Concepts of the Stock Market Chapter 15.1

What is a Stock?  A stock is a share of ownership in a company  When you buy a stock, you are paying for a small percentage of everything that the company owns  When you own a stock, you are referred to as a stockholder or shareholder

What is the difference between a Stock and a Bond?  A stock means that you own part of the company  Owning stock also allows you to receive a percentage of the profits that the company makes  A bond is simply a loan to a company  When you buy a bond, you get your original investment (principal) back plus interest  A bond is not a form of ownership in the company  Bond owners get paid back before stockholders if the company fails

How is Stock Performance Measured?  Several measures exist to measure stock performance. The two most common are: o The Dow Jones Industrial Average o The S & P 500  These measures allow the performance of the stock market to be measured and compared over time.  They also are used as an indicator of the health of the economy as a whole.

Components of the DJIA  3M  Altria Group  Alcoa  American Express  Am. Intl. Group  Boeing  Caterpillar  Citigroup  DuPont  Exxon Mobil  General Electric  General Motors  Hewlett Packard  Honeywell Int.  IBM  Intel Corp.  J.P. Morgan  Johnson & Johnson  McDonald’s  Merck  Microsoft  Pfizer  SBC Communications  Coca-Cola  Home Depot  Proctor and Gamble  United Technologies  Verizon  Wal-Mart  Walt Disney

10, / -0.09% Dow Jones Industrial Average Open:10, YTD % Change:0.85% High (day):10, High (52wk):10, Low (day):10, Low (52wk):9, Volume:236,390, Last Close:10,552.82

Why do Stock Prices Change?  Stock prices rise and fall due to many reasons: The Value of the Business increases or decreases Profits increase or decrease Interest rates rise or fall The Economy shows growth or decline Publicity about the company (good v. bad news)

Market Nicknames  A market that is declining (stock prices falling) is referred to as a BEAR MARKET!  A market that is rising (stock prices increasing) is referred to as a BULL MARKET!

 The Dow Chemical Company (NYSE) The Dow Chemical Company  DOW %DOW  Volume: 4,728,200 

Why did Dow Stock Change in Value?  Speculate on reasons for the variations over the past year... o New product lines o Effects of Hurricanes Katrina and Rita o Other possible ideas....

So...What Caused the Crash of the Stock Market in 1929?  According to economist John Kenneth Galbraith: 1. Bad distribution of income 2. Bank failures and lack of regulation 3. Foreign Trade Balance (imports v. exports) 4. Lack of Economic Intelligence AND..... SPECULATION & MARGIN BUYING

Causes of the Crash: Speculation  Speculation: making high risk investments to achieve high rewards  Investors took chances hoping for a big payoff  In some instances, the value of a business’ assets was less than the value of its stock due to speculation and over-confidence

What is MARGIN BUYING?  Instead of buying stocks only with cash, during the 1920s banks and brokers allowed investors to “buy on margin”  “Margin buying” means that an investor could pay a certain % as a down payment and borrow the remainder of the price of the stock  The goal was to sell the stock at a price higher than the purchase to pay back the loan plus interest and still make a profit!

Causes of the Crash: Margin Buying  Allowed people to invest without the immediate capital (Buy now, pay later)  Encouraged business growth and expansion  Furthered the stock buying frenzy in the country as prices rose  When prices fell, brokers tried to call in their loans  Investors who bought stocks on margin struggled to break even or lost their entire investment

Examples of Margin Buying: Positive  Stock Price$100  Margin$10  Borrowed$90  Selling Price$150  Repayment$90 + (interest)$23  Profit$37 This is a positive situation for the speculator because he can afford to pay back his loan plus interest and still make a profit. The margin allowed him to buy stock that he could otherwise not afford.

Example of Margin Buying: Negative  Stock Price$100  Margin$10  Borrowed$90  Selling Price$90  Repayment$90 + (interest)$23  Profit/Loss$33 This is negative margin buying because the speculator was not able to sell the stock at a price that allowed him to pay back the broker’s interest and margin. His gamble did not pay off and he lost money.

Rise of the Stock Market during the 1920s (Measured by the DJIA)  End of  3/4/29313  9/3/29381  Prices begin to fall in September due to profit taking  10/23/29-21 pts. per hour  10/24/29Black Thursday  10/25/29Bank Intervention  10/29/29Black Tuesday (4x more shares sold)  11/13/29198

Stock Market Performance

Effects of the Stock Market Crash  Immediate cause of the Great Depression  Caused income and profits to fall  American factories closed due to overproduction  Unemployment rose rapidly  Small businesses closed (restaurants, shops)  Farm prices fell even lower  Banks closed  The Dawes Plan (loans to Germany) ceased  The Allies stopped repayment of loans  World trade slowed and the Global Economy starts a downward cycle