Stocks EconomicsMrs. Huff
TARGET! • Students will learn to analyze and evaluate stocks using economic data.
What is "Financial Literacy"? • The ability of an individual to make appropriate decisions in managing their personal finances. • Saving vs. Investing • Stocks vs. Funds vs. Bonds • Cash Investments • Life Insurance, Mortgages, etc.
The Pyramid of Risk and Reward Highest Risk ~ Highest Potential for Return or Loss Stocks & Real Estate Bonds & Certificates of Deposit Lowest Risk ~ Lowest Potential for Return or Loss Savings Accounts
Random Factoid Time! • According to a new report, you can reduce your stress level at work by almost 20 percent by doing this. • Chewing Gum • Each one of these contains close to 8,000 calories. What are they?? • Average trick-or-treat bag • 37% of Americans have this with breakfast. • Soda
What is STOCK? • Shares/Equity ~ same as stock. • Shareholders ~ Owners of the company. • Board of Directors ~ Group elected by the shareholders that make the decisions of the corporation. • Stock ~ A share of ownership in a company. • What does it represent? • A claim on the company’s assets & earnings.
Stocks vs. Bonds Stocks Bonds Is Debt Purchasers are OWEES. (Company owes them $$.) Company must pay this back after a specified period of time. • Is Equity • Purchasers become OWNERS. • Company never has to pay this back. They are selling ownership.
Role of Risk Positive Negative If the stock decreases in value, (and you sell), you LOSE! Company goes bankrupt, you LOSE! • Greater potential for return on your investment. • Average stock returns 5-6% each year. • Ex. 1 share of GE purchased in 1892 would now be worth more than $184,000! Wow!
Types of Stock • Classes of stock ~ • Usually differentiates between different levels of voting privileges. • BERK.A • BERK.B • Common Stock • Majority of stock • Stockholders have voting privileges • Some may pay dividends • Preferred Stock • Fixed rate of dividends • May have voting privileges • “Preferred” status if they go bankrupt.
What causes stock prices to change? • Market Capitalization • Stock Price x # of shares outstanding • Large Cap ~ > $10 b. • Mid Cap ~ $2 - $10 b. • Small Cap ~ less than $2b • Mega Cap: >$200b • Micro Cap: $50m - $300m • Nano Cap: <$50m • Earnings • Profit a company makes • Supply & Demand • The stock MARKET is a MARKET of buyers and sellers.
P/E Ratio • < 15 – Bargain • 16-25 – Healthy • 26-40 – Overvalued • > 40 – Way Overvalued • P/E Ratio ~ Price: Earnings Ratio • Current Stock Price /Earnings per Share
Ticker Symbols • Single-letter ticker symbols • A: Agilent Technologies • B: Barnes Group • C: Citigroup • D: Dominion Resources • E: EniSpA • F: Ford Motor Company • G: Genpact • H: Hyatt • I: (Open) • J: (Open) • K: Kellogg • L: Loews Corporation • M: Macy's, Inc. • N: NetSuite, Inc. • O: Realty Income Corporation • P: (Open) • Q: Qwest Communications International Inc. • R: Ryder System Inc. • S: Sprint Nextel • T: AT&T • U: (Open) • V: Visa, Inc. • W: (Open) • X: United States Steel • Y: Alleghany Corporation • Z: (Open)
How do stocks trade? • NASDAQ • (National Association of Securities Dealers Automated Quotation) • No physical location – all done through computers. • New York Stock Exchange (NYSE) • “Big Board” • Largest stock exchange • Physical location on Wall St. • OTC ~ Over the Counter • Small, risky stocks – usually in end in .ob or .pk
Major Stock Indices • Standard & Poors 500 • Index of the top 500 stocks. • A broader view of the health of the markets. • Dow Jones Industrial Average (DJIA) • Index of the top 30 stocks. • Used to measure the overall health of the stock markets.
Where are stocks headed this/next year? • Super Bowl Indicator • NFC winner = Good year for stocks • AFC winner = Bad year for stocks • January Effect • If stock prices rise for the month, or even the first week, they will be up for the year as a whole. • Reent Data: • 1-4-10: 10,583.96 • 1-29-10: 10,067.33 • 12-27-10: 11,577.51 • 1-3-11: 11,674.76 • 1-31-11: 12,092.15 • 12-26-11: 12,217.56 • 1-2-12: 12,359.92 • 1-30-12: 12,862.23 • 12-31-12: 13,435.21 • 1-4-13: 13,433.25 • This is accurate 90% of the time. NFC = Just another reason to root “Go Pack!”
More Random Factoids! • According to experts, you are never more than 6 feet away from one of these. • Spider • 9 of these are sold every second in America. • Boxes of Jell-o • This celebrity makes $8 a SECOND! • J.K. Rowling • According to a new article, this is the #1 way to end a bad date. • Spill a drink on yourself
Reality • Stocks are volatile as so much depends on the emotions of the investors. • As much as people try to predict stocks, the markets are near impossible to predict.
How do you buy a stock? • All sales (either to buy or sell) involve commission. • Commission is the fee that goes to the brokerage. This can be dependent on whether it is a limit or market order. • Market ~ Buy/Sell at whatever the “market” price is. • Limit ~ Buy/Sell at a particular price. • Through a stockbroker: • Live human • Or • On-line ~ Scottrade, E*Trade, etc.
Bulls and bears, Oh My! • Bears • Economy is stinky. • Recession may be looming. • Unemployment is going up. • Stock prices are going down. • Bulls • Economy is GREAT! • GDP is growing. • Low unemployment. • Stock prices go UP!
The rest of the farm • Pigs • High risk investors. • Want short term profits. • Impatient and greedy. • Remember, most pigs get slaughtered. • Chickens • Afraid • Only choose “safe” investments. • Sheep • An investor who lacks a focused trading strategy and trades on emotion and the suggestions of others, including friends, family and financial gurus
And the zoo. . . • Lemmings? • The act of following the crowd into an investment that will inevitably head for disaster. • In the animal kingdom, a lemming is a rodent known for periodic mass migrations that occasionally end in drowning. • Ostriches? • A slang term given to investors or other market participants who ignore important pieces of information or situations, which have the ability to impact them or the market in which they operate.
Tax Implications ~ Capital Gains Short Long Hold stock more than 1 year before selling. Taxed at federal rate of 15% and then your state rate. • Hold stock less than 1 year before selling. • Taxed at “your” income tax bracket.
What about "selling short"? What is this? How does this work? Investor A “borrows” stock from XYZ corporation at $10 a share. A immediately sells the stock. When the stock drops in price, say to $5, A buys it back and returns it to Investor B. Technically A has bought it at $5 and sold it at $10, thereby making money. • Selling short is a method of trying to make money based on a stock declining in value • Be cautious, this is tricky!
Theories. . . • We already talked about the hemline theory. • Short skirts ~ Good for stocks. • Super Bowl Indicator • Win by NFC team good for stocks, win by AFC not so good. • Lipstick Indicator • When women are concerned about the economy they treat themselves to low-cost luxuries like lipstick. Thus, the more lipstick they buy, the worse things look for stocks.
January Effect • This is the only “theory” that is right more often than not. In fact, it is right 90% of the time. • If stock prices rise for the month, or even just the first week, they will be up for the year as a whole. • In reality, the stock market is legal, acceptable gambling. Your guess is generally as good as a paid professional’s!
Diversify – and invest for the LONG RUN. Secret to Success?