Young Investors Guide: Stock Basics for Successful Trading

1. YoungInvestors Stock Basics What you need to know, to trade well

2. Introduction • Stocks: Earn potentially large sums of money easily • Common part of Investment Portfolio • Fast-growing investment option • Advances in technology allow more people to trade • Significant Risk • Proper Education of your investments is Key to Success

3. What are stocks? • A share in the ownership of a company • Represents claim on assets and earnings • More stock = more ownership of company

4. Being a shareholder • Being a shareholder entitles you to a portion of the company’s profits and claim on assets • Profits paid in dividends, more shares = more profits. • Claim on assets is only relevant if company goes bankrupt • Get paid after creditors have • Limited Liability

5. Debt vs. Equity • All companies need to raise money at some point • Debt Financing: take loans, selling bonds • Equity Financing: Issuing stock to public

6. More detail: Debt Financing • A debt investment (bonds) guarantees the return of money (principal) along with promised interest payments. • Safe investment • Usually interest rate is very low

7. More detail: Equity Financing • When you become an owner you take the risk of company not being successful • Claim on assets of company as shareholder is less than creditors • Can earn a lot of money if company is successful (stock price increases) • Can lose entire investment if company is not successful.

8. Risk • No guarantees with stocks • Not all companies pay dividends • Without dividends, investor can only make money though appreciation of stock value • Stock may also depreciate completely also • With more risk comes more reward • Historically, long term average return is around 10-12%

9. Different Types of Stocks • Common Sock: • Majority of stock issued in this form. • Represent ownership in company • Claim on assets and profite • One vote/share to elect board members

10. Different Types of Stocks • Preferred Stock • Usually does not come with same voting rights • Usually guaranteed fixed dividend forever instead of variable dividends which are not guaranteed • Get paid before common stockholders

11. How Stocks Trade • Stocks traded on exchanges • (Physical & Virtual) • Purpose of stock market = facilitate exchange of securities • Primary market – securities are created (IPO) • Secondary market – investors trade previously-issued securities

12. How Stocks Trade • NYSE • Much of trading done face-to-face on trading floor • Order -> brokerage firms-> floor brokers-> specialist-> buyer • Auction based market • Nasdaq • Virtual (Over-the-Counter) • No central location or floor brokers • Brokerages act as market makers

13. What Causes Stock Prices to Change? • Market forces (supply & demand) • Price movement of a stock indicates what the company is worth • Value of a company = market capitalization • Most important factor – earnings/profit • Analysts base future value of a company on earnings projections • Hundreds of variables, ratios & indicators to determine price

14. How to Buy Stocks • 1) Using a Brokerage • Most common way • Full service brokerage  lots of full-time advice, but more expensive (beginner investors) • Discount brokerage  much cheaper, but no advice (expert investors)

15. How to Buy Stocks • 2) Dividend Reinvestment plan (DRIP) or Dividend Investment Plan (DIP) • Less common • Individual companies allow shareholders to purchase stock directly from the company at a reduced cost

16. How to Read a Stock Table

17. How to Read a Stock Table • Columns 1 & 2  52 week high’s and low’s • Columns 3 & 4  Company name and Stock Code • Columns 5 & 6  Annual DPS and Dividend Yield (DPS/PPS) • Column 7  Price to Earnings ratio (higher the better) • Column 8  Trading Volume • Columns 9 & 10  Day’s high’s and low’s • Columns 11 & 12  Closing Price and Net change • To find quotes, enter the company name (or ticker) into any major financial site like Yahoo! Finance, CBS Marketwatch, or MSN Moneycentral.

18. The Bulls, the Bears, the Farm • Bull Market - • Economy is strong and growing • People are finding jobs and GDP is increasing. • Best time to invest in stocks as they are going up • Bear Market- • Economy is weak and recession is looming • This causes stocks to fall and make it difficult to pick profitable stocks • Can still trade in a Bear market by something called “short selling” • The Farm - • Other symbolic animals are chickens and pigs • Chickens represent investors scared to trade and lose money • Pigs are greedy investors that trade high risk stocks in order to win big

19. Summary • Stocks mean ownership of portion of company’s assets + voting rights • Lose Big/Win Big depending on Stock Choices • Main Stock Types: Common and Preferred • Stock Market: Buyers and Sellers meet to Trade (i.e. NASDAQ) • Bonds: Debt, Guaranteed Return on Investment (Less Return)

20. Summary • Buy stocks using brokerage or divident reinvestment plan (DRIP) • Stock Prices Change Randomly • Supply and Demand for the Stock Influences Price the most • Earnings of the Company affect Demand of a Stock • Predicting the Future Prices of Stocks Correctly = Success