Lecture 02 - Basics of Investing I
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  • Pros Getting paid cash right away Usually, healthy sign of company making ample profits on its operations Cons Double taxation Money not re-invested into the company

Transcript

  • 1. Introduction to Stocks Basics of Investing I Spring 2008 Economics 98 / 198 DeCal ` www.ocf.berkeley.edu/~jml/decal
  • 2. Schedule Today
    • Administrative Issues
    • Current Events
    • Lecture content: Basics of Investing
      • What is a stock?
      • How are they traded?
      • What are brokerages?
      • Different types of orders
      • What is the market?
      • Terminology
    • Learning how to use the simulation; IBD
    • Assignments / Readings
  • 3. Administrative Issues
    • Attendance & Sign-In
    • Name Tags
    • Enrollment
    • Emails
    • Webpage
    • Syllabus Review
    • News Presentation Sign Ups
    • Investor’s Business Daily Access
  • 4. Current Events
  • 5. Current Events
    • Troubled / volatile markets
      • Damages from sub-prime mortgages and the housing sector
      • Fear of risk of recession
        • Weak job reports
    • Fed (Federal Reserve) meeting next week
      • Rate cuts?
    • Apple releases new lines of iPod
  • 6. Current Events
  • 7. NASDAQ
  • 8. S&P 500
  • 9.
    • Lecture Content
  • 10. What is a stock?
    • Common stock – most “common” type
    • Gives you a “share” of ownership of a publicly traded company
    • Entitled to a portion of profits – dividends
    • Stock ownership = claim on assets and earnings
      • Also something called “preferred stock”
  • 11. What is a stock?
    • Ticker symbols
      • Set of letters that represent a security traded on an exchange
      • Ex. MSFT, GS, AAPL, MA, BUD, LUV
    • Stock quotes
      • List of prices for a stock at a particular point during the trading day
    • Stock tickers
      • What do those green and red numbers mean?
  • 12. Different Types of Stock
    • Preferred Stock
      • No voting rights to company issues
      • Issued fixed dividends forever – main form of return
    • Common Stock
      • Majority of stock we see and hear about in the news
      • Ownership of the company
      • Entitled to portion of the earnings
      • Earn returns mainly through capital gains
    • What are capital gains?
      • Increase in asset value relative to the purchases price
      • Not realized until asset is actually sold
  • 13. Stocks vs. Bonds
    • Stocks are equity
      • Generally considered riskier
      • Quite possible to lose a significant portion, if not all, of your money
      • Potential for much higher returns
    • Bonds are debt
      • Guaranteed a fixed return
      • Have a higher claim than stockholders
        • What does this mean?
  • 14. Dividend Debate
    • Distribution of a portion of a company's earnings to its shareholders (usually cash)
  • 15. What Can Cause Stock Prices to Change? Supply and Demand! (What affects supply / demand of a stock?)
  • 16. Two Markets
    • Primary Market – market in which investors have first opportunity to buy newly issued shares
      • Initial Public Offering (IPO)
        • First time that company offers its shares to public markets (securities bought directly from company)
        • Where private companies become public
    • Secondary Market – investors trade already-issued shares of companies with each other
      • Ie. The stock market
      • Trading of a company’s stock DOES NOT DIRECTLY involve the company financially
  • 17. How Stocks Are Traded
    • Major exchanges
      • Lists stocks (and other securities), sets policies for how stocks are traded
        • New York Stock Exchange (NYSE)
        • American Stock Exchange (AMEX)
        • National Association of Securities Dealers Automated Quotation
    • Only “publicly traded
    • companies” are listed
  • 18. Market Indices (Index)
    • Definition
      • Aggregate value of combining several stocks together and intended to represent entire or portion of the stock market
    • S&P 500
      • 500 stocks chosen by Standard & Poor to represent US stock market
    • NASDAQ Composite
    • Dow Jones Industrial Average
      • 30 most significant stocks traded
    • S&P 600 Small-Cap
    • Russell 3000
      • 3000 of the largest stocks in the US
  • 19. Stocks Markets & Animals
    • Bull Market
      • When everything in the market is going great and stocks are generally heading upwards
    • Bear Market
      • When everything is NOT GOOD and stocks are generally headed
    • NOTE: Nothing lasts forever! Good times and bad times will end at some point
    • Other animal terms: pigs, chickens
  • 20. Brokerages
    • Need a medium to trade through – this is where brokerages come in
    • Cash vs. margin account
    • Choosing a broker
      • full service vs. discount
        • Fees (Commission)
        • Services
        • Minimum balance
  • 21. Opening an Account
    • Not a hard process- most of it just some paperwork and mail
      • Sign-up online and download forms
      • Mail checks, forms, and copy of ID
      • Accounts created within a couple of days
    • Cash accounts usually never turned down
      • Margin accounts might be a problem if you have pretty bad credit history
    • To start investing, won’t need much else other than a computer, some money, and investing know-how
  • 22. Brokerages
    • Some links for brokerage comparisons
      • Find something that works for what YOU need
      • No one broker that is best for all investors
    • http://www.investingonline.org/gso/broker_ratings.html
    • http://www.consumersearch.com/www/internet/online-brokers/reviews.html
    • http://www.stockbrokerguide.com/
  • 23. Different types of Orders
    • Market Order
    • Limit Order
        • An order to buy or sell a set number of shares at specified price of better. Limit orders usually cost more, but useful for getting specified price. By better I mean, lower.
    • Stop Order
        • An order placed for a security for when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits. Many people use this during vacations if they can’t use it.
  • 24. Different Types of Orders
    • Stop Limit Order
        • Executed at a specified price (or better) after a given stop price has been reached. Order becomes then a limit order to buy (or sell) at the limit price or better
        • Precision purposes
    • Good Until Cancelled (GTC)
    • Good Until End of Day
  • 25. Things to Internalize
    • Learn the basics!
      • Need to know what basic terms mean
      • Articles should help you
    • Advantages of starting young
    • Useful resources for stock tutorials
      • www.investorwords.com
      • www.investopedia.com
      • www.fool.com
  • 26. Homework / Reading
    • Set up your account
    • Online articles (Course website)
      • “ The Five Biggest Stock Market Myths”
      • “ Getting Started”
      • “ Brokers and Online Trading”
      • “ Stocks”
      • Get started on “Investing 101”
  • 27. IBD Subscription Investopedia Simulation