WHAT IS STOCK?
Stock represents ownership in a corporation
Stock, also called equity, is bought and sold
in portions called shares
Shares represent a percentage of ownership
STOCK EXCHANGES
New York Stock NASDAQ
Exchange Created in 1971
Oldest, largest, and Trading is done
most influential electronically (no face-
exchange in U.S. to-face meeting of
In general, handles representatives of the
largest and most buyer and seller)
influential companies
Trading takes place on
its floor
WHY A STOCK MARKET?
Like other types of markets, the stock market links
buyers and sellers
The stock market provides investment opportunities
for buyers of stock
The stock market provides businesses with the
opportunity to raise capital
Initial Public Offering (IPO): when a company sells
stock in itself for the first time
Going Public: term used when a company is
planning an IPO
HOW DOES ONE BUY STOCK?
Stocks are bought through a stockbroker
Brokers charge a fee (%) per transaction
Two ways to earn profits with stocks:
1. Dividends – quarterly payments to stockholders
from company’s profits.
2. Capital Gains – selling shares at a higher price than
you bought them.
STOCK CAN BE CLASSIFIED BY
WHETHER OR NOT IT…
PAYS DIVIDENDS… …OR GIVES
Income Stock: pays STOCKHOLDERS A
dividends (payments VOTE ON COMPANY
made quarterly – every POLICY
three months) Common Stock:
Growth Stock: pays no investors are voting
dividends because owners
company reinvests $$$ Preferred Stock:
into itself investors can’t vote, but
get paid before
common stockholders
CHARACTERISTICS OF STOCK
(abbreviations you’ll see in a stock report)
Sym: stock’s ticker Close: share price at
symbol the end of the day
Div: shown if co. pays Hi and Lo: extremes for
dividend; shows the day
amount of div. in dollars PE: price-to-earnings
per share ratio; price divided by
Yld%: yield is dividend company’s earnings per
divided by share price share
Net Chg: how much 52 Week Hi and Lo:
stock moved up or extremes for the past
down during the day year
MUTUAL FUNDS
Mutual funds: professionally managed pools of investors’ money
invested according to predetermined investment strategies
“professionally managed”: the mutual fund company makes daily
decisions about buying/selling in the fund
“pools of investors’ money”: investors buy individual shares in the
funds
“predetermined investment strategies”: each mutual fund focuses on
one or more types of stocks (ex: telecommunication stocks), bonds
(ex: municipal), or various combinations (ex: “balanced fund” = 60%
stocks, 40% bonds)
Advantages of mutual funds:
1. instant diversification (one fund can contain hundreds of stocks,
bonds, etc.)
2. easy to buy and sell (liquid)
BUYING ON MARGIN (Margin Buying)
Buying on margin is buying stock on credit
Investors must start an account with a
minimum balance of $2,000 (they can put in
more if they want)
Investors can now borrow as much as the $
amount in their account
Ex.: with $2,000 in their account, investors
have $4,000 in purchasing power
STOCK SPLITS
Splits are initiated if a company thinks that its
share price is too high to attract investors
Splits occur when a single share is divided up
into more than one share
Price is divided along with the stock
Ex: 100 shares @ $50 per share become 200
shares @ $25 per share
After a stock split share prices often rise
THE DOW
The Dow Jones Industrial Average tracks the price
changes of 30 of the largest companies in the
economy in various industries
It can indicate a “bull market” (average price of stock
rising) or a “bear market” (average price dropping
Using a few representative stocks, it is supposed to
measure the market and mirror the economy
Critics of the Dow claim it is not accurate due to only
30 of the strongest (“blue-chip”) stocks being
included…but since 1896 it does have a strong track
record