Investing in Stocks Personal Finance Holmen High School

Objectives Understand the stock market's function for both owners and investors Understand what drives prices up and down Recognize and apply the concepts of ◦ Earnings Per Share (EPS) ◦ Price/Earnings Ratio (P/E) ◦ Factoring growth in the valuation of a company

Meet Velma Velma owns a small cupcake shop Velma makes a profit of $5,000 a year Business is growing, but she needs cash to expand

Velma’s Options Loan from a Bank Issue Bonds ◦ Borrow from Investors Find Private Investors Find Public Investors

Velma and Daphne Velma needs to borrow money Daphne has money to lend

Velma and Daphne Velma Gets a Loan from a Bank Pays 7% Business Loan Daphne Puts Her Money in Checking Account or CD Earns 1%-3% in Interest 7%2%

Velma and Daphne Velma Issue Bonds Pays 6% to Investors Daphne Invests in a Bond Receives 6% Interest

Velma and Daphne Velma seeks private investors Family Friends Business People Daphne wants to buy 50% of the company Velma’s Company makes $5,000 a year Daphne wants half the profit ($2,500)

How Much Should Daphne Pay? If Daphne wants 50% of the business, how much should she pay Velma? What is Velma’s business worth?

Shark Tank

Issuing Stock- Going Public Allows public to invest in Velma’s company Issue shares to investors Profits are shared among investors

Public vs Private PrivatePublic Does not need to disclose ◦ Revenue ◦ Profits ◦ Expenses ◦ Salary Kwik Trip Menards Festival Need to disclose ◦ Revenue ◦ Profits ◦ Expenses ◦ Salary BP Home Depot Publix

What is the Stock Market? Just like a farmer’s market Buy and sell shares of stock in public companies Companies recognized by Ticker Symbols ◦ SBUXWMT ◦ MCDMSFT

Benefits of the Stock Market Owners Raise Money Investors become Owners Allows businesses to grow and expand

Why Go Public Velma’s business has grown to 10 stores Wishes to expand to 200 stores Needs to raise money to expand

Velma’s Cupcakes Value determined by Wall Street Issues 500,000 shares at $5/share Raises $2.5 million to expand her business Ticker Symbol: VCUP

What causes the price to change? After six months: Demand for Cupcakes is High Sales are Growing Profits are Rising VCUP Price: $8.00

What causes the Price to Change? After 12 Months: Demand for Cupcakes is Low Economy is Bad Sales are Slowing Profits are Falling VCUP Price $3.00

What causes the Price to Change? Supply and Demand High Demand-Low Supply- Price Rises Low Demand-High Supply- Price Falls

Total Profit Quarter1$200,000 Quarter 2$350,000 Quarter 3$150,000 Quarter 4$300,000 Total Profit $1,000,000 Number of Shares 500,000

Earnings Per Share QuarterProfitSharesEPS Quarter 1$200,000500,000$.40 Quarter 2$350,000500,000$.70 Quarter 3$150,000500,000$.30 Quarter 4$300,000500,000$.60 Year 1$1,000,000500,000$2.00

What’s a Fair Price? Is $8.00 Expensive for VCUP Is $3.00 Cheap for VCUP We don’t know until we look at the P/E Ratio

Price to Earnings Ratio Price- Current Share Price Earnings- Earnings Per Share VCUP Price- $8.00 ESP- $2.00 P/E4

Price to Earnings Ratio Not represented in dollars Lower the better High numbers mean a stock could be expensive Look at Competitors

Price to Earnings Pepsi P/E20 Coke P/E15 Coke is a better value because the P/E ratio is lower

Ways to Profit from Stock Capital Gain Buy 1,000 Shares of $20 Sell 1,000 Shares of $35 Profit- 1,000 x $15= $15,000 Dividends Own 200 Shares of Nike. Nike pays a dividend of $3/share. Profit- 200 x $3= $600

Question 1 Jerry's Juice Company has 500,000 shares outstanding Listed below are the quarterly EPS for the company. Q1 $.60 Q2 $.40 Q3 $.75 Q4 $.25 What are the total earnings for the past year? A.$125,000 B.$1,000,000 C.$2.00 D.$250,000

Question 2 All other things being equal, it is best to look for a company with a low P/E. True False

Question 3 Name one thing that could cause stock prices to fall.

Question 4 Calculate the EPS from the following information: Total Profit: $3,000,000 Total # of Shares: 1,000,000

Question 5 What is one difference between a privately and publically owned company?