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									Student Notes - Demystifying the Stock Market




            Demystifying the Stock Market
                        Notes and quotes taken from the video of the same name.
                        ______________________________________


Why do companies sell stock to members of the public?

    A company may need to raise a large amount of money and the best way of doing
    this is to sell stock (aka ownership) in the company. The money from the sale of
    stock can be used for several purposes:

        •    Building and/or expansion of operations
        •    Payment of loans
        •    Inventory acquisition
        •    Acquisition of another company

What does it mean to own stock in a company?

        A share of stock represents a share of ownership in a company. If the company
        issues 1000 shares of stock and you purchase 100 shares, you own 10% of the
        company. You literally own part of the company – including all its assets (land,
        building, cash, etc.)

If I’m an owner, how can I tell the company what I think they should be doing?

        As a stock owner you have the right to give input during the annual stockholder’s
        meeting. The most powerful tool at your disposal is if your stock gives you the
        right to vote on issues that can impact the growth of the company: the
        membership of the company’s Board of Directors and strategic decisions.

How can I profit from stock ownership?

        When the company profits so do you, either by

                 a)       an increase in the value of the stock or
                 b)       the receipt of cash dividends (usually paid quarterly)
                          (dividends are not guaranteed)

        There is no guarantee that the company you invest in will succeed. If the
        company fails, you may lose part or all of your original investment. You also hope
        that the company is doing well at the time you need to sell your stock.



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Student Notes - Demystifying the Stock Market




When should investment in the stock market become a part of my personal
finance plan?

    Because of the risk associated with the investment in stocks (if a company goes out
    of business or performs below expectations, you may never recoup your original
    investment), these are things that you should have in place before assuming this
    level of risk:

        1. Maintain a six to nine month cash reserve in a bank account (to be able to
           support yourself in case of an emergency)

        2. Have in place a well thought out retirement plan

        3. Have a well developed insurance plan

I understand that stocks are the riskiest type of investment but they have
historically offered the highest long-term return on investment. If I’m not that big
of a risk taker, what other options are there for me?

    The following investment types are rated from lowest to highest risk…

        1.   Certificate of Deposits (banks and savings and loan institutions)
        2.   Government and corporate bonds
        3.   Mutual Funds
        4.   Stocks

How does the economy influence how I should invest?

    Your investment strategy depends on your personal need for a

        •    Short term return on investment (ROI) or a
        •    Long term return on investment

    In periods of high or accelerating interest rates invest in
        • Certificates of deposit
        • Bonds

    In periods of low interest rates invest in
        • Mutual funds (a diversified stock portfolio managed by a company)
        • Stocks

From whom do I purchase the stock?

    There are three major stock exchanges in the United States – which make it possible
    for the purchase and sale of stocks for most major American corporations.

        •    New York Stock Exchange (NYSE) – largest
        •    American Stock Exchange (also in NYC)
        •    Nasdaq – stock brokers connected via Internet – not housed in one location



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Student Notes - Demystifying the Stock Market




        You can’t purchase directly from these exchanges (nor can you make the
        purchase directly from the company) you must make your purchase through a
        stock broker who is authorized to make the purchase of sale on your behalf.

Once a purchase is made, how can I tell how the value of my stock is
progressing?

        One of the more common methods is to check the stock tables listed in the
        newspaper or on the Internet. Common components of these tables are…

                 Hi Lo (High Low) – a 52 week overview showing the highest and lowest
                 price the stock has been selling for one year from today.

                 DIV (Dividend) – the estimated share of profit that will be mailed to you
                 quarterly for each share of stock that you own.

                 Yld % (Yield Percentage) – the dividend expressed as a percentage rate
                 of return. The higher the percentage the better.

                 PE (Price Earnings Ratio) – the ration of the price of the stock to the
                 company’s annual earnings per share. A PE of 21 means the stock is
                 selling for a price of about 21 times it’s earnings.

                 A company’s PE ratio is useful when it is compared to the overall market
                 average. If the market average is 15 and the company PE is 25 then the
                 stock is priced high compared to the average – this means that the stock
                 has good growth potential. A stock with a PE ratio that is lower than the
                 market average means that it has a low growth potential.

                 VOL (Volume) – how many shares of stock traded the previous day

                 Hi Lo (High Low) – the high and low selling price of the stock for that day.

                 Clos (Close) – the price of the stock at the closing time of the stock
                 market.

                 Net Chg (Net Change) – how much the stock gained or lost in value for
                 that day.


When is the best time to buy a stock?

        It depends on your personal reason for investment. It’s important to track the
        economy – this will give you a broad sense of what the market will do. Some
        easy methods of doing so are by researching the …

             •   Government Index of Economic Indicators – a monthly prediction by
                 government economists of how our economy will perform over the next
                 six months.



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Student Notes - Demystifying the Stock Market



             •   Interest rates – Low or falling interest rates are good for the stock market
                 because there’s little else to invest in that can match the potential.

                 High or increasing interest rates are bad for the stock market because
                 there are lots of other places to invest that can offer equal to greater
                 potential for a healthy return on investment.

             •   Dow Jones Averages – the average change of the stock prices of 30
                 major American corporations that represent the broad economic aspects
                 of our country. It’s the most used barometer purported to be a snapshot of
                 the general economic health of our country.

             •   Standard and Poors – the average change of stock prices of 500 major
                 stocks – it’s used the same way as the Dow Jones Averages.




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