Smart Woman Securities
Understanding
the Stock Market
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© 2010 Smart Woman Securities. Materials
1 are
for SWS members’ use only. All rights
Tonight’s Agenda
• Market Update – staying abreast of economic
news
• Introduction to Stocks
• The Stock Market
• Stock Returns
• Risks of Investing in Stocks
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Introduction to Stocks
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What are Stocks?
• Share of ownership in a company
– Proportionate claim to the earnings
and assets of the company
– Share of any dividends paid by the
firm
– As the value of the company
increases, so does your stock’s price
• “Public company” stocks are traded
in the stock market for anyone to
buy or sell
• Tickers
– Abbreviated symbol for the firm
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– e.g. the ticker for Starbucks is (SBUX)
What are Stocks?
• Also known as “equities
• Usually talking about “common stock”
• Usually they represent an ownership claim
• Contrast with a “bond” which is a loan that the investor has made to the firm
• Types of stock
– Common stock - most prevalent; often sold to the public
– Owners can vote to elect member of Board of Directors
– Preferred
– Treasury
• Market Capitalization = Number of shares outstanding x price of one share of stock
• Changes every day
• Large Cap: over $ 5 billion 5
• Mid Cap: between $ 1 and $ 5 billion
StockClassifications
• High growth potential due to market, product, segment,
growth or company-specific situation.
• Hard to identify and usually risker
• Ex. pharmaceutical companies → specific drugs
• Stock that is undervalued
value • Book value > current market price
• Typically sold off by investors for litigation, product
issues, marketing etc.
• Companies with reliable track record of consistently
income paying dividends
• Popular with investors who want a steady inflow of
income
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Source:
[Link]
StockClassifications
• Companies whose earnings tend to follow business cycle.
cyclical • Often more risky than stocks that are less subject to
changes in the business cycle.
• Ex. Oil and natural resources, steel, and housing.
• Stocks that tend to remain stable or rise during periods of
defensive economic downturn.
• Show poorer results during economic upturn.
• Ex. food, beverages, and pharmaceuticals.
• Companies with a well established reputation and a long
blue-chip record of financial stability.
• Usually pays out dividends.
• “Blue-chip” designation is debatable
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Source:
[Link]
The Stock Market
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Financial Markets
• Publicly-traded versus Privately-held
Corporations
– Public company shares trade in a public stock
market where any investor may buy or sell the
shares.
– Privately-held (a.k.a., closely-held) firms are
organized as corporations and have equity, but their
equity shares do not trade in a public market.
• Primary versus Secondary Market Transactions
– Primary = firm sells securities to investors to
raise capital.
– Secondary = investors trade securities among
themselves (the firm is not involved in these trades).
What is the Stock Market?
• The Stock Market or Equity Market is the total
market for stocks/equities
– All stocks available to publicly buy or sell
• The “Market” is Global
– Total Global Market Capitalization is around $70 Trillion
– Almost 60% of global Market Capitalization is outside the
U.S.
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What are StockExchanges?
• Stock Market vs. Stock Exchange
– An “Exchange” is where you buy or sell stocks
– The “Market” is ALL stocks traded on all exchanges
• U.S. and Global Stock Exchanges
– Major U.S.
o New York Stock Exchange (NYSE)
o NASDAQ
– Asia (Japan Exchange Group/Shanghai Stock Exchange/Hong Kong, etc.)
– Europe (Euronext, London Stock Exchange, Deutsche Boerse,
etc.)
• Stocks don’t have to trade on an exchange. Lots of small
companies are said to trade “Over the Counter” or 11
Stock Index
• A Stock Index is a Group of stocks constructed to measure
past performance and trends
• An index can be used as a proxy for how the “market” overall
is performing
• A company’s stock can be, and often is, in multiple indices
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U.S. Broad Stock Indices
• Dow Jones Industrial Average (DJIA)
– The “Dow” is 30 “Blue Chip” stocks selected by the Wall
Street Journal
– Most widely quoted in the press but narrow representation of
the broad market
– Includes American Express (AXP), ExxonMobil (XOM),
General Electric (GE), WalMart (WMT) and Verizon (VZ)
• Standard & Poor’s 500 (S&P 500)
– Primarily large cap U.S. stocks selected by Standard & Poors to
give a broad representation of the U.S. stock market
– The S&P500 is the Standard Institutional Benchmark and measure
of stock market performance
– Most mutual funds and other managers are ultimately compared
the S&P500 for benchmarking 13
Stock
Returns
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Why Do Stock Prices Change?
• Short-term:
o Company Specific News
o Industry News
o Earnings Announcements
o Direct Competitor Makes an Announcement
o General Investor Confidence
• Long-term:
o The company becomes more valuable
o Company has increased earnings, which occurs when a company
is increasing revenue (selling more), cutting costs, or a
combination of both
o People believe the future looks better for a company (valuation)
– Short term fluctuations are often hard to understand so market
timing is tough
– In SWS, we focus on long-term price changes as we can
conduct research here to help us determine what will happen. 15
We look at a minimum investment of one year.
Stock Returns
•
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Stock Returns
•
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Commissions, Dividends and Taxes
• Commissions - fees that a broker charges you to buy or sell a stock
– Always pay attention to fees, especially if you are only buying a few shares. It
may make sense to buy fewer stocks and more shares of each one.
• Dividends -a cash payment made to shareholders
– Dividends will increase your return
– Typically, larger, more mature companies issue dividends
• Taxes- You have to pay taxes on your dividends and realized
investment gains.
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Risks of Investing in
Stocks
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Stocks are risky in the short run, but
• Consider your return based on the S&P 500 this year
– December 31, 2018: 2506.85
– Friday’s close: 2992.07(up 19.4% on the year until Friday
9/20/19)
– But, December 29, 2017: 2673.61 (down – 6.2% for 2018 year)
• Biggest single day losses in S&P 500:
– October 19, 1987 -20.47%
– October 15, 2008 -9.03%
– December 1, 2008 -8.93%
– September 29, 2008 -8.81%
– October 26, 1987 -8.28%
– October 9, 2008 -7.62%
• There have been 16 days with losses of more than 6% in a given day
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Provide good returns in the longrun
Source: Chicago Center for Research in Security Prices, Standard and Poor’s, MSCI, and Global Financial Data.
And, diversification dramatically reduces
the overall risk
Dangers of Market Timing
Annualized Returns for Hypothetical
$10,000 Investment in the S&P 500
(10 Years Ending December 31, 2006)
End Value Return
Fully invested $22,447 8.42%
Minus 10 best days $13,985 3.41%
Minus 20 best days $9,632 (0.37%)
Minus 30 best days $6,909 (3.63%)
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Investing Tips
• Means to an End – Not A Competition
– No One Investment or Investment Style Fits
All
– Pick “Your” Way
• Have a Long-Term View
– Avoid market timing strategies
• Diversify, Diversify, Diversify
– Stocks, Bonds Cash
– Large Cap, Small Cap, International
– Balance of Growth and Value Styles
• Stay Emotionally Balanced
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– Understand Your Risk
Seminar Recap
• Many different types of companies and stocks,
which change with time
• Must understand what meets your investment goals
and invest in those types of stocks and investment
vehicles
• Investors are not always rational, which
leaves opportunities for you to invest
• Stocks are riskier than many other investments, but
provide the best opportunities for return over the
long run.
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