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Stock Market Basics - PowerPoint PPT Presentation

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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Presentation Transcript

Stock Market Basics

Financial Literacy

• Stock Splits

• Beta Values

• Price/Earnings Ratio

• The Stock Market in General

• Supply vs. Demand

• 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

• 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)

Company A:

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

• Company B:

• 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

• 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

Company Name, Ticker Symbol and Stock Exchange

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

Last price at the end of trading yesterday

Price the stock opened at this morning at beginning of trading time

The price analysts think the stock will be at a year from now

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

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

The highest and lowest prices the stock has traded TODAY

The highest and lowest prices the stock has traded during the PAST YEAR

The number of shares traded so far TODAY

The number of shares traded on an average day

The total value of all the stock outstanding

The price/earnings ratio (see definition below)

The net income the company earned for each share of stock

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

A chart of how the stock price has changed today

Charts of price changes for various time periods in the past

• 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))

• 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

• 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

• 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

• 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

• 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

• 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

How Do Stock Prices Change?Supply vs. Demand

• The stock exchange is organized based upon the laws of supply and 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.