Presentation on theme: "Kentucky Council on Economic Education 08/22/06"— Presentation transcript:
1Kentucky Council on Economic Education 08/22/06 Investing 101Kentucky Council on Economic Education08/22/06
2Penny a day…or $1million? Power of CompoundingInterest on principalplus interest earnedRule of 72Penny a day…or $1million?The power of compounding was said to be deemed the eighth wonder of the world - or so the story goes - by Albert Einstein. The Power of CompoundingLearning about investing and the power of compounding is one of the most beneficial lifetime lesson your students can learn. Many people--especially as they near retirement--wish they had learned the lesson of compounding when they were young. We've all heard of Joe Somebody's grandfather who invested a few dollars in the stock market 40 or 50 years ago and now owns a fortune!The benefit of investing early is related to compound interest. What is compound interest? Compound interest is interest that is paid not only on the principal (initial loan balance), but also on the interest it earns. It's much like a snowball effect--as your capital rolls down the hill, it becomes bigger and bigger, earning interest on interest.The following activity can help explain compounding to your students. Tell your students they can earn money for a job that will last for one month. They have two options for being paid. Earn one cent on the first day, two cents on the second day, and double your salary every day thereafter for the thirty days; orEarn exactly $1,000,000. (That's one million dollars!)Most likely many of your students will want the million dollars. However, if they do the math, they could earn over $10 million dollars ($10,737, ) in 30 days, due to compounding. See the lesson atDiscover the Power of CompoundingTry the Compounding Calculator or Power of 72 Calculator at to learn how compounding works with investing. Print your own classroom posters to teach the power of saving and compound interest...RULE OF 72 The Rule of 72 is a formula used to quickly calculate approximately how much time it will take you to double your investment given any compound interest rate. The Rule of 72 for-mula is as follows:Years To Double Your Money = 72 / (Compound Interest Rate)To apply this to our example in the compounding section, here is how to calculate how much time it will take you to double your initial investment of $1,000 in a bank account earning 10% compound interest:72 / 10 = 7.2 yearsLessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! In The News - Screens & Teens Learning from the Market - Getting Rich is Child's Play - The News About Compound Interest Learning from the Market - Why Study the Stock Market? Stock Market Game Guide - Understanding Stock Tables Stock Market Game Guide - Finding Stocks
3StocksA share in the ownership of a company. 100,000 shares outstanding in company You own 1,000 shares (100,000/1000) = 1% ownership. Types of StockCommon StockEntitles the holder to one vote in the affairs of the company and one vote to elect the board members.Preferred StockUsually doesn't come with the same voting rights as common stockholders. Receive a share of profits before common stockholders. In the event of company dissolution, preferred shareholders have a prior claim to assets ahead of common shareholders, but behind creditors.What is a Stock?A stock represent a share in the ownership of a company. If you own a company's stock, then you are an owner, or shareholder, of the company. The percent of a company that you own is calculated by dividing the number of shares owned by the number of shares of stock outstanding. For example: 100,000 shares outstanding in company You own 1,000 shares (100,000/1000) = 1% ownership. A stock certificate represents your ownership of the company. These days, when you buy stock of a company, you usually do not get the actual stock certificates. Instead, your ownership is tracked electronically, making it easier to buy and sell shares. Types of StockCommon Stock When people talk about stocks in general they are most likely referring to common stock. Common stock represents basic ownership of a corporation. Each share of common stock entitles the holder to one vote in the affairs of the company and one vote to elect the board members. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights as common stockholders. Preferred stockholders receive a share of profits before common stockholders. In the event of company dissolution, preferred shareholders have a prior claim to assets ahead of common shareholders, but behind creditors.
4Stock Classifications Blue-Chip Stocks biggest companies in the countryGrowth Stocks A growth company usually spends a lot of money on research and puts all its profits back into the company instead of paying dividendsIncome Stocks stable companies that pay higher-than-average dividendCyclical Stocks move up or down in sync with the business cycle, i.e., automobile, housing, etc.Defensive Stocks unaffected by changes in the business cycle,i.e., food, utilities. Etc.Value Stocks considered undervalued by investorsPenny Stocks - low-priced, speculative stocksStock ClassificationsA wide variety of companies trade in the stock market. Investors use many classifications to group these companies in order to analyze and track them and to help in diversifying their portfolio. These are some popular stock classifications.Blue-Chip Stocks Blue-chip stocks are stocks of the biggest companies in the country. The term "blue chip" comes from poker, where the blue chips carry the highest value. Blue chip companies are large, established firms, with a long record of profit, growth, dividend payout, and a reputation for quality management, products, and services. These firms are generally leaders in their industries and often set the standards by which other companies in their fields are measured. Blue chip stocks are some of the safest stocks in invest in. Well known blue chips include IBM, Coca-Cola, General Electric and Microsoft. Growth Stocks Growth stocks are stocks of companies with profits that are increasing quickly. This increase in profits is reflected in the rise in the company's stock price. A growth company usually spends a lot of money on research and puts all its profits back into the company instead of paying dividends.Income Stocks Income stocks are those stocks of stable companies that pay higher-than-average dividends over a sustained period. These above average dividends tend to be paid by large, established companies with stable earnings. Utility company stocks are often classified as income stock. Cyclical Stocks Cyclical stocks are stocks that move up or down in sync with the business cycle. Company earnings and common stock prices increase or decrease with changes in business conditions or cycles. Examples of cyclical stocks include automobile, housing, steel, and industrial equipment companies.Defensive Stocks Defensive stocks are stocks whose prices are relatively unaffected by changes in the business cycle. They are generally stable and relatively safe in declining markets. Examples are industries that produce necessities. Food, drug, and utilities companies are defensive stocks.Value Stocks Value stocks are stocks that are currently selling at a low price and are considered undervalued by investors. Companies that have good earnings and growth potential but whose stock prices do not reflect this are considered value companies. Investors who buy value stocks believe that these stocks are only temporarily out of favor and will soon experience great growth.Penny Stocks Penny stocks are low-priced, speculative stocks that are very risky. They are issued by companies with a short or erratic history of revenues and earnings. These stocks are popular among small speculators. Penny stocks are typically valued under $5.00 and can not be purchased in the Stock Market Game, due to their volatility.
5Industries and Sectors Industries - Companies are grouped by industry, based on the products or services they offer. Companies in the airline industry would be Delta, TWA, Southwest, etc. Sectors are broad groupings of similar industries. The airlines industry would be part of the transportation sector.Industries/sectors are used by investors to compare similar companiesCompanies are grouped by industry, based on the products or services they offer. Companies in the airline industry would be Delta, TWA, Southwest, etc. Sectors are broad groupings of similar industries. The airlines industry would be part of the transportation sector.One way to determine which companies are worth investing in is to identify a sector or industry that is performing above other sectors/industries; then, comparing companies within that sector or industry. Many investors diversify their portfolio by selecting stocks from several different industries and sectors.Below are examples of a Healthcare Sector and Transportation Sector and industries in each:For a complete listing of Sectors and Industries, see the lesson "Stocks in a Box" in the Beyond the Market curriculum in the Learning Resource Center.There are no hard-and-fast rules for categorizing companies and industries. Many investing websites group and analyze stocks by sector and industry. See Yahoo Finance for a sample of these groupings - (You can also compare stocks from different industries under websites like finance.yahoo.com)
6Dividends Offered by well established companies Paid to investors Offered by well established companiesPaid to investorsAs cash or stock (usually quarterly)Decided by the Board of DirectorsRecord Date/Distribution DateDividends When a corporation earns a profit, there are essentially two things that can be done with it. The corporation can put the profit back into its business (its retained earnings) to pay down debt or acquire more property. Another alternative is for the company to pay a portion of the profit to its owners (stockholders) in the form of a cash dividend.The Board of Directors of a company decides if it will declare a dividend, how much it will be, how often it will declare it, and the dates associated with the dividend. Dividends are usually paid out quarterly, and sometimes semi-annually or annually. Many companies don't pay dividends at all. Fast-growing smaller companies typically don't pay dividends, but rather re-invest their profits to grow their company. Companies in well-established, industries, on the other hand, are likely to pay big dividends since they have little need for the cash generated by their operations. Since the stocks of such companies provide the investor with a regular stream of fairly large dividends, they are often referred to as income stocks.If the Board declares a dividend, it will announce that the dividend will be paid to shareholders of record as of the record date and will be paid or distributed on the distribution date.In order to be a shareholder of record on the record date, you must own the shares on that date (when the books close for that day). Since virtually all stock trades by brokers on exchanges are settled in 3 (business) days, you must buy the shares at least 3 days before the record date in order to be the shareholder of record on the record date and receive the dividend.A common measure of the return an investor earns from the receipt of dividends is dividend yield. Dividend yield is calculated by dividing dividends received per share by the current price of a stock. For example, if a stock was paying a dividend of $1 annually per share and the stock was currently selling for $10, its dividend yield would be 10% ($1/10). Actually, most companies pay dividends quarterly, so in the example just cited, the investor would receive 25 cents four times during the year.Stock DividendsRather than paying cash, some companies declare stock dividends--issuing stockholders additional shares of stock. For example, if a company declared a 10 percent stock dividend, you would receive ten additional shares of stock if you owned 100 shares. Companies declare stock dividends to avoid paying out cash, as well as to reduce the selling price of their stocks, making the stock accessible to more investors. The Stock Market Game simulation reflects dividend payments to shareholders of record, just as in the "real world". The Transaction History report is where dividend payments will be reported.Lessons and Activities in the Learning Resource CenterIn The News Volume Declaring Dividends
7Stock Splits 2 for 1, 3 for 1 Reverse splits, i.e., 1 for 2 Example: Johnny holds 100 shares of GTD, currently valued at $60/share, so he has a $6,000 investment.GTD announces a stock split of 2 for 1.After the stock split, Johnny will hold 200 shares of stock, and those 200 shares will be valued at $30/share shares X $30 share = $6,000. (Same value!)What is a stock split? Typically, stock splits occur when a publicly held company distributes more stock to holders of existing stock. A stock split, say 2-for-1, is when a company issues one additional share for every one outstanding. So for every share of stock you own, you receive one more share. (So it is called a "2-for-1 split.") Often times students think that if their stock splits, that their portfolio value will increase greatly. But, what they need to understand is that as the stock splits in two, so does its price. In a standard 2-for-1 split, the company simply makes each share worth half as much as it did before the transaction. The post-split value is exactly the same as the presplit value. You just have twice as many shares at half the price.Example: Johnny holds 100 shares of GTD, currently valued at $60/share, so they have a $6,000 investment. . GTD announces a stock split of 2 for 1. After the stock split, Johnny will hold 200 shares of stock, and those 200 shares will be valued at $30/share. 200 shares X $30 share = $6,000. (Same value!)A company will usually split a stock when the price of that stock is getting too high for the regular investor to purchase. Typical stock splits are 2 for 1, or 3 for 1, but there are also reverse splits, i.e., 1 for 2, etc.In the Stock Market Game simulation, stock splits are reflected in portfolios when they happen (although it is usually a 2 day process for the split to show up.). There are websites that track stock splits. Check out a few of these. Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Stock Talk Volume - Anna and the Banana
8IPO – Initial Public Offerings First sale of stock by a company to the public.Distributed through investment bankers in the "primary market”Buyers (usually institutional investors) of these new shares of stock will sell to the publicInitial Public Offerings (IPOs)An IPO (initial public offering) is the first sale of stock by a company to the public. Typically, an IPO involves the stock from a young and oftentimes little-known company. But occasionally, well-known and well-established privately-held companies do "go public." Krispy Kreme is an example of a well-known company that has recently gone public.When students use the Stock Market Game, they cannot buy IPOs when they are first issued, because IPOs are distributed through investment bankers in the "primary market". In the primary market, a company decides to "go public", meaning it will sell stocks to the public to raise money the first time. Buyers (usually institutional investors) of these new shares of stock will later sell them to the stock market known as the secondary market. Students can buy the stock when they become available to the public -- usually a few days after the initial IPO offering. IPOs can be a risky investment because it is tough to predict what the stock will do on its initial day of trading and there is no stock data history to rely on.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Economics and the Stock Market - The Demand for Financial Capital SMG Teacher's Guide to the Internet - Why Go Public? Stock Market Game Guide - The Market for Stocks In the News - Sweet Stock Bloomberg Market Mentor - IPOs
9Mutual Funds Mutual fund company Manager Pooled money of investors Mutual fund companyManagerPooled money of investorsInvestors buy shares of the mutual fundGood way to get started in investingIn the Stock Market Game simulation, students can buy mutual funds in addition to stocks. A mutual fund is a company that makes investments on your behalf and on behalf of other investors. The mutual fund will have a fund manager who is responsible for investing the pooled money of investors into specific securities (usually stocks and/or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. A mutual fund, by its very nature, is diversified -- its assets are usually invested in many different securities. Minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds. Most typical investors invest in mutual funds (most retirement funds are offered as a selection of mutual funds.) In the Stock Market Game simulation, students can buy mutual funds in addition to stock. Lessons and Activities in the Learning Resource Center Bloomberg Market Mentor - Mutual Funds/Index Funds
10Bonds IOU issued (debt securities) Issued by governments and corporations to raise moneyInvestor is the lenderCompany/Govt repays principal plus interest (generally quarterly)Students cannot invest in bonds in the Stock Market Game.Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When a company issues bonds, it is borrowing money from investors.When an investor buys a corporate bond, the investor lends money to the "issuer," the company that issued the bond. In exchange, the company promises to return the money, also known as "principal," on a specified maturity date. Until that date, the corporation usually pays a stated rate of interest, generally quarterly or semiannually. Bondholders are not owners of the corporation. But if the company gets in financial trouble and needs to dissolve, bondholders must be paid off in full before stockholders get anything.Governments and municipalities also issues various types of bonds to raise money to build bridges, roads, etc. Students cannot invest in bonds in the Stock Market Game.For further information:The SIA Investor website: The Bond Market Association runs an information site.
11Forms of Business Sole proprietorship Partnership Corporation There are basically three ways a business can organize--as a sole proprietorship, a partnership, or a corporation. Most all large businesses that you know (including household names like Microsoft, Sears, and Coca-Cola) are corporations. Small businesses (like your local hairdresser, law firms, or plumber) might be corporations, too, but often they are either sole proprietorships or partnerships.Sole proprietorship is a business that is owned by one person. There are advantages to organizing a business as a sole proprietorship. He/she gets to make all decisions regarding operations, such as what hours to operate, what to produce, how to produce, whom to hire, etc. The sole owner does not have to share the profits. There are also disadvantages to a sole proprietorship. If the business doesn't have enough money to pay off what it owes to other businesses or persons, the owners themselves must do so out of their personal savings or property.Partnership is a business that is owned by more than one person. There are two kinds of partnerships, general partnerships and limited partnerships. General partners share the responsibilities to manage the business as well and receive a full share of the profits. General partners, like sole proprietors, have unlimited liability. A limited partner has a liability that is limited to the amount he/she has invested in the firm. Limited partners usually do not participate in the management of the business and may receive a smaller share of the profits.A corporation is a legal entity, separate from its owners, with the rights to buy and sell property, enter into legal contracts, and to sue and be sued. The main advantage of a corporation is the ease of raising financial capital. Corporations can sell shares of stock to investors, who become shareholders--each owning a portion of the company. Shareholders in a corporation elect a board of directors, who in turn hire managers to run the business. Since a corporation is a legal entity, shareholders of the corporation are not legally responsible for the financial losses a corporation may experience. Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Learning from the Market - What is a Corporation? - Economics and the Stock Market Game - Businesses in the Marketplace Stock Market Game Guide - Business Organization
12Public or Private Company? Private company does not issue stock to the public, only privately.Public company is a corporation that has "gone public“. As students begin the research of corporations, they will find many that they cannot invest in. Why is this?Actually, there could be several reasons. In many cases the reason may be that the corporation is a private company rather than a public company.What is the difference?You can broadly divide companies into two types: private and public. Private companies are (as the name implies) privately held. A private company is one that does not issue stock to the public, only privately. Most public companies were privately owned before "going public”. Being private means there are a smaller number of shareholders and very little information about the company has to be disclosed by the owners.Most all small corporations are privately held. Although, don't think of only small companies as private. There are also large companies that are private, such as Domino's Pizza, and Hallmark Cards.By contrast, a public company (more accurately called publicly-owned company) is a corporation that has "gone public", selling shares in their corporation to the public over a stock exchange, like the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the NASDAQ market. Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and report financial information every quarter. In the United States, public companies report information to the Securities and Exchange Commission (SEC), a governing body that oversees public companies. Lessons and Activities in the Learning Resource Center Beyond the Market - Symbol Search
13How do businesses raise capital? Three major sources of financial capital for companiesRetained earningsDebt (loans, corporate bonds, etc.)Equity (stock)How do businesses raise capital? Why do companies issue stock? When a corporation wants to expand, there are three major sources of financial capital: retained earnings, debt, and equity. The preferred choice for obtaining financial capital is retained earnings. Retained earnings represent the net profits of the corporation. Many corporations use their net earnings to grow their business. Debt is another source of financial capital. Corporations can make short-term loans from banks or issue corporate bonds to obtain long-term financing. Issuing bonds involves borrowing money from investors--with an agreement to pay back the money borrowed by a set date plus interest. The third source of financial capital is the sale of equity securities (stocks) representing ownership interest in the company. Corporations issue stock to raise money. They use this money to finance expansions, pay for equipment, and fund projects, etc. Corporations issue stock when they may need additional capital to operate successfully. The sale of stock brings in capital that does not need to be repaid, but, instead, investors own part of the company and can share in its profits.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! Learning from the Market - How do Businesses Obtain Financing? Economics and the Stock Market Game - Business Survival and Growth Economics and the Stock Market Game - The Demand for Financial Capital
14Parent Companies, Brands, Subsidiaries Parent Company - A company that exercises control over one or more subsidiary enterprises.Subsidiary - a wholly or partially owned company which is part of a large corporation (parent).Brand - A name, term, symbol, design, or combination of these that identifies a seller's products and differentiates them from competitors' products, i.e., Taco Bell, Lands’ End, etc.Parent Company - A company that exercises control over one or more subsidiary enterprises.Subsidiary - a wholly or partially owned company which is part of a large corporation (parent).Brand - A name, term, symbol, design, or combination of these that identifies a seller's products and differentiates them from competitors' productsWhen picking stocks, students are likely to think of popular brand names. Students who are big fans of Taco Bell or Land's End might want to buy stocks in these businesses. As they begin their research, they will find they can't find ticker symbols for Taco Bell or Land's End. This is because Taco Bell is a brand of YUM! Brands and Land's End is a subsidiary of Sears, Roebuck & Co. Students may need to conduct further research to find the parent companies for products or subsidiaries. For tips on researching companies and for tips on finding parent companies, see the Teacher Guide in the Teacher Resource Center - "#6 Where Do I Begin My Research?" Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! Beyond the Market - Symbol Search Stock Talk - Volume 7-2: Rolling Stock
15Mergers and Acquisitions A merger is a form of corporate acquisition in which one firm absorbs another and the assets and liabilities of the two firms are combined. An acquisition is when one business takes possession of another business. This is also called a takeover or buyout.Mergers are a way for a company to grow faster, to become more efficient, to acquire new product lines, to change its image, or to eliminate a rival.In many corporate mergers or acquisitions, the shares of one company are converted to shares of the other company. In other cases, one company simply buys all of the other company's shares. It pays cash for these shares.Mergers and Acquisitions As students begin researching stocks, they will run across companies that are merging, or may be part of a take-over by another company. In their research, if students pull up chart data and there is no data for the past 3-4 weeks, this company has probably either gone bankrupt, or merged. In the Stock Market Game simulation, If students have a stock in their portfolio for a company that merges with another, the simulation will automatically adjust their portfolio to reflect the correct shares of stock and change the stock symbol (if necessary).What is a merger? A merger is a form of corporate acquisition in which one firm absorbs another and the assets and liabilities of the two firms are combined. An acquisition is when one business takes possession of another business. This is also called a takeover or buyout.Mergers take place for a variety of reasons. A firm may see a merger as a way to grow faster, to become more efficient, to acquire new product lines, to change its image, or to eliminate a rival.In many corporate mergers or acquisitions, the shares of one company are converted to shares of the other company. In other cases, one company simply buys all of the other company's shares. It pays cash for these shares.Lessons and Activities in the Learning Resource Center In the News Volume - Time for AOL StockTalk - Sports Cap
16Market Exchanges American Stock Exchange (AMEX) New York Stock Exchange NYSEOldest stock market in USAuction market (with brokers on trading floor)American Stock Exchange (AMEX)NASDAQ (National Association of Securities Dealers Automated Quotation System), is an electronic marketOver the Counter Bulletin Board (OTBB) for companies that don't qualify to list on the major market exchanges because they are too small or their stock prices too low.New York Stock ExchangeThe New York Stock Exchange, the oldest stock market in the U.S., is located in New York City. In this auction market, brokers make buys and sells for investors on the "trading floor". Companies must meet strict requirements to be listed on this market. Most of America's "blue-chip" companies list on the NYSE. There are nearly 3,000 companies on the NYSE. Visit the NYSE website, and select the link "trading floor" to learn more about trading on the New York Stock Exchange.American Stock Exchange (AMEX)Also located in New York City, the American Stock Exchange is the third largest stock market in the U.S. Also an auction market, there are around 700 companies listed on this exchange. Visit the AMEX website, to learn more.NASDAQ NASDAQ (National Association of Securities Dealers Automated Quotation System), is an electronic market, without a physical trading floor. Trades are made by brokers over a computerized network. The NASDAQ lists most U.S. technology companies, as well as smaller, newer companies, although a few "blue-chip" companies also list on the NASDAQ. Nearly 4,000 companies list on the NASDAQ. Visit the NASDAQ website, to learn more about this market, as well as how trades are made.Over the Counter Bulletin Board (OTBB)The OTC Bulletin Board is an electronic quotation system for companies that don't qualify to list on the major market exchanges because they are too small or their stock prices too low. There are no listing requirements for OTC companies, other than periodic financial reporting to the SEC.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Beyond the Market - Awesome Auction Beyond the Market - Snazzy Nazzy Learning From the Market - What are markets? Learning From the Market - Showtime on Wall Street Economics and the Stock Market Game - The Securities Markets Stock Market Game Guide Activities- The Market for Stocks StockTalk - Mouse Wisdom Stock Talk - A Look at Delist (Over the Counter) StockTalk - Overtime? Bloomberg Market Mentor - Electronic vs. Floor Trading
17History of Stock Market May 17, 1792Buttonwood Tree AgreementNYSE – 1817Curb trading – AMEXSecurities Exchange Act of 1937 History of the Stock MarketThe United States stock market had meager beginnings. On May 17, 1792, 24 brokers signed an agreement forming the first organized stock market in New York under a Buttonwood tree at what is now 58 Wall Street. They agreed to sell shares or parts of companies among themselves and charge people a commission or fee to buy and sell shares for others. It wasn't until March 8, 1817, that a formal constitution was adopted and the first stock exchange was formed under the name "New York Stock & Exchange Board." From the late 1700s until about 1860, brokers made markets outdoors. The first stock ticker was introduced in Formal memberships in a stock exchange first became salable in In 1869, the New York Stock Exchange (NYSE) started to require the registration of securities by its listed companies to prevent over-issuance.The New York Stock Exchange was not the only way to buy stocks during the 1800s. Stocks that were not good enough for the NYSE were traded outside on the curbs. This so called "curb trading" became what is known today as the American Stock Exchange, which finally moved indoors in It wasn't until after the crash of 1929 that government regulation of the stock market was formalized with the Securities Act of 1933, to provide full disclosure to investors and prohibit fraud in connection with the sale of securities. The Securities Exchange Act of 1934 provided for the regulation of securities trading and established the Securities and Exchange Commission (SEC). In the 1940s and 1950s trading in commodities and monetary instruments became part of the stock exchanges, as well as automated trading functions. In 1971, the NYSE was incorporated and Merrill Lynch was the first member organization listed in July.
18Stock Market Crash October 29, 1929 - Black Tuesday Set off the Great DepressionNPR AudioA stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles such as the dot-com bubble.The most famous crash, the Stock Market Crash of 1929, started on October 24, 1929 (known as Black Thursday) when the Dow Jones Industrial Average dropped 50%. This event preceeded the Great Depression. The succeeding-years saw the Dow Jones drop-a-total of over 85%. Richard Armour, in his satirical American history book It All Started With Columbus, remarked that the 1929 crash occurred "near the corner of Dun and Bradstreet".There was also a crash or "adjustment" on Monday October 19, 1987, known in financial circles as Black Monday, when the Dow Jones lost 22% of its value in one day, bringing to an end a five-year bull run. The FTSE 100 Index lost 10.8% on that Monday and a further 12.2% the following day. The pattern was repeated across the world.The stock market downturn of 2002 was part-of-a-larger bear market and a Dot-com stock market bubble as well as Enron corruption that took the NASDAQ 75% from its highs and broader indices down 30%.
19IndicesA stock index is a measure of average stock prices in a group of individual stocks.Reflect how the market is doing as a groupExamples:Dow Jones Industrials - which tracks 30 blue chip stocks (of well-known companies)Standard & Poor's 500- which tracks 500 stocks from industrial, transportation, utility and financial companiesRussell which tracks 2000 smaller company stocksNASDAQ Composite Index - which tracks all the stocks listed on the NASDAQ, almost 4,000 in all.There are thousands of publicly traded companies in the stock market, so to determine the condition of the market, investors refer to stock indices. A stock index is a measure of average stock prices in a group of individual stocks. The Dow Jones Industrial Average--a group of 30 blue chip stocks is an index.Stock indexes are useful because they reflect how the market is doing as a group. If you were read the financial pages of the newspaper or log onto the internet, you would have to look at hundreds and thousands of stocks just to see how the overall market is doing. By looking at a stock index, you can get an idea of how stocks did overall without having to look at all of the stocks.Examples of commonly quoted stock indexes are:Dow Jones Industrials - which tracks 30 blue chip stocks (of well-known companies) Standard & Poor's 500- which tracks 500 stocks from industrial, transportation, utility and financial companies Russell which tracks 2000 smaller company stocks NASDAQ Composite Index - which tracks all the stocks listed on the NASDAQ, almost 4,000 in all.The Stock Market Game has an "American Indices" link to current data of all the indices on the market.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! Beyond the Market - Market Meters
20The DOW Dow Jones Industrial Average 30 blue chip stocks A stock market indexMost-quoted market indicatorThe DOWWhen you hear people say "the market was up (or down) today", they are usually referring to the "DOW" (the Dow Jones Industrial Average.) The Dow Jones Industrial Average (DJIA) is an index of thirty, blue chip stocks that are traded in the United States. It is believed that by looking at the companies on the list, a person can get a general picture of how the market as a whole is performing. The Dow Jones Industrial Average is the most-quoted market indicator in newspapers, on TV and on the Internet.For more information: Learn more about the original DOW, as well as the thirty stocks that make up the DOW today at the Dow Jones website.Stock Market Price History -Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! Beyond the Market - Market Meters Stock Market Game Guide Activities - The Long Arm of the Dow In The News - The Dow's New Clothes In the News - The Nasdaq Newies
21Bull and BearBear market describes a period of time when stock prices are falling.Bull market is a period when stock prices are generally rising.For those who don't spend a lot of time on Wall Street, bulls and bears refer to opposite trends in the stock market. According to Investor Words, a bull market is "a prolonged period in which investment prices rise faster than their historical average." Conversely, a bear market means "a prolonged period in which investment prices fall, accompanied by widespread pessimism." So, bulls good, bears bad.No one's quite sure how the two animals came to symbolize the market, but there are a few theories floating around. According to this article from the Motley Fool, a bear market earned its name because bears tend to swat at things with their paws in a downward motion (as in "the market's going down"). A bull market, on the other hand, got its name because bulls swing their horns upward when they strike (as in "the market's going up").Another theory proposes that the animals' personalities are behind the symbolism. Bears move with caution, while bulls are bold and like to charge ahead. So a "bearish" investor thinks the market will go down, while a "bullish" investor thinks it's headed up. Certainly no one can argue that both animals are intimidating and best avoided. Maybe they're meant to serve as a warning to investors: Unless you know what you're doing, you could be headed for pain.
22Factors Affecting the Stock Market HealthcompanyindustryeconomyGlobalGood News/Bad NewsMicroeconomic variables - factors that can affect companies or industriesMacroeconomic variables - factors that affect the economyConsumer confidenceInvestor perceptionMany factors affect the stock market and they all have to do with health. Health?? That's right, but not exactly physical health. We are talking about the health of the company, the health of the industry the company is part of (e.g., computer industry), the economic health of the country (e.g., depression, recession), and the global economic health. Good News/Bad NewsEconomic factors that can affect companies or industries are called microeconomic variables. These factors can include the quality of management, competition, sales, profit, forecasts, etc. Students can pick up on these factors by researching companies (e.g., annual reports). Other factors that can affect companies or industries might include news about new products, improved technology, mergers, etc. Students can pick up on these factors by reading current news releases.Factors that affect the economy are called macroeconomic variables. Macroeconomic factors that can affect the stock market include changes in GDP, unemployment, fiscal policy, interest rates, unemployment, etc.Consumer confidence (or lack thereof), and global events both can affect the economy and the stock market.Investor Perception – if investors think the market will go down…it will!Many of the following lessons can help students understand how good news or bad news affects the economy and/or the stock market.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password! Economics and the Stock Market Game - The Securities Markets: How Prices Are Determined Stock Market Game Guide Activities - Demand and Supply Stock Market Game Guide Activities- Why Stock Prices Change StockTalk - Volume Ashley and the Fed In The News - Share of the Vote In The News - Jee D. Pea In The News - Healing Wounds In The News - The Mystery of Mr. G. In The News - Recess In The News - Clothes Call In The News - A Knight at the Fed In The News - Payroll Call In The News - Health & Wealth
23Diversification "Don't put all your eggs in one basket." Strategy of spreading your investment dollars across various types of securities, i.e.,several industry sectors (e.g., transportation, technology, airlines, retail, etc.)large and small companies,growth and income stocks,cyclical and non-cyclical stocks,blue chip companies, andinternational companies. In the Stock Market Game,5 stock minimum rule30% maximum equityAsset Allocation and DiversificationAsset allocation and diversification is about not putting all your eggs in one basket.Asset allocation is a risk-management strategy that involves distributing investments across a broad spectrum of asset classes. These classes might include stocks, bonds, mutual funds, real estate, and cash, or its equivalents, i.e., CDs, and Treasury bills which can be quickly liquidated. History has shown that not all classes of assets move up and down at the same time. One year, stocks of large companies may generate the best returns, while in another it will be government bonds or even a bank certificate of deposit. Using an asset allocation strategy can help minimize risk and possibly increase total return for an investor.Diversification is the strategy of spreading your investment dollars across various types of securities, i.e.,several industry sectors (e.g., transportation, technology, airlines, retail, etc.)large and small companies,growth and income stocks,cyclical and non-cyclical stocks,blue chip companies, andinternational companies. Diversification isn't just buying randomly. If anything, it's the opposite, because it means developing an appropriate mix of investments for maximum growth and minimal risk. How does an investor know how much diversification is needed in their portfolio? It all depends on the investor's goals, risk tolerance, timeframe, and amount of money they are investing. Mutual funds are a type of investment that can be bought to diversify a portfolio. Employee retirement savings programs are usually composed of a diversified mix of mutual funds, based on the owner's risk tolerance.In the Stock Market Game, many states have diversification rules. Be sure that you check with your local coordinator.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Beyond the Market - Stocks in a Box Bloomberg Market Mentor - Diversification In The News - Reel SmartFor further information" Visit the SIA Investor website:
24Supply and Demand Stock prices change because of supply and demand more buyers than sellers – price goes up!More sellers than buyers – price goes down!Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.To help students understand, give them examples like E-Bay, or an auction.
25Reading an Annual Report Get from company website or call/write companyChairman of the Board LetterSales and Marketing10 Year Summary of Financial FiguresManagement Discussion and Analysis CPA Opinion LetterFinancial StatementsSubsidiaries, Brands and AddressesList of Directors and OfficersStock Price Historyfrom Annual Report Library (http://www.zpub.com/sf/arl/)Reading an Annual ReportStudents can write or call the corporate office and ask for an annual report, or search the company website -- where many companies post their annual report. There are also many websites online that provide annual reports for free. A company’s annual report contains valuable information for the investor. Not all annual reports will have the same sections or the same type or level of information. Listed below are nine identifiable sections that appear in most Annual Reports, with tips on what to look for or how to interpret each section.Chairman of the Board Letter - Should cover changing conditions, goals to achieve or achieved or missed, actions taken or not to be taken. Is it well written? Reading between the lines - what is being apologized for?Sales and Marketing - Should cover what the company sells, how, where and when. Is it clear where it make most of it's money presently? Is it understandable? Is it clear the scope of lines, divisions and operations?10 Year Summary of Financial Figures - Is this included? What's the growth of profits and operating income?Management Discussion and Analysis - Is it a clear discussion of significant financial trends over past two years? How candid and accurate is it?CPA Opinion Letter - Written by the CPA firm as an opinion on the company's financials. The important thing to look for here is what the qualifications are.Financial Statements - Check sales, profits, R&D spending, inventory and debt levels over time. Read the footnotes to ferret out other information.Subsidiaries, Brands and Addresses - Where is the headquarters? Is it clear what lines, brand names the company has and what their overseas distribution network is?List of Directors and Officers - How many outside vs. inside directors? Are the directors well known and respected? Are there less than 5 or more than 12 directors?Stock Price History - General trend of price over time: up or down? Which exchange is company traded/listed? Stock symbol? Bonus/dividend history? from Annual Report Library (http://www.zpub.com/sf/arl/)Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Beyond the Market - Reading an Annual Report In The News - A Counting Story (balance sheet and income statement) In The News - Annual Report (earnings) Bloomberg Market Mentor - How to Read an Annual Report
26Fundamental Analysis Thorough review of company Product Operating efficiencyManagementFinancial performanceProfit/Loss, EPS, P/E, etc.Position in IndustryDifferent investment professionals analyze stocks in different ways. There are two basic approaches that investors use: fundamental analysis and technical analysis.Fundamental AnalysisFundamental analysis focuses on a thorough review of the basic facts about a company, including its product, operating efficiency, management and financial performance. Fundamentalists will evaluate many ratios and financial figures before deciding if a stock should be purchased or sold. Comparing these measures over time and to companies in similar industries gives an indication of the company's current value. Some of the more significant financial factors reviewed include book value, earnings per share (EPS), price/earnings ratio (P/E), etc.:Much of this information can be found in annual reports, Form 10-Ks filed with the Securities and Exchange Commission, articles and research reports. Fundamentalists may also look at the economy at large--such as unemployment and interest rates--to estimate a stock's potential.In the Stock Market Game, many students use fundamental analysis--usually at a very basic level: researching the company's products, efficiency, and financial performance and its position in the industry and the economy at large.
27Technical AnalysisUsed to evaluate the worth of a stock by studying market statistics.Stock and stock market trendsChartingTechnical analysis is the practice of studying the stock market's past in an attempt to determine its future. People who utilize technical analysis often study charts and graphs of a particular stock, industry, and / or sector to try and find patterns.Technical analysis is a form of stock evaluation that relies on stock data, such as price movement, volume, open interest to predict future price trends. Technical analysis is not concerned with the business, but focuses strictly on the data, using charts and graphics to spot trends and certain buy and sell points.
28Crunching the NumbersBook value - This represents the different between the company's assets and liabilities. A low book value (from too much debt) could mean that the company's profits will be limited. However, a low value may also indicate that the assets are underestimated, and that the stock is a good value for potential investors.Earnings Per Share (EPS) - This represents the company's net profit divided by the number of shares outstanding. Analysts typically look for steadily increasing EPS, which shows a pattern of consistent growth.
29Crunching the NumbersPrice/Earnings (P/E) Ratio - company's stock price divided by its 12 month EPS.High P/E means high projected earningIf a company has a PE of 10, that means that investors are willing to pay $10 for every $1 of last year's companies earnings.Compare the PE ratios of other companies in the same industry, or to the market in general, or against the company's own historical P/E ratio.Beta – quantifies how volatile a stock is compared to the overall marketA stock that rises or falls in value at the same rate as the market has a beta of 1.0.Beta below 1 - less volatile -- and potentially less riskyBeta above 1 - more volatile, meaning that investors might expect its price to rise or fall more quickly.
30Margin Going on Margin" borrowing money to invest In SMG – pay 7% interest (per annum) for any money spent over initial $100,000 cash. Very Risky – not suitable for a long-term, buy-and-hold investor. Minimum Maintenance If the Total Equity in your portfolio falls below 30% of the value of your long and short positions, your team will receive a margin call. (Note: In a margin call, the computer will automatically sell shares of stock in the portfolio to recoup its losses.)As students have learned, in the Stock Market Game simulation, they can "go on margin". This means that they can basically "borrow" money to invest in the stock market. In effect, instead of having $100,000 to invest, they can have up to $200,000 to invests (depending on long position value).But, there's a catch! They will have to pay 7% interest (per annum) for any money they spend over their initial $100,000 cash. So, decision-making becomes even more involved when teams go on margin. Will this stock make enough profit to cover the 2% broker's fee and the cost of going on margin?In the Stock Market Game simulation, when a team spends over their $100,000, there is no "warning" that they are about to do so, they must keep track of their own cash holdings (in their Account Summary). If they go over $100,000, the simulation automatically begins charging them interest for any money over the original $100,000. This interest is posted weekly to their Transaction History report and is included in the Interest and Dividends field on their Account Summary.Buying on margin can be very risky and is not suitable for a long-term, buy-and-hold investor. For very young students, you can tell them to 1) not spend more money than is in their cash balance--in effect, not going on margin, or 2) let them go on margin, but have them watch their "Buying Power". Remember, "Total Equity" is the number their portfolio is ranked on.Below are explanations of some of the fields in the Account Summary that relate to buying on margin.Buying Power shows the total amount of money available for stock purchases and short sales when fully extended on margin. Buying Power is twice Available Equity. If a team puts up all their available they may borrow that same amount. This means that 50% of the money for the transactions is their own, which meets the 50% buy margin requirement.Formula: Buying Power = Available Equity x 2.Available Equity is the amount of equity available for supporting additional buy and short sell transactions. This is the most this team can provide for their part of the 50% initial margin requirement. If this figure is negative, all buy and short sell transactions will be rejected. Formula: Available Equity = Total Equity - (0.5)(Value of longs + Value of shorts) For this formula, use the absolute value (positive value) of the value of shorts).The Buy Margin Requirement is the amount of collateral that must be supplied to meet the 50% initial margin requirement when borrowing on margin. The Buy Margin Requirement is 50% of the value of the longs plus the value of the shorts. (Formula: Buy Margin Requirement = .50 x (value of longs + value of shorts). For this formula, use the absolute value (positive value) of the Value of shorts).The Minimum Maintenance (also know as Minimum Maintenance Margin Requirement is the minimum margin requirement (30%) that a team portfolio must maintain after borrowing on margin. If the Total Equity in your portfolio falls below 30% of the value of your long and short positions, your team will receive a margin call. This figure is only relevant for teams that have borrowed money. Formula: Minimum Maintenance = .30 x (Value of Longs + Value of Shorts).(Note: In a margin call, the computer will automatically sell shares of stock in the portfolio to recoup its losses.)Note: Students can find explanations and formulas for all fields in a portfolio by selecting the Help button when on a portfolio page.Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!Learning from the Market - Getting Fancy: The Bulls, the Bears, and the Pigs In The News - Chargin at the Margin BloomBerg Market Mentor Newsletter - Risk/Buying on Margin
31Short SellingWay to make money in the stock market--particularly during a Bear market when prices are dropping. It can also be effective if you know a company is headed in a downward spiral. Brokerage loans you stock from inventoryYou sell the stock you “borrowed”When stock value drops, you “short cover” – buy the stock on the marketYou give brokerage back their stock you borrowed, andYou profit from the differenceShort Sell 100 $50.00 (you borrow 100 shares of stock and sell it at $50/share and get credited with $5,000)Short Cover 100 $30.00 (you buy the stock at $30/share and your account is charged $3,000You return this stock to the broker Your profit is $2,000.You can lose more than you put in!Students can short sell in the Stock Market Game.Short SellingThis is the topic that always seems to draw interest from a few students. What is short selling? It's not an easy concept to understand and seems to go against all that we teach about the stock market. But short selling is a way to make money in the stock market--particularly during a Bear market when prices are dropping. It can also be effective if you know a company is headed in a downward spiral. A short sale is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will fall. If the price drops, you can buy the stock at the lower price and make a profit. If the price of the stock rises and you buy it back later at the higher price, you will incur a loss.When you sell short, your brokerage firm loans you the stock. The stock you borrow comes from either the firm’s own inventory, the margin account of another of the firm’s clients, or another brokerage firm. As with buying stock on margin, your brokerage firm will charge you interest on the loan, and you are subject to the margin rules.For Example: You borrow 100 shares of stock currently selling for $50 a share and sell it. When the stock value drops (which you hope it does), say to $30/share, you "short cover". In this short cover transaction you are actually buying 100 shares on the market at $30/share (current price). It costs you $3,000. You then pay back the broker the 100 shares you borrowed from him that was worth $50/share. Short Sell 100 $50.00 (you borrow 100 shares of stock and sell it at $50/share and get credited with $5,000)Short Cover 100 $30.00 (you buy the stock at $30/share and your account is charged $3,000 -- you return this stock to the broker)Your profit is $2,000.The major drawback to short selling is that you can lose more than you put up! In regular investing, you can only lose as much money as you put into the market. In short selling you can actually lose more than you put up (when you borrowed the stock) if the value of the stock goes up!Students can short sell in the Stock Market Game. On their 'Make a Trade' page, they can select to short sell and then short cover their stock. Lessons and Activities in the Teacher Support Center in the “In The Classroom” tab – see the Publications link Access the Teacher Support Center with your teacher ID/password!StockTalk -Short Story Bloomberg Market Mentor - Investing in a Down Market
32Investing for the Long Term 1) start with a plan2) understand your risk tolerance3) diversify4) keep track of your investments5) invest for the long termAs you introduce your students to investing, don't forget to give them valuable advice every investor needs to know:1) start with a plan 2) understand your risk tolerance 3) diversify 4) keep track of your investments, and 3) invest for the long term.No matter what you decide to do with your savings and investments, your money will always face some risk. You could stash your dollars under your mattress and face the risk of having it stolen or you could keep your money in a savings account, and risk the possibility of losing buying power of your dollars, over time, due to inflation.Investing in stocks, bonds, or mutual funds carries risks too. When you invest in a stock, you are taking a risk that the it will decline in value--with the possibility of losing all the money you invested. The lesson to learn about risk is that it's impossible to realize a return (make money) on any investment without facing a certain degree of risk. The fundamental concept to understand when investing is the higher the risk, the higher the return you should expect to receive. The lower the risk, the lower the return you should expect.Risk tolerance is different for every investor. A good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. When you find your own comfort zone, you'll know your personal risk tolerance -- the amount of risk you are willing to tolerate in order to achieve your financial goals.Diversifying your portfolio is one way to balance your risk. By investing in a number of different stocks, bonds, and cash investments, you can decrease the risk.Set investing goals and invest for the long haul. Over time, shares have historically provided better returns and served as a better hedge against inflation than cash or bonds. The longer you have to invest, the more time you have to weather the market's inevitable ups and downs. Investors who adopt a "buy and hold" approach to investing tend to come out ahead of those who try to time the market.What is a long term investor? The following quote gives us an interesting insight into American investing..."Whether you mean to or not, putting your money into the market for the long term is making a statement about the world economy and America's role in that economy. In fact, you are making an economic bet that the U.S. will lead a growing world economy. If you don't believe that world growth led by U.S. corporations will continue, then you are betting your money contrary to your beliefs. The reason why I say this is because this is exactly what a long-term investment in the U.S. stock market has been over the past 100 years -- a bet that the U.S. will continue to lead the world economy. The global economy has grown tremendously over the last 100 years, and the U.S. has been leading the way most of the time." Moe Chernick - February 15, motleyfool.com