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Stock Market Basics

Stock Market Basics. Financial Literacy. What We Will Cover. Stock Splits Beta Values Reading a Stock Quote Price/Earnings Ratio The Stock Market in General Purchasing a Stock Supply vs. Demand. Stock Split.

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Stock Market Basics

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  1. Stock Market Basics Financial Literacy

  2. What We Will Cover • Stock Splits • Beta Values • Reading a Stock Quote • Price/Earnings Ratio • The Stock Market in General • Purchasing a Stock • Supply vs. Demand

  3. Stock Split • Sometimes the price of a stock gets high, and the company wants to lower the price to be more attractive to investors, so they splittheir shares

  4. Stock Split - Example • Example: You own 100 shares of Company A, worth $10 each for a total portfolio value of $1000 (100 shares X $10/share) • Company splits 2 for 1 • You now have 200 shares (100 X 2) • But they are worth half as much ($10/2) • Your portfolio value stays the same: $1000 (200 shares X $5/share)

  5. Stock Split- Example Company A: Your Beginning Portfolio Value: 100 shares X $10/share = $1,000 total value Stock splits 2 for 1: Now you have 100 X 2 shares = 200 shares But they are worth half as much= $5.00/share Ending Portfolio Value: 200 shares X $5.00/share = $1,000 total value The total portfolio value didn’t change

  6. Stock Split – Another Example • Company B: • Your Beginning Portfolio Value: • 200 shares X $33/share = $6,600 total value • Stock splits 3 for 1: • Now you have 200 X 3 shares = 600 shares • But they are worth 1/3 as much = $11.00/share • Ending Portfolio Value: • 600 shares X $11.00/share = $6,600 total value • The total portfolio value didn’t change

  7. Practice Stock Split Problems:

  8. Another Stock Split Problem:

  9. And Another….

  10. Beta Value • The beta value measures a stock’s volatility compared to overall changes in the stock market • If a stock has a beta of +1.5 and the market goes up 10%, the value of the stock is expected to rise 15% (multiply the increase in the stock market X the beta value) • Average beta is between +0.5 - +2.0 • Beta value can be found under “Key Statistics” or on the main stock page • A higher beta indicates more risk because the stock price change will be more drastic

  11. Practice Beta Values:

  12. Reading Stock Quotes

  13. Stock Quote Company Name, Ticker Symbol and Stock Exchange

  14. Stock Quote Current Price (Last Trade Price), up (green) or down (red) for the day in dollars and percent; last trade time

  15. Stock Quote Last price at the end of trading yesterday

  16. Stock Quote Price the stock opened at this morning at beginning of trading time

  17. Stock Quote The price buyers are willing to pay (bid) and the price sellers are asking (ask)

  18. Stock Quote The price analysts think the stock will be at a year from now

  19. Stock Quote The volatility index: how much the stock is predicted to move as compared to the market as a whole

  20. Stock Quote The next day the company will report earnings (or report profit for the previous three months)

  21. Stock Quote The highest and lowest prices the stock has traded TODAY

  22. Stock Quote The highest and lowest prices the stock has traded during the PAST YEAR

  23. Stock Quote The number of shares traded so far TODAY

  24. Stock Quote The number of shares traded on an average day

  25. Stock Quote The total value of all the stock outstanding

  26. Stock Quote The price/earnings ratio (see definition below)

  27. Stock Quote The net income the company earned for each share of stock

  28. Stock Quote The dividend the company pays per year in dollars and as a percentage of stock value

  29. Stock Quote A chart of how the stock price has changed today

  30. Stock Quote Charts of price changes for various time periods in the past

  31. Price/Earnings Ratio • P/E ratio is the most commonly used measurement of how expensive a stock is • Formula: price of stock divided by earnings per share • For ZION, it is closing price (23.86) divided by earnings per share (.97) = 24.59 (approximately))

  32. P/E Ratio – What Does It Mean? • It is the price investors are willing to pay for each dollar of profit in the company • The higher the P/E ratio, the more investors are willing to pay for the profits of a company– it becomes a more expensive stock • Companies with high P/E ratios are more riskybecause there are higher investor expectations • If the company doesn’t meet expectations, the stock price will drop, sometimes drastically

  33. P/E Ratios: • N/A: a company with no earnings • 0-10: a stock is either undervalued (cheap) or the company’s earnings are declining • 10-17: For many companies, this is considered fair (accurate) value • 17-25: The stock may be overvalued (expensive), or it may be a company expected to have future high growth • Over 25: Investors have high expectations for future growth; may be overvalued and risky

  34. How Well the Stock Market is Doing Overall

  35. 3 Basic Indicators (Indexes) • Dow Jones Industrial Average (“DOW”) • Lists the 30 leading industrial blue chip stocks • Standard and Poor’s 500 Composite Index • Covers market activity for 500 stocks • More accurate than DOW because it evaluates a greater variety of stock • National Association of Security Dealers Automated Quotations (“NASDAQ”) • Monitors fast moving technology companies • Speculative stocks, show dramatic ups and downs

  36. Ups and Downs • The term bull marketmeans the market is doing well because investors are optimistic about the economy and are purchasing stocks • The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned

  37. Purchasing Stock

  38. Brokers • A Broker is a person who is licensed to buy and sell stocks, provide investment advice, and collect a commission on each purchase or sale • Purchases stocks on an organized exchange (stock market) • The vast majority of all stocks are bought and sold on an organized exchange

  39. Organized Exchanges • A stock exchange is a place where stocks are bought and sold. • There are minimum requirements for a stock to be on an exchange, to ensure only reputable companies are listed • Each exchange has a limited number of seats available which brokerage firms purchase to give them the legal right to buy and sell stocks on the exchange • NYSE, Nasdaq, and American Stock Exchange

  40. How Do Stock Prices Change?Supply vs. Demand • The stock exchange is organized based upon the laws of supply and demand

  41. Stock Supply vs. Demand • With a limited number of shares of stock, • If the demand is high: • Share prices will rise because investors are willing to pay more to get the stock. • If the demand is low: • Share prices will drop because investors are willing to take a lower price to get rid of their shares.

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