1. What, where, why, and how answers to stocks Ch 12 in Textbook

2. Companies Type of Companies Private Public Sole-proprietorship
Partnership
Corporations
Private
No trading on the open market
Ex: M&M Mars
Public
Stock traded on open stock market
Ex: Hershey
We will be talking about publicly traded companies!

3. IPO: Initial Public Offering vs Trading on the Secondary Market
Also known as Primary Market
Where securities are created
IPO occurs when a private company sells stocks to the public for the first time.
Company needs to file with SEC (Securities Exchange Commission) to go public
Secondary Market
Known as “the market”
defining characteristic is that investors trade among themselves.
investors trade previously issued securities without the issuing companies' involvement.
Ex: if you buy Microsoft stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft (the company) is in no way involved with the transaction

4. Stock Exchanges NYSE--oldest in world
Human component as well as computer
Historically was an open auction: buy low and sell high is goal
NASDAQ--—Nat’l Association of Securities Dealers Automated Quotations.
Second largest stock market in dollar volume in the United States behind the New York Stock Exchange.
It is a completely electronic stock exchange
Composite of many stocks—many tech stocks
Stocks traded Mon-Fri 9:30-4:00 (EST)

5. Stock Indexes A benchmark to judge performance of investments
Dow-Jones
30 blue-chip stocks
Representative of the US economy as a whole (less the transportation and utility sectors )
S&P 500
500 large companies
many consider it the best representation of the U.S. stock market
Nasdaq
often used to judge the progress of the technology sector, since NASDAQ has so many tech stocks

6. Factors that Influence the Market
The company itself-
When co. is doing well, profits are up, debt is down, stock is attractive
Interest Rates-
When interest rates are low, savings acc’ts aren’t profitable,
return on investment not keeping pace with inflation, so people look to stock to increase their returns
The Market-
The demand (and supply) of a product or service can determine a co.’s ability to make a profit. Demand high = increase stock value
Non-market risks:
unpredictable & uncontrollable, such as natural disaster
Industry risk:
events that effect single industries, such as fads, trends
Political risk:
taxes & gov’t regs make investments less attractive (environmental regs)

7. Bear vs Bull Market Bear Market Bull Market
Downward turn in stock market
Usually swift and savage
Bull Market
Upward trend
Usually lasts longer than Bear market

8. Types of Stock Income Growth
Pay high dividends (give earnings to stockholders)
Growth
Money re-invested to grow company
Earn money as stockholder when you sell….price of stock appreciates (goes up)

9. Types of Stock Cyclical Defensive Perform in relation to the economy
Do well in good economy, bad in bad economy (luxuries)
Defensive
Stable in good and bad times
Provide basic needs via product or service—if people need it, it will do well.

10. Types of Stock O-T-C/Risky Blue Chip
Traded on lesser known (pink) markets
Inexpensive/risky
Blue Chip
Nationally known
High price/low yield
Low risk/safe investments
Ex: Coke, Ford, Exxon

11. Earning Money: Dividend
Common (there is also preferred)
Stockholders have voting rights
Board of directors elected by stockholders
Can vote on major issues: issue more stock, sell co, etc.
More stock you own, more votes you have—more votes = more influence on corporate policy
May or may not pay dividend
Share profits with stockholders
quarterly, semi or annually
Many people Re-invest their dividends—
this means the money earned on dividends automatically buys more shares of stock
No commission is paid for re-investing dividends

12. Earning Money
Selling—you only make or lose money when you sell your stock.
Capital Gain (make money)/Loss (lose money)
Return on Investment (ROI)
ROI = (Selling Price – Cost)/Cost
To calculate it, you simply take the gain of an investment (Selling Price – Cost), and divide by the cost of the investment.
Investing in Joe's Pizza For example, if you buy 20 shares of Joe's Pizza for $10 a share, your investment cost is $200. If you sell those shares for $250, then your ROI is ($ )/$200 for a total of 0.25 or 25%.

13. EPS: Earnings per share & Stock Split
Your personal piece of a company’s net income
Ex: co profit/# of outstanding shares
$100,000/ 100,000 shs = $1.00
$100,000/ 1,000,000 shs = 0.10
Stock split
Increase in number of shares of a stock
Value of stock still same
Usually done to make stock more affordable—more people will buy, stock will increase in value

14. Long-term Techniques Buy and Hold
Most investors purchase stocks as long-term investments
Stock go up and down, but over the years, overall trend of non-speculative stock is moderately up.
You ride out the down times
Earning income through dividends while holding stock

15. Long-term Techniques Dollar-Cost Averaging Direct Investment
Equal dollar amount of the same stock at regular intervals
Result is usually a lower average cost per share
Avoid buying at the highest price—don’t have to worry about timing investments perfectly
Direct Investment
Buying directly from a corporation (no brokerage fees)
May get for below market value price
Reinvesting Dividends
Using dividends earned to buy more shares (avoids fees)

16. Short term Techniques “Playing the Market”
1. Buying on Margin
Borrow money from broker to buy stock
Open a Margin account and sign contract
Deposit min. $2,000.00
This is called leverage: use of borrowed money to buy securities
Betting the stock will rise
When you sell the stock you pay interest on the borrowed money plus a commission
If stock goes down, you make up the difference
If market value decreases to ½ of original purchase, the broker can “call the margin”
You need to put up more money in margin account or sell stock

17. Selling Short 2. Short selling
borrowing stock from the broker and sell borrowed stock
Betting stock will go down in value
Must replace stock you borrowed—so you want stock to go down. This allows you to buy it back at lower rate and make a profit
If stock rises, you lose. You need to buy it back at higher price than you borrowed it.