National Council of Economic Education

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National Council of Economic Education

  1. 1. National Council of Economic Education Carolyn Shirk Vice President 849 Tame Deer Drive Winfield, PA 17889 Cell: 570-975-5149 570-374-9467
  2. 2. Investment Basics
  3. 3. Stock Market IQ Quiz Investment Basics
  4. 4. <ul><li>True or False </li></ul><ul><li>Stocks are items found in the storeroom of a grocery store. </li></ul><ul><li>Only rich people invest in the stock market. </li></ul><ul><li>Most stocks on the stock market are sold by the United States Government. </li></ul><ul><li>If the stock market goes up 30 percent one year, it will fall by 30 percent in the next year. </li></ul>Investment Basics
  5. 5. <ul><li>Any stock that goes up in price must eventually come back down. </li></ul><ul><li>Bears, Bulls, and Pigs are found in the stock market. </li></ul><ul><li>Stock prices are set by the Securities and Exchange Commission, a regulatory agency of the U.S. government. </li></ul><ul><li>Stock markets are open on business days around the clock, around the world. </li></ul>Investment Basics
  6. 6. <ul><li>Sometimes companies buy their own stocks on the stock market. </li></ul><ul><li>It is hard to buy a good stock today because all the good ones have already been purchased. </li></ul><ul><li>Buying stocks is a sure way to make money. </li></ul><ul><li>Corporations sell new issues of stock on the New York Stock Exchange. </li></ul>Investment Basics
  7. 7. <ul><li>“ Insider” stock trading means that trading stocks takes place inside a building. </li></ul><ul><li>People can buy stocks on the internet. </li></ul><ul><li>When the stock market goes up, it causes the economy to grow. </li></ul><ul><li>From Learning from the Market , © National Council on Economic Education, New York, NY </li></ul>Investment Basics
  8. 8. <ul><li>Insured Savings Accounts </li></ul><ul><li>Savings Bonds </li></ul><ul><li>Certificates of Deposit </li></ul><ul><li>Treasury Bonds </li></ul><ul><li>Corporate Bonds </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Stocks </li></ul><ul><li>Collectibles </li></ul><ul><li>Commodities </li></ul>Different Types of Investments: Investment Basics
  9. 9. The RISK to RETURN Relationship: The RISKIER the Investment - The HIGHER the Return Investment Basics
  10. 10. The Difference Between Stocks, Bonds, and Mutual Funds Stocks: You own a piece of the company You make money if the company does well Bonds: You loan money to a corporation or government You earn the interest Mutual Funds: You own one portion of a collection of stocks, bonds, or other securities Investment Basics
  11. 11. The Three Main Markets: NYSE : N ew Y ork S tock E xchange Oldest, largest, best-known stocks NASDAQ : Large, mid-sized, and small growth companies AMEX : A merican S tock Ex change Mid-sized growth companies Investment Basics
  12. 12. <ul><li>Large : </li></ul><ul><li>Often have high prices </li></ul><ul><li>Low risk of failure </li></ul><ul><li>Usually pay regular dividends </li></ul><ul><li>Small : </li></ul><ul><li>Potential for growth is greater than for larger companies </li></ul><ul><li>Generally prices are lower </li></ul>The Difference Between Large and Small Companies: Investment Basics
  13. 13. <ul><li>Common Stocks: </li></ul><ul><li>Pay dividends based on performance of the company </li></ul><ul><li>Have higher risk but may have higher reward </li></ul><ul><li>Preferred Stocks: </li></ul><ul><li>Dividend amount is preset </li></ul><ul><li>Dividends are paid on preferred stocks before common stocks </li></ul><ul><li>Have lower risk but may limit reward </li></ul>Investment Basics
  14. 14. <ul><li>Stock Splits: </li></ul><ul><li>More shares are created at a lower price per share </li></ul><ul><li>Stockholders profit if stocks go up </li></ul><ul><li>Indicated with an (s) in the paper </li></ul><ul><li>Ex : Dell $109  $54 </li></ul>Investment Basics
  15. 15. Other Terminology: Blue Chips the largest and most profitable stocks Bull Market a market that is rising Bear Market a market that is falling Investment Basics
  16. 16. Why long term investing is the best route? Investment Basics
  17. 17. DJIA over last 33+ years :
  18. 18. PE Ratio or Price-to-Earning Ratio <ul><li>Market Value Per Share/Earnings per Share </li></ul><ul><li>If a company is currently trading at $43 a share and the EPS over the last 12 months were $1.95 per share, the P/E ratio for the stock would be $22.05 </li></ul><ul><li>($43/$1.95)= $22.05 </li></ul>What stocks should I buy? Investment Basics
  19. 19. <ul><li>Earnings per Share or EPS is the firm profit divided by number of shares. </li></ul><ul><li>Find EPS and PE ratios on the internet & newspaper </li></ul>Earnings Per Share Investment Basics
  20. 20. PE Ratio <ul><li>More earnings per share given stock price results in a lower PE ratio and a better buy. </li></ul><ul><li>PE Ratios show how much an investor is willing to pay per dollar of earnings </li></ul>
  21. 21. PE Ratio <ul><li>PE Ratios show how much an investor is willing to pay per dollar of earnings </li></ul><ul><li>Mattel: An investor is willing to pay $15.81 for every dollar of earnings </li></ul>
  22. 22. <ul><li>Beta = % change in stock return / % change in market return. </li></ul>Apple Inc. <ul><li>Beta = 1 means that the stock and market change by the same percentage. </li></ul><ul><li>Larger beta means a larger change than the market on any given day. </li></ul>
  23. 23. Where to get more information <ul><ul><li>American Stock Exchange- www.amex.com </li></ul></ul><ul><ul><li>NASDAQ- www.nasdaq.com </li></ul></ul><ul><ul><li>NYSE- www.nyse.com </li></ul></ul><ul><ul><li>CNNfn- www.cnnfn.com </li></ul></ul><ul><ul><li>Google - http://finance.google.com/finance </li></ul></ul><ul><ul><li>Database of Corporate Information- www.sec.gov/edgarhp.htm </li></ul></ul><ul><ul><li>Yahoo! Finance- http://finance.yahoo.com </li></ul></ul>
  24. 24. Economics and the Stock Market <ul><li>Micro vs. Macro economics </li></ul><ul><li>Going from a good idea to a corporation </li></ul>
  25. 25. Microeconomics <ul><ul><li>Scarcity and choice </li></ul></ul><ul><ul><li>Utility and profit maximization </li></ul></ul><ul><ul><ul><li>How do we allocate our budget, time? </li></ul></ul></ul><ul><ul><ul><li>How do firms allocate resources to produce goods and services? </li></ul></ul></ul><ul><ul><li>Efficiency </li></ul></ul>Microeconomics studies the behavior of the consumer, household, or firm. Micro vs. Macro
  26. 26. Micro and the Stock Market <ul><li>Look at one company: </li></ul><ul><ul><li>How does this company make its product? </li></ul></ul><ul><ul><li>Who buys this product? </li></ul></ul><ul><ul><li>Does the company have good managers? </li></ul></ul><ul><li>Look at one industry: </li></ul><ul><ul><li>How much competition in the industry? </li></ul></ul><ul><ul><li>Is the industry young or old? </li></ul></ul>What stock brokers and mutual fund managers get paid to do! Micro vs. Macro
  27. 27. Macroeconomics Macroeconomics studies the economy as a whole or as aggregates and attempts to predict or forecast changes in national output, unemployment, and inflation. Micro vs. Macro
  28. 28. Macro & the Stock Market <ul><li>Look at the whole economy: </li></ul><ul><ul><li>Inflation: Producer and Consumer Price Indices (PPI & CPI) </li></ul></ul><ul><ul><li>Unemployment: Unemployment rate </li></ul></ul><ul><ul><li>Interest rates: actions of the Fed </li></ul></ul><ul><ul><li>Productivity </li></ul></ul><ul><li>Use information to estimate good times to buy and times to sell. </li></ul>Note: an “active” investor thinks about how these indicators will affect the economy in 3 months! Micro vs. Macro
  29. 29. When is the news good? <ul><li>Example : decrease in the unemployment rate: </li></ul><ul><ul><li>Good : sign of a growing economy  increased consumer spending  increased profits. </li></ul></ul><ul><ul><li>Bad : indication of future labor shortages  increasing wages  inflation  fed increases interest rates  decrease profits, slow growth. </li></ul></ul>
  30. 30. U.S. Department of Labor Bureau of Labor Statistics “ Economy at a Glance” http://www.bls.gov
  31. 31. <ul><li>Product idea: on-line financial services including banking, investments, retirement planning, estate planning, legal services, etc. </li></ul><ul><li>Need funds to start business - find investors “ venture capitalists. ” </li></ul><ul><li>Each investor owns a stake or “ share ” of the corporation and has limited liability. </li></ul>Going Public: From a Good Idea to a Corporation Going public
  32. 32. <ul><li>Suppose the company is doing well. You need more money - go public, “ initial public offering ” </li></ul><ul><li>Going public: investment bank creates a prospectus and buys all shares of stock and resells them at a set price to the public </li></ul><ul><li>A “ tombstone ” is the public notice of an IPO </li></ul>Going Public: From a Good Idea to a Corporation Going public
  33. 35. Important to Stress at the End of the Game <ul><li>Diversification </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Long-Term Proposition </li></ul>

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