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
  • Lecture 02 - Basics of Investing I

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