Stock Market Investing

Stock Market Investing Advanced Proverbs 23:5 "Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle." Proverbs 8:10 "Choose my instruction instead of silver, knowledge rather than gold, for wisdom is more precious than rubies, and nothing you desire can compare with her." REVIEW  Stocks (shares) are offered to enable a company, that is in need of long-term financing, to sell stocks in order to exchange for cash. This is the main method of raising business capital. The other is bonds. When the corporations issue these stocks they are said to be publicly held. An IPO is an initial public offering—the first time stocks are issued.   If you own shares of a company you may be entitled to vote, receive dividends, right to sell, liquidity or residual rights. Stock market investing formula    Total Investment Value = (________)(________) + ________ – ________ (# of Shares)(Share price) + dividend – broker fee Dividend: a set price that the company pays its shareholders (a % of their profits) Broker Fee: a fee that a stock broker charges for buying or selling stocks   Stock Markets  To trade stocks (buy or sell), you must purchase through a stock-broker who works with a stock exchange. Bear vs Bull Market Bear vs Bull Market   A market that is RISING is called a Bull Market; A FALLING market is called a Bear market.  “The markets are bullish on gold” means people are buying gold stocks because they are increasing steadily. Learning the Lingo…      In your glossary, define each of the following.  Examples optional        Bear vs. Bull market Diversification (as in „Diversified portfolio‟) Bid (High), Ask (Low) Prices & Volume Floor Trader vs. Stock Broker Blue Chip Stocks vs. Growth Stocks vs. Penny Stocks Small Cap vs. Large Cap Dividend rate vs. Broker Fee Common vs. Preferred stock P/E Ratio Stock splitting Liquidity High-risk strategies: 1) Buy on Margin    Buying Stock on Margin Purchase stock like normal, but you borrow the money to make the purchase Advantages?   Get in on a good deal quickly Don‟t need to sell other stock or have money up-front  Disadvantages?   Charged interest on loan If share prices goes down, you still owe original amount, plus interest, plus broker fees! High-risk strategies: 2) Selling Short     Selling Short is the opposite of the usual „buy low sell high‟ strategy of buying stocks Selling short is a bet by an investor that a stock will go down in price. Strategy: Look for companies that are about to fall in price. Advantages?  Can make money on stocks going down If price goes up, you lose double Disadvantages?  High-risk strategies: 2) Selling Short  So how do short sellers make money? Well, they are betting that the stock they sell will drop in price. If the stock drops, the short sellers buy back the stock at a lower price and return it to the lender. For example, if an investor thinks Ben's Bowling Business (BBB) is overvalued at $25 and is going to drop in price, he or she may borrow the stock and sell it for the $25. If the stock goes down to $20, the investor, after buying it off the TSX, and returning it, would make $5 per share. However, if the stock went up to $30, the investor would be at a loss of $5 per share. High-risk strategies: 3) Stock Options   A privilege, sold by one party to another, that gives the buyer the right to buy (call) or sell (put) a stock at a set price within a certain time period . Advantages?  You have the option of buying more stock in the future at a set price, even if the market changes  Disadvantages?  It costs money to buy an option, on top of broker fee High-risk strategies: 3a) Call   An option contract giving the owner the right (but not the obligation) to BUY a stock, at a set price, within a set time period. Advantages?  Ex: XIU trades at $60.00 You can buy a call to purchase XIU at $62.00 for 3 months. If it goes up to $65.00, you can still buy it at $62.00 & make $3/share If the price drops, your money used to buy the call option is wasted. You wouldn‟t want to buy it at $62  Disadvantages?  High-risk strategies: 3b) Put  An option contract giving the owner the right (but not the obligation) to SELL a stock, at a set price, within a set time period.  Advantages?  Ex: ACE.B trades at $35.00 You expect it go down, so you buy a put for the right to sell ACE.B at $33.00. If it goes down to $30, you can still sell it for $33!  Disadvantages?  If the price goes up, your money used to buy the put option is wasted. You wouldn‟t want to sell it at $33! Graphical example  The possible payoff for a holder of a put option is shown by the following diagram: Strategies when using Options  Purchase a „call‟ when you expect the stock to go up in price. Wait, and then   1) Exercise the call option. (buy more at a lower price!) 2) Sell the call option to someone  Purchase a „put‟ when you expect the stock to drop in price. Wait, and then   1) Exercise the put option. (sell at the higher price!) 2) Sell the put option to someone