Stocks, Banks and Supply and Demand

Copy the following questions and answer them as we go 1. How are banks important to an economy? 2. What are stocks? 3. Why does the price of stocks change?

Let’s start with stocks/shares… Stocks/shares are… A. pieces of a company that can be bought and sold B. a slowdown in the economy C. the goods and services that a company produces D. loans that you can give to the government in exchange for some extra money later

Here’s how it works… I love to cook. Not just any food, I love to cook tasty gourmet Puerto Rican food.

From good food to business… My friends tell me I should start a restaurant because they have never eaten anything as good as my food. So I take their advice. I decide to start my own restaurant. I’ve heard, however, that starting a restaurant costs a lot of money. And that restaurants aren’t profitable until the 2 nd or 3 rd year.

What kinds of things do I need to start a restaurant? Name some things So how much money are we talking about?

Where do I get the money? A. Personal savings B. Wealthy friends/private investors C. A bank D. sell stocks E. all of the above

All are right except for selling stocks. In most cases a company must have some history in order to sell stock publicly.

Let’s talk about banks… The following statements are true about banks except A. It is a place in which people can safely keep their money and make financial transactions B. banks pay interest and charge interest C. banks use their customer’s money to make loans to other people D. banks have all of their customer’s money safely stored in a safe in the bank

Let’s talk about banks… Banks are perhaps the most important institution of an economy They borrow money but more importantly, they LEND money Without the help of a bank, starting my small restaurant would be nearly impossible And my small business creates jobs for the economy

Back to my restaurant… So the bank liked my idea for the restaurant (it helped that I had $100,000 of my own money. Banks want to know that you have an incentive [motivation] to take care of their money) They lent me money because they think my restaurant will succeed. Eventually, I will have to pay back the money with interest.

My restaurant is booming Five years have passed and my restaurant is booming The bank has financed my expansion and I have over 50 restaurants in 5 states (think a Puerto Rican Chipotle) Ajo Dulce

I have some options If I want to keep growing and keep the company in the family, then I can continue to find the financing for expansion. Since the company is doing well, many large banks and private investors would be happy to do this for me. I have another option, however, I can sell my company to the public.

Why go public? The #1 Reason: Money (Other reasons: prestige, name brand recognition, liquidity) I can divide my company into 30 million pieces called stocks or shares. I can then sell these shares in a stock market I announce to the world the day that I will sell my stock

My IPO (Initial Public Offering) Listen world! My name is Ajo Dulce. I’m a wonderful little restaurant that sells great gourmet Puerto Rican food. I have a great product, a great lively setting and a solid customer base. I will continue to grow as a company. If you would like to buy a piece of me you can find me at the New York Stock Exchange (a stock market) on March 13, I’ll start selling at $50 a share.

Then what? Let’s say the IPO went well and the company sold 30 million shares at $50 That’s $1.5 billion that the company can use to grow Drawbacks: It is no longer my company. It is the company of the people who bought shares in my company and it is managed by a group of people (which probably includes me) called a board of directors By the way not only people can buy stocks. Most stocks are owned by institutions: banks, other companies, retirement funds, etc.

All right so the company was sold to the public and now it is a large commercial restaurant like McDonalds, Chillis or TGI Fridays. What about the people who bought the shares in my company. What happens to those shares?

Why do people buy shares/stock in a company? #1 You get a cool certificate showing how many shares you own in the company

What do you get if you buy a share of a company? #2, and more importantly, a share is an investment--a way for your money to make money ( or lose money) How you ask? The most common way is by watching the value of the share/stock rise. An example:

Google Google went public in October of Google set its price at $85 a share. Let’s say I bought 100 shares for $8500. At its highest point (Dec 7, 2007), a share of Google was worth $714. On this date my investment was worth $71,400. If I was lucky enough to sell all my shares on that date, I would have made about $63,000. This is money I didn’t have to work for. It’s an investment. Any questions?

Why do stock prices change? Supply and demand: the more something is demanded the higher its price; the less it’s demanded, the lower the price What’s the price of the fly here?

It’s the same for anything bought and sold in a market where there are no fixed prices. Why is less more for this oil executive?

This cartoon suggests that building a border wall is an economic problem. Explain.

Supply and Demand If investors believe that Google is a great company and continue to buy its stock, it’s price will continue to rise. If all of a sudden they believe Google sucks and begin selling their shares, the price of the stock will fall

Review Why are banks especially important to an economy? a.They print money b.They lend money to start businesses c.They always have people’s money when they need it d.They pay people interest for saving their money in their institution

Why are small businesses important to an economy? A. they add some values (a unique product or service) B. they create jobs for the economy C. they create wealth for the city, state and nation D. all of the above

What is a share/stock? A. a piece of a company B. a piece of the government C. a loan from a bank D. all of the above

Why do people/institutions buy stocks? A. as an investment—a way to have your money make money B. it helps the economy by creating jobs C. to grow your own company like in the case of Ajo Dulce D. all of the above

Why do stock prices go up and down? A. the company changes the prices B. Supply and demand C. Banks and small businesses negotiate the price D. all of the above

Based on what you have learned... Write your answer on your paper. If stocks are bought and sold at a place called the stock market, what do you think happens when a stock market crashes?