The stock market
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The Stock Market. The Financial System. The financial system is a network of institutions which connect investors with borrowers. Institutions in the financial system include banks and stock exchanges.

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The Stock Market

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The stock market

The Stock Market


The financial system

The Financial System

  • The financial system is a network of institutions which connect investors with borrowers.

  • Institutions in the financial system include banks and stock exchanges.

  • The key to the financial system is information. Investors carry out research before buying stocks and bonds.


Risk vs return

Risk vs. return

  • An investment return is the money an investor receives above and beyond the sum of money she initially invested.

  • Low risk investment = low return.

  • High risk investment = high return (maybe).


Investment portfolio

Investment portfolio

  • An investment portfolio is an investors’ collection of financial assets such as stocks, bonds, mutual funds.

  • The portfolio should reflect the risk tolerance of the investor

  • Diversificationis spreading out investments to reduce risk.


Bonds

bonds

  • Bonds are loans made by investors to corporations or governments.

  • The borrower must pay the investor a fixed rate of interest (coupon rate) until maturity(due date).

  • Bonds can be very safe (U.S. treasury bonds) or very risky (junk bonds).


The stock market

Why would a corporation or government sell bonds?


Bond example

Bond Example

  • Chipotle needs cash to expand its international operations. It decides to issues bonds (IOUs) to raise money for the expansion.

  • Chipotle issues 100,000 bonds of $1,000 apiece which pay the investor a coupon rate (interest) of 5% annually. The bonds mature in 5 years.

  • The investor receives $50 dollars a year and at the end of year 5 she gets her $1,000 back.

  • Investment return= $1,250


Stocks

Stocks

  • When a person is buying stock, she is buying a piece of ownership in a corporation.

  • Stocks can be purchased directly from the company (primary market) or from other investors (secondary market).

  • Stockholders get to vote for the board of directors who control the company.

  • 1 share = 1 vote.


Stocks cont

Stocks cont.

  • Stocks are riskier than bonds.

  • If the corporation is profitable then the value of the stock rises and the stockholder shares in the profits.

  • If the corporation fails, the investor can lose his investment.

  • The value of a stock changes daily.


Stocks vs bonds

Stocks vs. Bonds

  • Stocks you own, bonds you loan.

  • Why do corporations sell stock instead of bonds?

  • Why would an investor purchase stock instead of a bond?


Mutual funds

Mutual Funds

  • A mutual fund pools the money of many investors and the fund invests this money in a variety of stocks.

  • Mutual funds enable investors to invest in a broad range of companies in the market.

  • Mutual funds can be very broad, total stock market fund, or have specific focus such as energy or healthcare.

  • Mutual funds help investors diversify and reduce risk.


Profiting from stocks

Profiting from stocks

  • There are two ways an investor can profit from her stocks:

  • Dividends- payments made by corporations to shareholders (i.e. profit sharing).

    Example- Facebook declares a dividend of $5 per share.

  • 2. Capital gains- selling a stock for more than its original purchase price.

  • Short term capital gain = own for less than 1 year

  • Long term capital gain= own for more than 1 year

  • Example: Google Stock- $53.14 8/27/04

  • $537.76 4/11/14


Trading stocks

Trading Stocks

  • The two major stock exchanges are:

  • New York Stock Exchange- The NYSE handles the most powerful and established corporations in the world.

  • Example- GM, Coca-Cola, Wal-Mart

  • NASDAQ- NASDAQ is an electronic trading network which specializes in technology stocks.

  • Example- Facebook, Amazon, Google


Stockbrokers

Stockbrokers

  • Stockbrokers connect buyers with sellers of stock.

  • Stockbrokers work for brokerage firms such as Merrill Lynch or Charles Schwab.

  • Stockbrokers are paid a commission each time they make a trade


Stock index

Stock index

  • Dow Jones Industrial Average- The “Dow” monitors and reports the trading activity of 30 large companies.

  • The Dow as of 4/11/14 was at 16,026 points

  • The Standard & Poor’s 500- The S&P 500 tracks stocks in a variety on industries.

  • The S&P as of 4/11/14 was at 1,815 points


The stock market

Dow Jones Index Companies


Bull and bear markets

Bull and bear markets

  • A bull market occurs when the stock market rises steadily over time.

  • A bear market occurs when the stock market falls over a period time.

  • Stock indexes like the Dow and S&P 500 indicate if the market is a bull or a bear


Market crashes

Market Crashes

  • The Great Crash of 1929- On 10/28/29 the market crash began and the Dow declined nearly 25% in two days.

  • Black Monday- On 10/18/87 the Dow lost nearly 23% in a single day.

  • The Financial Crisis- The Dow declined from 14,000 in October 2007 to 7,949 in January 2009


Regulations

regulations

  • Securities and Exchange Commission regulates trading stocks and bonds.

  • The goal of the SEC is to protect investors from fraud and deception in the sale of stocks and bonds.

  • The SEC also aims to create a level playing field for all investors and prevent insider trading.

  • Insider trading is buying or selling stock after learning about important, nonpublic information.


Alternative investments

Alternative investments

  • Alternatives are illiquid, risky investments open to wealthy individuals and institutional investors.

  • Alternatives are not publically traded.

  • Loosely regulated by the government.

  • Example- a hedge fund is a high risk mutual fund only open to wealthy investors.


What type of investor are you

What type of investor are you?

  • You received a graduation gift of $100,000. Create an investment strategy to manage your money.

  • You investment strategy should answer the following questions:

  • Are you a cautious or an aggressive investor?

  • What industries will you focus on?

  • Will you purchase both domestic and foreign investments?

  • Would you buy stocks, mutual funds, bonds or all three?

  • How will you allocate your money among the different types of investments?


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