Stock Market Basics

Why Learn About Stocks

• The stock market is the core of
Capitalist economic system
 A Stock is a share of ownership in the
assets and earnings of a company
 A Bond is a type of debt that a company
issues to investors for a specified amount
of time.
 The Stock market is a general term used
to describe all transactions involving the
buying and selling of stocks and bonds
issued by a company
Mutual Funds

• Investors pool their money

• The manager will invest in a variety of
stocks, bonds and other securities
• Mutual funds offer diversification (not
“putting all your eggs in one basket”)
• You can start with as little as $1000 or
less
• Broker commissions are lower than in
stock purchases
Why Companies Issue Stock

When a company would like to grow, it

issues stocks to raise funds and pay for
ongoing business activities
• It is popular because:
 The company does not have to repay the
money
 Paying dividends is optional
• Dividends are distributions of earnings paid to
stockholders
Why People Buy Stock

• The very best way for your money to

grow over a long period of time is to
invest in stocks
Risk vs. Return

• On average, stocks have a high rate of

return
 The increase or decrease in the original
purchase price of an investment
• Higher rate of return = greater risk
 Uncertainty about the outcome of an
investment
• Stocks provide portfolio diversification
 Money invested in a variety of investment
tools
Ways a Stock Value Can Change
• The dollar value increases or decreases
• Stock split occurs – shares owned by
existing stockholders are divided into a
larger number of shares
 Example: if you own 100 shares, a 2 for 1
split would give you an extra 100 shares
for a total of 200, BUT the price will be half
of the original. Your total investment value
won’t change
• A merger of two companies
• Dividends are paid
Beta Value

• The beta value measures a stock’s volatility

compared to overall changes in the stock
market
 If a stock has a beta of +1.5 and the market goes
up 10%, the value of the stock is expected to rise
15%
 Average beta is between +0.5 - +2.0
 Beta value can be found under “Key Statistics”
 A higher beta indicates more risk because the
stock price change will be more drastic
Remember…

• You can lose money in the stock

market:
 Interest rate risk:
• When the interest rate goes up, stock prices go
down
 Inflation risk:
• Inflation can impact interest rates, thus
causing stock prices to decrease
 Business risk:
• How well or how poorly the business in which
you are invested is doing
Risks

• Financial risk:
 If a company has too much debt, it will not
be able to make payments, and price will
drop
• Market risk:
 Stocks go up and down in relation to the
market as a whole
• Political and regulatory risk:
 Changes in the tax or legal environment
may affect stock value
Reading Stock Quotes
Year to Date Percent Change

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Year to date percent change is the

stock price percent change from
January 1st of the current year
 If a stock was $43.00 on January 1st and
$36.00 on July 30th,, the percentage
change would be -16.3%
52-Week High Low

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

52-Week High & Low shows the

highest and lowest prices the stock
was sold per share during the last
52 weeks
Stock Name – Ticker Symbol

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

Stock – Each company’s stock is

provided with an abbreviated
trading symbol name
Dividends per share

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Dividends per share is the total cash paid

to common stockholders per share
annually
 Helpful when determining the type of stock
 If a company paid $10,000 in dividends for
30,000 shares, the dividends per share would
be $0.33
Dividend Yield Percentage

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Dividend yield percentage is the dividend

expressed as a percentage of the price of
the share
 If a company paid $1.25 in dividends for a stock
with a market price of $50.00, the dividend yield
percentage would be 2.5% (1.25/50)
 Helpful to know how much income to expect. A
company paying high dividends is not reinvesting
money to grow.
Price/Earnings Ratio
YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Price/earnings ratio is the closing price of

the share compared to the annual
earnings per share
 If the stock’s market price is $50.00 and the
earnings per share is $2.25, the P/E ratio is 22.2
• It means that for every dollar the company
earns, the stock’s market price is worth $22.00,
or investors are willing to pay $22.00
 A high number indicates people are optimistic
about the company and health of the market.
Volume

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Vol 100’s is the number of

transactions to the share on the
reported day
 Represented in hundreds (take the number
and add two zeros)
High and Low

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• High and low entries represent the

high and low selling price of one
share for the previous day
Close

YTD 52-Week Stock Div YLD P/E Vol High Low Close Net
% High Low % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Close is the price of the last share

sold for the day
Net Change

YTD 52-Week Stoc Div YLD P/E Vol High Low Close Net
% High Low k % 100s Chg

-16.3 43 36 AAR .33 2.5 22 1479 40 37 39 .027

• Net change is the difference between

the closing price of the share from
the prior day and the current day
Stock Quote From Yahoo
Name of stock, exchange
and ticker symbol

Current price

Today’s change in dollars

and percent

Yesterday’s closing price

Today’s opening price

Shares traded
Today’s range of prices today Price/Earnings Ratio

Range of prices over past Earnings per share

year

Dividend amount per share

and percentage
How Well the Stock Market is
Doing Overall
3 Basic Indicators

• Dow Jones Industrial Average (“DOW”)

 Lists the 30 leading industrial blue chip stocks
• Standard and Poor’s 500 Composite Index
 Covers market activity for 500 stocks
 More accurate than DOW because it evaluates a
greater variety of stock
• National Association of Security Dealers
Automated Quotations (“NASDAQ”)
 Monitors fast moving technology companies
 Speculative stocks, show dramatic ups and downs
Ups and Downs

• The term bull market means the market is

doing well because investors are optimistic
about the economy and are purchasing
stocks

• The term bear market means the market is

doing poorly and investors are not
purchasing stocks or selling stocks already
owned
Purchasing Stock
Brokers

• A Broker is a person who is licensed to

buy and sell stocks, provide investment
advice, and collect a commission on
each purchase or sale
 Purchases stocks on an organized
exchange (stock market)
 The vast majority of all stocks are bought
and sold on an organized exchange
Organized Exchanges

• Minimum requirements for a stock to

ensure only reputable companies are
used
• Each exchange has a limited number of
seats available which brokerage firms
purchase to give them the legal right
to buy and sell stocks on the exchange
New York Stock Exchange

• New York Stock Exchange (NYSE)

 Oldest and largest, began in 1792
 1,366 seats available
 2,800 companies
 Average stock price is $33.00
 Strict requirements
American Stock Exchange
• American Stock Exchange
 Began in 1849
 2nd largest exchange
 Its requirements are not as strict as NYSE
allowing younger, smaller companies to
list
 Average stock price is $24.00
Regional Stock Exchanges

• Regional Stock Exchanges

 Stocks are traded to investors living in a
specific geographical area
• Including Boston, Cincinnati, Philadelphia,
Spokane
NASDAQ

• National Association of Securities

Dealers Automated Quotations
 Stocks are traded in an over the counter
electronic market
 4,000 small companies
• Company requirements are not as strict
 More volatile because companies are
young and new
 Average stock price is $11.00
Supply vs. Demand

• The stock exchange is organized based

upon the laws of supply and demand
 Supply is the relationship of prices to the
quantities of a good or service sellers are
willing to offer for sale at any given point
in time
 Demand is the relationship of prices to
the quantities and the corresponding
quantities of a good or service buyers are
willing to purchase at any given point in
time.
How Do You Choose a Stock or Mutual
Fund?
• There are over 7,000 individual stocks
• There are over 13,000 mutual funds
• Not all of them make money…some of
them lose quite a lot
Some Suggestions on Choosing Stocks
and Mutual Funds

• Buy stock in a company that you like

and personally buy from
 Examples: Pepsi, Kohl’s, Apple Computer
(iPods), McDonalds, WalMart, etc.
• Suggestions (“tips”) from someone
already investing
• Suggestions from a financial manager
Diversification

• It is very risky to put all of your money

into just one or two investments
 If the price declines, you can lose a lot of
money
• Diversification means that you lower
your overall risk by investing in a
variety of stocks or mutual funds
 If one declines, it will not negatively affect
your overall portfolio value too much
Go to the Internet

• [Link]
• [Link]
• [Link] (the Motley Fool)
• [Link]
• [Link]
• [Link] (Wall Street Journal)
• [Link] (for mutual
funds)