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Lecture 02 - Basics of Investing I


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Lecture 02 - Basics of Investing I

  1. 1. Introduction to Stocks Basics of Investing I Spring 2008 Economics 98 / 198 DeCal `
  2. 2. Schedule Today <ul><li>Administrative Issues </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>Current Events </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. <ul><li>Lecture Content </li></ul>
  5. 5. What is a stock? <ul><li>Common stock </li></ul><ul><li>Gives you a “share” of ownership of a publicly traded company </li></ul><ul><li>Stock ownership </li></ul><ul><ul><li>Voting rights </li></ul></ul><ul><ul><li>Claim to assets (behind debt holders) and earnings </li></ul></ul><ul><ul><li>Potentially entitled to dividends </li></ul></ul>
  6. 6. 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>
  7. 7. Basic Stock Quote
  8. 8. More Stock Quotes
  9. 9. 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><ul><ul><li>Example. </li></ul></ul>
  10. 10. 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 high returns </li></ul></ul><ul><li>Bonds are debt </li></ul><ul><ul><li>Lower and usually fixed return </li></ul></ul><ul><ul><li>Higher claim than stockholders </li></ul></ul><ul><ul><ul><li>What does this mean? </li></ul></ul></ul>
  11. 11. Dividend Debate <ul><li>Distribution of a portion of a company's earnings to its shareholders (usually cash) </li></ul><ul><li>Bad or Good? </li></ul><ul><ul><li>Why? </li></ul></ul>
  12. 12. What Can Cause Stock Prices to Change? EASY!  Supply and Demand! But…what affects supply / demand of a stock?
  13. 13. What Can Cause Stock Prices to Change? <ul><li>Earnings & growth expectations </li></ul><ul><li>Positive / negative news </li></ul><ul><li>Economy sentiment </li></ul><ul><li>Investor sentiments & attitudes </li></ul><ul><li>Irrational exuberance / behavior </li></ul>
  14. 14. 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>
  15. 15. 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>
  16. 16. 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>
  17. 17. 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>
  18. 18. 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>Criteria </li></ul><ul><ul><li>Full service vs. discount </li></ul></ul><ul><ul><li>Fees (commission) </li></ul></ul><ul><ul><li>Services / tools </li></ul></ul><ul><ul><li>Minimum balance </li></ul></ul>
  19. 19. 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 difficult if you have pretty bad credit history </li></ul></ul><ul><li>What you will need: a computer, starting capital, and investing know-how </li></ul>
  20. 20. 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> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  21. 21. Different types of Orders <ul><li>Market Order </li></ul><ul><li>Limit Order </li></ul><ul><ul><ul><li>Order executes to buy / sell at specified price of better (lower). Limit orders usually cost more, but useful for getting specified price </li></ul></ul></ul><ul><li>Stop Order </li></ul><ul><ul><ul><li>Order executes when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits </li></ul></ul></ul>
  22. 22. 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>
  23. 23. 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> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul>
  24. 24. Current Events
  25. 25. Investopedia Simulation
  26. 26. Homework / Reading <ul><li>Set up simulation account & start trading </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>