Why would a business/corporation want to sell stock? To raise capital to invest in company growth

Kroger wants you to supply 10 of their stores with your donuts.

A bigger donut fryer A bigger sugar machine Two delivery trucks Storage space for supplies More floor space for the new equipment 5 new employees

You need $500,000 to expand. You have $100,000 available to invest. What are your options for coming up with the other $400,000? Partnership Bank loan Sell stock to investors

Initial Public Offering - IPO Go through an investment bank/broker who will sell the shares to the public

What can a majority owner do? Has control to run the company his/her way. Owns more than 50% of the stock.

What are the two types of stock? Common and Preferred

What are the advantages of owning common stock?

What are the advantages of owning preferred stock?

Donut shop makes $50K a year with 10,000 shares. If the shop pays all its profits in dividends, the dividend is $5 per share.

1. Make a profit 2. Receive a dividend

The opinion of buyers regarding the financial future of the company

(reflect the reasons people purchase stock) Growth (stock price increases-short term profit) Quality of projected dividend payments (long term stream of income)

A place for buying and selling stocks Is it a real place? Yes and no, some stock exchanges are virtual or electronic.

How do the laws of supply and demand apply to the prices of stocks in a stock market?

What might motivate a buyer to pay a higher price for a company’s stock? Ex. Why pay more for Exxon than McDonalds? Quality: long term health of the company, expected earnings & dividends, etc

What are the major stock exchanges? NYSE NASDAQ AMEX How are they different from each other?

New York Stock Exchange

What are stock indices? Stocks grouped by some category What do they tell you? Price trends in specific industries

What are the major indices? Dow Jones Industrial Average (30 select industrial stocks) Standard and Poor’s 600 (S&P 500) (500 general stocks)

What is a composite index? NASDAQ Composite NYSE Composite by industry What might an energy index show?

What does a corporation hope to gain from selling stock? Needed capital to improve and increase productivity and profitability

What does an investor hope to gain from buying stock? Increased income

Stock markets provide a venue for selling stock so companies can raise the capital and undertake projects that an individual owner or partnership wouldn’t have the money to do. Stock markets provide investment opportunity for individuals. Mutual funds allow for just about anyone to own stock. What are mutual funds? Privately managed stock portfolios. Stock market indices provide information to corporate leaders, economic analysts, and government policy makers. (See trends, predict risks & returns, give business owners info about whether it’s a good time to expand.

Stock prices rose above the earnings potential (real value) of the companies issuing the stock. People overpaid for the stocks creating a “bubble” in the market. When they realized they had paid too much they began panic selling, causing the “bubble” to burst and people to lost the money they had invested.

Buying and selling stocks to try to benefit from short term price changes.

What organization was established by the government to implement safeguards to prevent companies from deceiving investors about the financial health of those companies? Securities and Exchange Commission (1934). Read the SEC inset on page 158.

Companies were falsifying or concealing information about their financial stability.

1. Require companies to fully disclose their financial status so that potential investors can make informed investment decisions. 2. Regulate the activities of stock exchanges and brokers in the best interest of the investor.

Companies have to file regular reports with the SEC. Some recent problems: ENRON, Madoff, Banking Crisis