Chapter 11 The Stock Market Notes

The Stock Market Buying Stock • • • Corporations raise money by issuing stock – ownership in the corporation. Stock is issued in portions called shares. Stocks are also called equities – claims of ownership in a corporation. Benefits of Buying Stock • Dividends - Paid out usually four times a year (quarterly) - Size depends on the corporation’s profits • Capital Gains - Selling the stock for more than it was paid for. - Capital Gain vs. Capital Loss Types of Stock • Income Stock - Pays dividends at regular times during the year. • Growth Stock - Pays few or no dividends. - The issuing company reinvests its earnings in the business thus the stock will increase in value over time. Common Stock - Investors who buy stock are voting owners of the company. - 1 vote for each share owned. Preferred Stock - Nonvoting members of the company. - Receive dividends before the owners of common stock. - If the company goes out of business, preferred stockholders get their investments back before common stockholders. Stock Splits • • • • When each single share of stock splits into more than one share. Done when the price of stock becomes so high that it discourages potential investors from buying it. Google at $500 a share would be split to 2 stocks at $250 per share. Why would stock owners want this to take place? Risks of Buying Stock • • The firm selling the stock may earn lower profits than expected, or it may lose money. Results include… - smaller dividends, if any at all. - price of stock decreases to less than it was originally paid for. How Stocks are Traded • Stockbroker – a person who links buyers and sellers of stock. - Many advise individual investors for a fee. • • • Stockbrokers work for brokerage firms, or businesses that specialize in trading stocks. Costs are covered and profits are earned by charging a commission, or fee, on each stock transaction. Sometimes they act as dealers of stock, buying shares at lower prices and selling them to investors at higher prices (spread). Stock Exchanges • • • Markets for buying and selling stock. These markets act as secondary markets for stocks and bonds. Major U.S. stock exchanges include… - The New York Stock Exchange (NYSE) - The Nasdaq - the Internet New York Stock Exchange • • Handles the stock and bond transactions for only the largest and most established companies in the country. The companies listed on the NYSE are referred to as blue chip companies and are in high demand. The OTC Market • Over-the-counter, or electronic trading, takes place when an investor buys directly from a dealer or trader who will search the market for the best price. Nasdaq • The National Association of Securities Dealers Annotated Quotations. - The American OTC market. Stock Futures • Futures – contracts to buy or sell commodities at a specific date in the future at a price specified today. o Examples….grain or livestock • Markets include… o The New York Mercantile Exchange and the Chicago Board of Trade Stock Options • • • Options – contracts that give investors the choice to buy or sell stock and other assets. Investors may buy or sell a particular stock at a particular price up until a certain time – 3 to 6 months This option is called a call option. Example • • • • You agree to pay $10 per share today for a call option of $100 per share within 6 months. This gives you the right to purchase a certain stock at a certain price within that time period. If the price of the shares climb to $115 per share you would make the purchase at $100 per share and earn $5 per share. If the price were to drop to $80 per share you could refuse to pay the option and purchase the shares at that price. Put Option • The option to sell shares of stock at a specified time in the future. Example • • • • You, as the seller, pay $5 for the right to sell a particular stock that you do not yet own at $50 per share. If the price per share falls to $40, you can buy the share at that price and require the contracted buyer to pay the agreed-upon $50. You would then make $5 per share. If the price rises to $60, you can throw away the option and sell the stock for $60. Daytrading • • • Daytraders try to predict minute-by-minute price changes based on computer programs and tell the trader when to buy and sell. Daytraders might make dozens of trades in a given day. The risks are high and traders can lose a great deal of money. Measuring Stock Performance • Bull Market… o When the stock market rises steadily over a period of time. • Bear Market… o A steady drop in the stock market over a period of time. The Dow Jones • The Dow Jones Industrial Average since 1896 tracks 30 large companies and reports daily on the trades that have taken place in those specific businesses. S & P 500 • • • The Standard and Poor’s 500 gives a broader view of the market by tracking 500 different stocks. Most are mentioned on the NYSE. It is through these two reports that investors are able to base conclusions on what their investments may do in the future.