What are stocks? A stock is a share in the ownership of a company. Stock represents a claim on the company’s assets and earnings. As an owner (shareholder), you are entitled to your share of the company’s earnings as well as any voting rights attached to the stock.

Why do companies issue stock? At some point every company needs to raise money. Companies can either borrow it from somebody or raise it by selling part of the company. By issuing stock, the company does not have to pay back the money or make interest payments.

What does the shareholder get out of the deal? The shareholder gets the hope that the shares will be worth more in the future. If the company does well, the stock will probably increase in value. If the company does not do well, the shareholder may lose the money he or she invested.

What’s an IPO? IPO stands for Initial Public Offering. It’s the first time the stock is available to the public to purchase. The stock exchange itself is a secondary market. The primary market is the brokers.

Before a company can offer large amounts of stock to the public, it must register with the SEC (Securities and Exchange Commission) and prepare a public offering. This offering includes a prospectus and a number of other legal documents. The prospectus is the accounting and legal equivalent of taking your clothes off. Everything good and especially bad or risky about the company, the senior staff, and majority stockowners is reported in the prospectus for the world to see.

What is a dividend? A dividend is money that a company pays to its stockholders from the profits it makes. Not all companies pay dividends to their stockholders. The only way shareholders in these companies make money is to sell the stock at a higher amount than they bought it at on the open market.

What is the difference between common and preferred stocks? Common stock is the type most people purchase. It represents ownership of a company and a claim on part of the profits. Investors get one vote per stock. Preferred stocks don’t have the same voting rights, but investors are usually guaranteed a fixed dividend. If the company is liquidated, they are paid off first.

How do stocks trade? Most stocks are traded on exchanges such as the New York Stock Exchange or NASDAQ. The NYSE is a physical location whereas NASDAQ is a virtual market. Exchanges are simply places where buyers and sellers meet and decide on a price for a stock. Think of it as a flea market where buyers and sellers come together and agree on a price for a product.

The New York Stock Exchange On the NYSE, orders come in through brokerage firms and flow down to the floor brokers who go to a specific spot on the floor where the stock trades. At this spot, there is a ‘specialist’ whose job is to match buyers and sellers. Prices are determined by the auction method. The current price is the highest price someone will pay and the lowest price someone is willing to sell for.

The NASDAQ Exchange NASDAQ is a virtual market called an “over the counter (OTC) market. It has no central location or floor brokers. Trading is done through a computer and telecommunications network of dealers. These market makers provide continuous bids and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They usually maintain an inventory of shares to meet demands of investors.

What sets the prices on a stock exchange? Market forces changes stock prices every day. Share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply) the price goes up. If more people want to sell than buy, the price goes down.

What makes people want to buy one stock and not another? The price of a stock indicates what investors feel a company is worth. The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes. Public companies must report their earnings on a quarterly basis. If a company has done well, the stock price will likely rise. If not, it will drop.

What else might influence the price of a stock? Often times current world events have an impact on the price of stocks. For example, after 9/11, aviation stocks decreased in value. This was in anticipation of a drop in traveling by the consumer and thus a decrease in profits. This caused a lot of trouble for those companies.

What about all these animals? The Bull – a bull market is when the economy is doing well, the GDP is growing and stock prices are rising. The bull market charges ahead. The Bear – a bear market is when the economy is bad, recession is looming and stock prices are falling. A bear market hibernates and moves slowly.

In Review Stock means ownership. You can lose all of your investment with stocks. The two main types of stocks are common and preferred. Stock markets are places where buyers and sellers come together. Stock prices change according to supply and demand. Bulls make money. Bears make money. Chickens sit on money. Pigs just get slaughtered!.

 Bonds are securities that represent debt owed by the issuer to the investor, and typically have specified payments on specific dates.  Types of bonds we will examine include long- term government bonds (T-bonds), municipal bonds, and corporate bonds. Copyright © 2009 Pearson Prentice HallAll rights reserved

 The U.S. Treasury issues notes and bonds to finance its operations.  The following table summarizes the maturity differences among the various Treasury securities. Copyright © 2009 Pearson Prentice Hall. All rights reserved

 No default risk since the Treasury can print money to payoff the debt  Very low interest rates, often considered the risk-free rate (although inflation risk is still present) Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Issued by local, county, and state governments  Used to finance public interest projects Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Typically have a face value of $1,000, although some have a face value of $5,000 or $10,000  Pay interest semi-annually Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Cannot be redeemed anytime the issuer wishes, unless a specific clause states this (call option).  Degree of risk varies with each bond, even from the same issuer. Following suite, the required interest rate varies with level of risk. Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Junk Bonds ◦ Debt that is rated below BBB ◦ Often, trusts and insurance companies are not permitted to invest in junk debt ◦ Michael Milken developed this market in the mid- 1980s, although he was convicted of insider trading Copyright © 2009 Pearson Prentice Hall. All rights reserved

The next slide explains in further details the rating scale for corporate debt. The rating scale is for Moody’s. Both Standard and Poor’s and Fitch have similar debt rating scales. Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Some debt issuers purchase financial guarantees to lower the risk of their debt.  The guarantee provides for timely payment of interest and principal, and are usually backed by large insurance companies. Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Bonds are the most popular alternative to stocks for long-term investing.  Even though the bonds of a corporation are less risky than its equity, investors still have risk: price risk and interest rate risk. Copyright © 2009 Pearson Prentice Hall. All rights reserved

The next slide shows the amount of bonds and stock issued from 1983 to Note how much larger the market for new debt is. Even in the late 1990s, which were boom years for new equity issuances, new debt issuances still outpaced equity by over 5:1. Copyright © 2009 Pearson Prentice Hall. All rights reserved

Copyright © 2009 Pearson Prentice Hall. All rights reserved

 Mutual funds are a type of investment that takes money from many investors and uses it to make investments based on a stated investment objective.  Each shareholder in the mutual fund participates proportionally (based upon the number of shares owned) in the gain or loss of the fund.

 Mutual funds offer investors an affordable way to diversify their investment portfolios.  Mutual funds allow investors the opportunity to have a financial stake in many different types of investments.  These investments include: stocks, bonds, money markets, real estate, commodities, etc…  Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, however, allows the investor to have much greater exposure to each of these asset classes.

 Most mutual funds are professionally managed by an investment expert known as a portfolio manager.  This individual makes all of the buying and selling decisions for the fund.  There are thousands of different mutual funds in the United States.  This provides investors with many options to help them achieve their investment objectives.

 Mutual Funds can be divided into five basic categories based upon the funds investment objective.  These categories are: 1. Money Market Mutual Funds 2. Stock Mutual Funds 3. Index Funds 4. Bond Mutual Funds 5. Balanced Mutual Funds

 This is the most conservative type of mutual fund.  The goal is to maintain the $1 value of its shares while providing income.  Invests in high-quality, short-term securities such as certificates of deposit, U.S. Treasury Bills, and U.S. Treasury Notes.  MMMF’s are an appropriate place for savings.  These funds have typically offered higher interest rates than bank savings accounts.  Money market mutual funds are not insured by the FDIC.

 Type of fund that invests in stocks.  These funds are also known as equity funds.  There are many different types of stock mutual funds.  Some of the most common include: Large-cap funds, mid-cap funds, small-cap funds, income funds, growth funds, value funds, blend funds, international funds, and sector funds.

 These are mutual funds whose holdings aim to track the performance of a specific stock market index.  The most common index fund tracks the S&P 500. These index funds invest in the exact stocks (and in the same percentages) as those found in the S&P 500.  Index funds also track bonds, real estate, and other types of assets.  These funds are lower cost than other types of funds.

 Type of mutual fund that invests in bonds.  There are different types of bond mutual funds.  Typically, bond mutual funds have the objective of providing stable income with minimal risk.

 These are also known as hybrid funds.  These mutual funds invest in stocks, bonds, and money markets.  These are very diversified mutual funds. The stock portion of the fund provides the potential for making money, while the bond and money market portion provide stability