Stock Market Primer
by David Beck 2003
What does the corporation have to do with the stock market?
Remember:
• A “stock” or a “share” represents a part of the ownership of the business firm. • To have shares, you have to
pay
for them!
So first, note that when you buy or sell something you need to know…
THE PRICE!
Prices are listed PER SHARE. So if the listed price is $26.75, that means that EACH SHARE of the company is worth $26.75.
But nobody buys JUST ONE SHARE! You’ll buy, say, 1,000 shares!
At $26.75 a share, that means you’re paying
$26,750!
Here are the key questions, regarding the corporation:
• What is the firm going to do with that money? • And why does it want to do that?
As an investor, you can… •
Buy a stock if you
want… and you can
•
Sell a stock if you
already have it. • This buying and selling takes place in the stock market.
The Stock Exchange
• There are a number of them… • The most common one is in New York City: the NYSE. • It is located on Wall Street.
Stock Measures
• The most common stock measure is the Dow Jones Average. • Another one often cited is the NASDAQ.
If stock prices are generally going up for a while, then…
It is a bull market.
If stock prices are generally going down for a while, then…
It is a bear market.
How do the values (prices) of stocks come to be?
1. Actual value.
This is what the firm itself is really like. Key: MANAGEMENT.
How do the values (prices) of stocks come to be?
2. Perceived value.
This is based on buying and selling. Why is that?
This is where it gets tricky…
People can actually manipulate the value of a stock in this way. They may do this using the practice of
insider trading.
What’s this?
Types of investors
1. Long-term: Puts
stock certificate in the drawer, and earns dividends.
2. Short-term: Buys
low and sells high.
Of course, the key question is:
How do I know what firms to invest in?
Or in other words, isn’t it all just a gamble?
Some keys:
Be educated! Not just about finances, but about what’s going on IN the company!
Be able to read a financial report, and critically evaluate what analysts say.
Again, what’s the key thing to look at?
The firm’s management!
Among other things…
Another key is the price to earnings ratio, or P/E ratio. This is the market value per share divided by the earnings per share.
A high P/E ratio may mean high future earnings. But it should always be compared to:
1. other companies in the industry 2. the market in general 3. the company’s history
One more thing you should know… What if a firm doesn’t want to sell shares of its company, and it still wants to raise capital?
A firm can also…
Sell bonds. Bon d A bond is exactly like a loan a firm gets from someone who buys the bond.
Are you saying that even little old me could lend money to a big business? Bon d
Of course! Even you have money a corporation could use for capital!
Buying a bond.
You would buy a bond if you think the company will do so well, that at a specified future date (when the bond matures) you’ll get back your investment
Bon d
PLUS MORE $$$ !
The difference…
Stocks: You’re buying
OWNERSHIP, and is generally more risky.
Bonds: You’re buying
DEBT, and is generally more safe.