popular with the greater use of the Internet, it is extremely risky!! Some complain that it is as addictive as gambling.
DIVIDEND a) Cash dividend: Base your answers on the IBM stock chart. 1. You own 1000 shares of IBM 2. The current dividend for IBM is $_________ per share 3. How much would your dividend check be? $__________ b) Stock dividend: Base your answers on the IBM stock chart. 1. From #3 above, how much would your dividend check be? $________ 2. What is the current price of IBM stock? $________ 3. How many shares of stock would you receive? ________ ¢ MONEY PAID TO STOCKHOLDERS 121 1/ (4) hint: 480 /
CAPITAL GAINS The most attractive part of capital gains is they are taxed at a much lower rate than income. You only pay the tax when you sell!! Example: Bill Gates over a three year period made nearly $20 billion in profit on his shares of Microsoft stock. He paid ZERO DOLLARS in tax because he never sold the stock. If he ever sold the stock, he would pay capital gains tax, not income tax on his profits. Dividends are taxed at your income tax rate. PROFITS MADE ON THE INCREASE OF THE VALUE OF STOCK
BUYING ON MARGIN Example: Margin requirement is 20% 1) You purchase 100 shares of XYZ stock for $200 a share. How much would this investment cost? $________________ 2) Since you only have to put 20% down, how much cash would you need to buy this stock on margin? $___________ 3) How much do you still owe on this investment? $________________ 4) Four months later XYZ stock is trading at $220 a share. If you sold the stock how much would your investment be worth? $____________________ 5) How much was your profit? $____________ 4, , ,000 BUYING STOCK WITHOUT PAYING THE FULL PRICE It is similar to putting something on lay-away. Put a portion down now, pay the rest later! 22, ,
SOME ADVICE ON PLAYING THE MARKET: Understand the ___________/________________ ratio. The more risk you take, the more money you could earn or lose! _____________ on to stocks as long as you can When the market drops dramatically, _________! ____________! _____________! Own stocks in at least ________ different industries. TEN is better Never invest money that you many need. Invest only ________________________ The stock market reacts to the economy. It rarely influences it. REWARD HOLD RISK BUY SIX SPARE SAVINGS
Stock Exchange – SECONDARY MARKET WHERE SECURITIES ARE BOUGHT AND SOLD
The New York Stock Exchange (America’s largest companies): Is considered a __________________ exchange b/c all trades must be made on the ____________________________________ Brokerage firms pay for their space on the floor Minimum qualifications to be traded on the NYSE ______________________ - $2.4 million in pretax revenue for the most recent year ___________________ – the company must hold at least $18 million in assets Market value of common stock at least $_______ million in assets Publicly held share – _______________________ Number of shareholders – _______________ EXCHANGE FLOOR CENTRALIZED EARNING POWER ASSETS MILLION 2,000
American Stock Exchange – 1.Requirements are much less strict than those on NYSE 2.Is traditionally where smaller companies & new companies start
National Association of Securities Dealers Automated Quotation System– 1.Most often referred to as 2.Sometimes called over-the-counter stocks 3.The most volatile exchange b/c it features may hi-tech, insurance, and medical stocks NASDAQ
BONDS & OTHER FINANCIAL INSTRUMENTS
What is a bond? Formal contract to repay borrowed $ plus interest on a schedule It is a company borrowing money. Not all companies issue bonds.
Two reasons to invest in bonds Interest paid on bonds Gains made by selling bonds MONEY!!
Some Helpful Terms Par value – Amount the bond issuer promises to pay the maturity Maturity – Date when the bond is due to be repaid Coupon rate – Interest rate you receive every year until a bond matures Yield – The annual rate of return
Treasury Bonds Issued by the U.S. Gov’t Helps keep the gov’t running
Municipal Bonds Issued by the state & local gov’ts Used to pay for projects like roads, bridge, schools, etc.
Corporate/Junk Bonds Issued by companies Usually for business expansion Highest risk
Moody’s A credit ranking agency Ranks the credit-worthiness of borrowers using a standardized ratings scale
Standard & Poor’s (S&P) Publishes financial research & analysis on commercial & gov’t entities Known for its stock market indexes
How Bond Ratings Work
Certificates of Deposit (CD’s) Form of deposit offered by banks, credit unions, & savings and loans Have a maturity date (usually 6 months – 5 years)
Mutual Funds A pool of money managed by an investment company Allows you to buy a lot of different comp Purpose is to be DIVERSIFIED
Transaction Log Purchase Date : Company Symbol: Purchase Price/ Stock: How many shares? Total Cost: Current Balance: New Balance: XXXXXX$10,000.00