1. BASICS OF INVESTING AND THE STOCK MARKET

2. Saving and Investing:
Financial System- allows the transfer of money b/t savers and borrowers
Financial Intermediaries- institutions that help channel funds from savers to borrowers; they are b/t savers and investors ex: banks, credit unions, finance companies, etc.

3. 3 advantages to financial interm:
1. sharing risk- diversification allows you to spread out investments to reduce risk
2. providing information- they collect info about borrowers; this is passed on to investors which encourages us to invest our money in those companies
3. providing liquidity- ease with which people can convert assets into cash

4. What do I look for?
Liquidity- the ease with which savings or investments can be turned into cash
Risk- the chance of losing some or all of the money invested.
Return- earnings from an investment
Remember: risk = rate of return

5. Investment Options:
Savings Accounts- provides a small but steady return; offered at any financial institution
Certificates of Deposit- like a savings account, but it pays a slightly higher return; the trade off is that it is less liquid
-available at any financial institution also
Real Estate- less liquid and comes with risk of being a landlord, however, the values tend to appreciate and provides a steady cash flow

6. Stock- Provides the greatest return to investors; long run investment
Bonds- IOUs or long-term loans to the issuer who promises to pay you a specified rate of interest during the life of the bond and to repay the original loan when it matures; less risky than stock
**Mutual Funds- a pool of stocks and/ or bonds in which the investor owns many shares instead of just one company

7. Compound Interest
It is interest that is paid on your original investment and the interest earned
Don’t withdraw the interest earned along the way- this stunts the growth of your earnings
It is money that your money makes for you that you didn’t have to work for
The Rule: pay yourself first!
spend less, use credit wisely, and search for the best options among financial institutions

8. What is the Stock Market?
The exchanging between buyers and sellers of stocks and bonds which is done by stockbrokers (defn)
It isn’t necessarily a physical location, but a set of arrangements and transactions that make it possible for stocks to be traded
Includes all forms of investment, not just stocks of companies
It is composed of several different exchanges: NYSE, AMEX, and NASDAQ

9. New York Stock Exchange
Oldest, has about 2,800 listings
No small corporations, only large volume
Includes some major indexes used to measure the activity of the stock market as a whole such as the Dow Jones Industrial Average and the Standard & Poors 500

10. American Stock Exchange
NASDAQ
Not a physical location but an electronic network
Over 3,700 listings
most technology-based companies are traded here
The US mkt for Over the Counter trading
The companies listed here are smaller than those on the NYSE
Lists about 800 companies

11. Measuring Stock Performance:
Bull and Bear Markets: bulls are mkts that are rising and bears are mkts that are declining
DJIA- an average composed of 30 stocks that are representative of the whole mkt and reported in points, not dollars
S&P 500- stock prices of 500 companies in leading industries; considered the most accurate reflection of US stock market

12. What is a stock? A piece of ownership in a corporation; aka equity
Advantages to stock ownership: investment opportunity to make money, some pay dividends (defn), has the potential to grow at a higher rate of return than other forms of investment
Disadvantages of stock ownership: Very risky, no guarantees

13. Bonds:
Issued by the government and/ or corporations for investment purposes
Government bonds are the safest form of investment and not taxable by state or local governments/ used to finance the national debt
Corporate bonds are somewhat riskier than government bonds but still safer than stock, and the rate of return is higher than on government bonds
Pays interest to investors at set intervals

14. Mutual Funds:
More Americans invest through mutual funds than any other method
Some are just bonds, just stock, or combinations of both
Factors to consider: performance, cost, convenience
Advantages- professional management, diversification, liquidity, and investment objective

15. How do I buy or sell?
Brokers- professional managers who give expert advice and facilitate the exchanges between sellers and buyers; they are usually paid either a commission or a fee
- commission is a percentage of the total transaction
- fee is paid for services of a financial advisor to minimize your risks and maximize your profits; this is paid regardless of making a profit or loss

16. Banks- many banks offer investment services, such as Trustmark
Internet- it is very easy and cost efficient to do it yourself online; helpful sites include ETRADE.com, TDAMERITRADE.com, and fidelity.com

17. Researching Companies:
Select a few to research
Monitor their progress/ review their history
Don’t just look for “good” companies, but ones that may generate surprises, however, surprises are very difficult to predict (you are looking for potential)
Review their financial information- look for changes in sales, changes in earnings, demand for their goods or services, get recommendations from professionals
Positive or negative publicity

18. Helpful Websites: www.marketwatch.com www.bloomberg.com

19. Stock-selection Criteria:
Share price- determined by supply/ demand of stock and profits of company
Price/ earnings ratio- the recent stock price divided by 12 months of earnings per share; it measures how much the investor will pay for a dollar of earnings or profits
high P/E = young, fast-growing company that may be more risky
low P/E= less risky, more stable company

20. Annual revenue or sales- this reflects how well the company may be doing; rising sales/ revenue means profits are increasing, therefore, stocks will be more valuable (demand will increase pushing up the stock price)
Earnings per share- this measures how a company’s profits compare to the number of shares; rising earnings per share suggests that a company is well managed

21. What determines stock prices?
Supply/demand
Law of Demand- at lower prices, people choose to buy more and vice versa
Law of Supply- at higher prices, people choose to produce more and vice versa
As the company becomes more profitable, people will purchase more stock which will drive its price upward. As the price goes up, the incentive to sell stock will increase. If the stock is available in excess, then the price will come back down. As it falls, people will be motivated to buy more.

22. Expectations are Everything
Demand: people buy stock when their expectations for a company are positive because they believe the share price will increase and they may see an improved dividend payment
Supply: people sell stock if they have negative expectations for a company’s future because they fear stock prices will drop, dividends will decrease, and they don’t want to miss a better opportunity to purchase other stocks

23. Expectations can cause
a huge upset in
the Stock Market!!

24. Stock Market Summary (2007):
From 1926 to 2003 there was a 72% chance that the year experienced a positive stock market growth and a 28% negative chance
Out of the 72%: 40% was at a growth rate of 20% or more
Out of the 28%: 16.7% was between 0 and -10
In other words, when it was positive, it was really positive; when it was negative, it was a small loss and not the huge losses most people associate with the stock market
Over the last 80 years, the market has averaged a growth of 12% including losses as well as gains

25. How are things now?
The Dow has been making new records hitting over points recently (Oct 07)
The S & P 500 has also been making gains
The economy has been growing, but it is slowing and inflation remains in check
Analysts believe we are due for a negative year soon (2008 or 2009) but this is where having a balanced mutual fund is attractive-when the stocks go down, the bonds tend to go up washing the losses

26. Suggested Readings: Start Late, Finish Rich by David Bach
Wall Street Journal’s
-Understanding Markets
-Understanding Stocks
-Understanding Bonds
Dave Ramsey’s materials are oriented more for getting out of debt rather than building wealth