Types of Investments

Types of Investment Tools StocksBonds Mutual Funds Real Estate Speculative Investments

Stocks Stock Stockholder or shareholder Usually a stockholder owns a very small part of a company A share of ownership in a company Owner of the stock

DividendsMarket Price Return on Stocks If stock is sold for a market price higher than what was paid Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends- depends on company profit Current price that a buyer is willing to pay for stock If stock is sold for a market price lower than what was paid Stockholder will receive a return Stockholder will lose money Definition What is received?

Bonds Form of lending to a company or the government (city, state, or federal) Annual interest is paid to investor Once the maturity date is reached, the principal is repaid to the bondholder Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Definition Return

Advantage Disadvantage Mutual Funds Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds Make sure to research the fees charged by a mutual fund Reduces investment risk Fees may be high Saves investors time

The Market for Stocks

How Securities Are Bought and Sold IPO IPO initial public offering initial public offering must register with US Securities and Exchange Commission must register with US Securities and Exchange Commission provide a prospectus (details about a company’s operation and the stock to be issued) provide a prospectus (details about a company’s operation and the stock to be issued) Investment Banks/Brokerage Houses Investment Banks/Brokerage Houses buy large quantities then resell buy large quantities then resell

How Securities Are Bought and Sold Parties involved Parties involved buyer: person wanting to purchase stock buyer: person wanting to purchase stock broker: licensed professional who is employed by a brokerage firm and specializes in buying and selling securities broker: licensed professional who is employed by a brokerage firm and specializes in buying and selling securities clerk: a member of a brokerage house who transfers orders and information between stockbrokers in an office and floorbrokers at a stock exchange clerk: a member of a brokerage house who transfers orders and information between stockbrokers in an office and floorbrokers at a stock exchange floorbrokers: member of a brokerage house who completes a customer’s buy or sell order on the floor on a stock exchange floorbrokers: member of a brokerage house who completes a customer’s buy or sell order on the floor on a stock exchange specialist: broker on an exchange who trades in certain stocks at a specific location (post) on the trading floor. specialist: broker on an exchange who trades in certain stocks at a specific location (post) on the trading floor.

Order of Execution BUYERbroker Clerk at the exchange Floorbroker on the trading floor SELLERbroker Clerk at the exchange Floorbroker on the trading floor COMPETE

Order/Sell Terminology Asked Price: price sellers are willing to accept for a particular stock at a given time Asked Price: price sellers are willing to accept for a particular stock at a given time Bid Price: The price buyers are willing to pay for a particular stock at a given time Bid Price: The price buyers are willing to pay for a particular stock at a given time At the Market: an order to buy or sell a stock at the best price currently available At the Market: an order to buy or sell a stock at the best price currently available Limit Order: an order to buy or sell a stock at a certain price Limit Order: an order to buy or sell a stock at a certain price Benefits of Trade: the advantage obtained by a buyer and a seller when they trade a stock Benefits of Trade: the advantage obtained by a buyer and a seller when they trade a stock Costs of Trade: the time and money buyers and sellers spend to find one another and arrange trades Costs of Trade: the time and money buyers and sellers spend to find one another and arrange trades

Order/Sell Terminology Commission: fee a broker collects for helping people buy and sell a stock Commission: fee a broker collects for helping people buy and sell a stock Quotes: the highest price bid by a buyer and lowest price asked by a seller for a stock at a given time Quotes: the highest price bid by a buyer and lowest price asked by a seller for a stock at a given time Round Lot: an order for execution of lots of 100 shares Round Lot: an order for execution of lots of 100 shares Odd Lot: less than the normal unit of trading, which is 100 shares Odd Lot: less than the normal unit of trading, which is 100 shares Penny Stock: shares that sell for less than $5/share Penny Stock: shares that sell for less than $5/share Blue Chip: shares of well-established, successful companies Blue Chip: shares of well-established, successful companies

Video – How Stock Markets Work

Review What is stock? What is stock? What is Ownership? What is Ownership? The Market for Stocks The Market for Stocks How Securities Are Bought and Sold How Securities Are Bought and Sold Order of Execution Order of Execution Order/Sell Terminology Order/Sell Terminology

Assignment Market Identification Market Identification Learning from the Market, Activity 1, Lesson 5 Learning from the Market, Activity 1, Lesson 5