Investing 101

1. Investing 101 Mark Ameerali Bcom Finance

2. A Bit About Me • Born New Westminster 1983 • Grew up in the Fraser Valley • Graduated HCHS hon. 2001 • Entered CCC • Transferred to UBC Arts 2002 • Completed CSC • Entered Sauder • Completing Finance

3. The Class Is About YOU! • Congratulations on doing something to inform yourself! • Who are you? Where do you come from? And why are you here? • What do you hope to learn here?

7. Lesson 1: Stocks Main Teaching Points • What is a stock? • Where do stocks come from? • What are the benefits/rights of ownership? • What are the risks of ownership? • What is a stock exchange? • What is a Mutual fund?

8. What is a stock? • A stock is OWNERSHIP in a company. • A stock is a SAY in how the company is run (AGM) • A stock is PARTICIPATION in the profits AND losses of the company • Unlimited Life (never dies)

9. Where do stocks come from? • Not from a mommy and daddy stock! • Stocks are ISSUED from companies. • These issues are handled by the Investment Bankers of the world IE Morgan Stanley, Merrill Lynch, Goldman Sachs, TD, RBC, CIBC etc.

10. Birth of a Stock • Non-Corporations or PRIVATE companies that do very well need external financing to grow to the point where the world is at their fingertips. (ie Starbucks) • You CANNOT simply BORROW all the money you need to run a PUBLIC company. (why?) • These companies decide to sell their company (or portion of it) to the PUBLIC, and (usually) commit to running the company.

12. Conception • Company will approach investment bank i.e. RBC • Investment bankers research the market, the company and (attempt to) price the security. • Investment banks purchase shares and hold them in preparation to sell to the general public. • Pay day comes and stocks are traded publicly.

13. Infancy • Stock is sold to the general public. • Traded on either one or many exchanges. • Initially it will usually not pay a dividend because the company is still growing. • The value of the stock depends on many many things. i.e. Global economy, domestic economy, commodity prices, labour conditions, market valuation techniques, projected earnings.

14. Adolescence • When the stock grows up enough and the earnings of the companies are large enough to distribute, (as opposed to saving to re-invest in the company) the earnings are distributed to the share holders. • There are different ways and times when this will happen. i.e. Tech VS Utility stocks.

15. Maturity • Shares are either much higher than at issue (or much lower). • Stocks have grown (or shrunk) to such a degree that the price is getting too high/low. • A stock split is required to balance out. (what is a split?)

16. Pricing a Stock • Dividend Discount Model • D1/K-g or D1/K • Stock is worth the PRESENT VALUE of its future payouts (Utility Vs Tech) • Stock is worth the Price Earnings ratio. P/E * X (where X = some #) • Castles in the air. (IPOs)

17. Systematic Effects entire mkt i.e. 9/11 Can’t Diversify away Can’t escape it Unsystematic Effects only 1 company (or very few) i.e. CEO leaves. Can diversify away Can escape it. (Chart) Stocks Are Risky!? Systematic and Unsystematic Risk

18. Unsystematic Systematic 10 30 100 1000

19. Break • Take 10. Availability reminder. • BEFORE you run off, find someone in class and explain to them the most interesting thing you have learned thus far.

20. PRO - Capital Appreciation - Votes Dividends Something to talk about CON Volatility Market crashes (corrections) Idiosyncratic (firm specific) risk Taxes (Capital Gains Tax) Benefits, Rights, and Risks of Ownership

21. Stock Exchanges • There are different types of exchanges. • Virtual • Physical • NYSE – Physical location with human traders • TSE – Virtual Exchange all computer based.

24. Exchanges • Stock Exchanges are simply a medium for exchange of the possession of ownership of companies. • They also help to enforce the rules and regulations imposed on public companies. i.e. listing requirements, financial reporting etc. • Exchanges in England Germany Asia Many in the USA, Toronto (Vancouver).

25. Mutual Funds • What is a Mutual Fund???

26. Mutual Funds • Pooling of assets of many to create large buying power. • Imagine what it would cost to purchase 30 different stocks? • Pool Assets. • Professionally managed. • Diversified.

27. Mutual Funds • Many different kinds Michelle Quigg segment on ethical investing. There are funds who only invest in “ethical” companies for example no tobacco producing companies or animal testing pharmaceutical companies.

28. Mutual Funds • Many different kinds of mutuals. • Sector Funds (Metals, Energy, Tech) • Ethical Funds • Aggressive Funds • Balanced Funds • Conservative Funds

29. Mutual Fund Pros • Professionally managed • Diversification for cheap. • RRSP, RRIF eligible in most cases • Flexible (Can concentrate or not)

30. Mutual Fund Cons • Uncertainty – You never know which fund will perform best • Fees – Management Expense Rato of MER on an actively managed fund hovers around 2.5% that cuts into gains. Difficult to beat benchmark. • Participate in Downside risk. (Cant hedge or short sell)

31. Stock Competition • Pick a 5 stock portfolio TODAY. • Portfolios will be recorded next day. • Follow them for the duration of the course. • Read the news periodically follow what is going on with them. • Person with the highest (4wk) return who can explain the news over the duration of the game wins.

32. Questions?

33. Extra • Bell Curve. • Volatility of returns. • Balance Sheet • Cashflow statement • Income Statement • Prospectus. • Business models (sole, partner etc)