Introduction to Stocks

1. Spring 2008 Economics 98 / 198 DeCal ` Introduction to Stocks Basics of Investing I www.ocf.berkeley.edu/~jml/decal

2. Schedule Today Administrative Issues Lecture content: Basics of Investing What is a stock? How are they traded? What are brokerages? Different types of orders What is the market? Terminology Learning how to use the simulation; IBD Current Events Assignments / Readings

3. Administrative Issues • Attendance & Sign-In • Name Tags • Enrollment • Emails • Webpage • Syllabus Review • News Presentation Sign Ups • Investor’s Business Daily Access

4. Lecture Content

5. What is a stock? • Common stock • Gives you a “share” of ownership of a publicly traded company • Stock ownership • Voting rights • Claim to assets (behind debt holders) and earnings • Potentially entitled to dividends

6. What is a stock? • Ticker symbols • Set of letters that represent a security traded on an exchange • Ex. MSFT, GS, AAPL, MA, BUD, LUV • Stock quotes • List of prices for a stock at a particular point during the trading day • Stock tickers • What do those green and red numbers mean?

7. Basic Stock Quote

8. More Stock Quotes

9. Different Types of Stock • Preferred Stock • No voting rights to company issues • Issued fixed dividends forever – main form of return • Common Stock • Majority of stock we see and hear about in the news • Ownership of the company • Entitled to portion of the earnings • Earn returns mainly through capital gains • What are capital gains? • Increase in asset value relative to the purchases price • Not realized until asset is actually sold • Example.

10. Stocks vs. Bonds • Stocks are equity • Generally considered riskier • Quite possible to lose a significant portion, if not all, of your money • Potential for high returns • Bonds are debt • Lower and usually fixed return • Higher claim than stockholders • What does this mean?

11. Dividend Debate • Distribution of a portion of a company's earnings to its shareholders (usually cash) • Bad or Good? • Why?

12. What Can Cause Stock Prices to Change? EASY!  Supply and Demand!But…what affects supply / demand of a stock?

13. What Can Cause Stock Prices to Change? • Earnings & growth expectations • Positive / negative news • Economy sentiment • Investor sentiments & attitudes • Irrational exuberance / behavior

14. Two Markets • Primary Market – market in which investors have first opportunity to buy newly issued shares • Initial Public Offering (IPO) • First time that company offers its shares to public markets (securities bought directly from company) • Where private companies become public • Secondary Market – investors trade already-issued shares of companies with each other • Ie. The stock market • Trading of a company’s stock DOES NOT DIRECTLY involve the company financially

15. How Stocks Are Traded • Major exchanges • Lists stocks (and other securities), sets policies for how stocks are traded • New York Stock Exchange (NYSE) • American Stock Exchange (AMEX) • National Association of Securities Dealers Automated Quotation • Only “publicly traded companies” are listed

16. Market Indices (Index) • Definition • Aggregate value of combining several stocks together and intended to represent entire or portion of the stock market • S&P 500 • 500 stocks chosen by Standard & Poor to represent US stock market • NASDAQ Composite • Dow Jones Industrial Average • 30 most significant stocks traded • S&P 600 Small-Cap • Russell 3000 • 3000 of the largest stocks in the US

17. Stocks Markets & Animals • Bull Market • When everything in the market is going great and stocks are generally heading upwards • Bear Market • When everything is NOT GOOD and stocks are generally headed • NOTE: Nothing lasts forever! Good times and bad times will end at some point • Other animal terms: pigs, chickens http://www.investopedia.com/university/stocks/stocks7.asp

18. Brokerages • Need a medium to trade through – this is where brokerages come in • Cash vs. margin account • Criteria • Full service vs. discount • Fees (commission) • Services / tools • Minimum balance

19. Opening an Account • Not a hard process- most of it just some paperwork and mail • Sign-up online and download forms • Mail checks, forms, and copy of ID • Accounts created within a couple of days • Cash accounts usually never turned down • Margin accounts difficult if you have pretty bad credit history • What you will need: a computer, starting capital, and investing know-how

20. Brokerages • Some links for brokerage comparisons • Find something that works for what YOU need • No one broker that is best for all investors • http://www.investingonline.org/gso/broker_ratings.html • http://www.consumersearch.com/www/internet/online-brokers/ • http://www.stockbrokerguide.com/ • http://online-stock-trading-review.toptenreviews.com/

21. Different types of Orders • Market Order • Limit Order • Order executes to buy / sell at specified price of better (lower). Limit orders usually cost more, but useful for getting specified price • Stop Order • Order executes when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits

22. Different Types of Orders • Stop Limit Order • Executed at a specified price (or better) after a given stop price has been reached. Order becomes then a limit order to buy (or sell) at the limit price or better • Precision purposes • Good Until Cancelled (GTC) • Good Until End of Day

23. Things to Internalize • Learn the basics! • Need to know what basic terms mean • Articles should help you • Advantages of starting young • Useful resources for stock tutorials • www.investorwords.com • http://www.investopedia.com/university/ • www.fool.com

24. Current Events

25. Investopedia Simulation

26. Homework / Reading • Set up simulation account & start trading • Online articles (Course website) • “The Five Biggest Stock Market Myths” • “Getting Started”