National Council of Economic Education Carolyn Shirk Vice President 849 Tame Deer Drive Winfield, PA 17889 Cell: 570-975-5149 570-374-9467
Investment Basics Stock Market IQ Quiz
Investment Basics • True or False • Stocks are items found in the storeroom of a grocery store. • Only rich people invest in the stock market. • Most stocks on the stock market are sold by the United States Government. • If the stock market goes up 30 percent one year, it will fall by 30 percent in the next year.
Investment Basics • Any stock that goes up in price must eventually come back down. • Bears, Bulls, and Pigs are found in the stock market. • Stock prices are set by the Securities and Exchange Commission, a regulatory agency of the U.S. government. • Stock markets are open on business days around the clock, around the world.
Investment Basics • Sometimes companies buy their own stocks on the stock market. • It is hard to buy a good stock today because all the good ones have already been purchased. • Buying stocks is a sure way to make money. • Corporations sell new issues of stock on the New York Stock Exchange.
Investment Basics • “Insider” stock trading means that trading stocks takes place inside a building. • People can buy stocks on the internet. • When the stock market goes up, it causes the economy to grow. • From Learning from the Market, © National Council on Economic Education, New York, NY
Investment Basics Different Types of Investments: • Insured Savings Accounts • Savings Bonds • Certificates of Deposit • Treasury Bonds • Corporate Bonds • Mutual Funds • Stocks • Collectibles • Commodities
Investment Basics The RISK to RETURN Relationship: The RISKIER the Investment - The HIGHER the Return
Investment Basics The Difference BetweenStocks,Bonds,andMutual Funds Stocks:You own a piece of the company You make money if the company does well Bonds:You loan money to a corporation or government You earn the interest Mutual Funds:You own one portion of a collection of stocks, bonds, or other securities
Investment Basics The Three Main Markets: NYSE: New York Stock Exchange Oldest, largest, best-known stocks NASDAQ: Large, mid-sized, and small growth companies AMEX: American Stock Exchange Mid-sized growth companies
Investment Basics The Difference BetweenLargeand SmallCompanies: Large: • Often have high prices • Low risk of failure • Usually pay regular dividends Small: • Potential for growth is greater than for larger companies • Generally prices are lower
Investment Basics Common Stocks: • Pay dividends based on performance of the company • Have higher risk but may have higher reward Preferred Stocks: • Dividend amount is preset • Dividends are paid on preferred stocks before common stocks • Have lower risk but may limit reward
Investment Basics • Stock Splits: • More shares are created at a lower price per share • Stockholders profit if stocks go up • Indicated with an (s) in the paper • Ex: Dell $109 $54
Investment Basics Other Terminology: Blue Chipsthe largest and most profitable stocks Bull Market a market that is rising Bear Marketa market that is falling
Investment Basics Why long term investing is the best route?
Investment Basics What stocks should I buy? PE Ratio or Price-to-Earning Ratio • Market Value Per Share/Earnings per Share If a company is currently trading at $43 a share and the EPS over the last 12 months were $1.95 per share, the P/E ratio for the stock would be $22.05 ($43/$1.95)= $22.05
Investment Basics Earnings Per Share • Earnings per Share or EPS is the firm profit divided by number of shares. • Find EPS and PE ratios on the internet & newspaper
PE Ratio • More earnings per share given stock price results in a lower PE ratio and a better buy. • PE Ratios show how much an investor is willing to pay per dollar of earnings
PE Ratio • PE Ratios show how much an investor is willing to pay per dollar of earnings • Mattel: An investor is willing to pay $15.81 for every dollar of earnings
Apple Inc. • Beta = 1 means that the stock and market change by the same percentage. • Larger beta means a larger change than the market on any given day. • Beta = % change in stock return / % change in market return.
Where to get more information • American Stock Exchange- www.amex.com • NASDAQ- www.nasdaq.com • NYSE- www.nyse.com • CNNfn- www.cnnfn.com • Google -http://finance.google.com/finance • Database of Corporate Information- www.sec.gov/edgarhp.htm • Yahoo! Finance- http://finance.yahoo.com
Economics and the Stock Market • Micro vs. Macro economics • Going from a good idea to a corporation
Micro vs. Macro Microeconomics Microeconomics studies the behavior of the consumer, household, or firm. • Scarcity and choice • Utility and profit maximization • How do we allocate our budget, time? • How do firms allocate resources to produce goods and services? • Efficiency
Micro vs. Macro Micro and the Stock Market • Look at one company: • How does this company make its product? • Who buys this product? • Does the company have good managers? • Look at one industry: • How much competition in the industry? • Is the industry young or old? What stock brokers and mutual fund managers get paid to do!
Micro vs. Macro Macroeconomics Macroeconomics studies the economy as a whole or as aggregates and attempts to predict or forecast changes in national output, unemployment, and inflation.
Micro vs. Macro Macro & the Stock Market • Look at the whole economy: • Inflation: Producer and Consumer Price Indices (PPI & CPI) • Unemployment: Unemployment rate • Interest rates: actions of the Fed • Productivity • Use information to estimate good times to buy and times to sell. Note: an “active” investor thinks about how these indicators will affect the economy in 3 months!
When is the news good? • Example: decrease in the unemployment rate: • Good: sign of a growing economy increased consumer spending increased profits. • Bad: indication of future labor shortages increasing wages inflation fed increases interest rates decrease profits, slow growth.
U.S. Department of LaborBureau of Labor Statistics “Economy at a Glance” http://www.bls.gov
Going public Going Public: From a Good Idea to a Corporation • Product idea: on-line financial services including banking, investments, retirement planning, estate planning, legal services, etc. • Need funds to start business - find investors “venture capitalists.” • Each investor owns a stake or “share” of the corporation and has limited liability.
Going public Going Public: From a Good Idea to a Corporation • Suppose the company is doing well. You need more money - go public, “initial public offering” • Going public: investment bank creates a prospectus and buys all shares of stock and resells them at a set price to the public • A “tombstone” is the public notice of an IPO
Important to Stress at the End of the Game • Diversification • Mutual Funds • Long-Term Proposition