Stock market

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Stock market

  1. 1. The Stock Market <br />& Introduction to the LHA Stock Market Game Mr. Servello<br />
  2. 2. Markets<br />A market is any one of a variety of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange (Wikipedia)<br />Stock Markets<br />Bond Markets<br />Futures Markets<br />Commodities Markets<br />Currency Markets<br />Money Markets<br />
  3. 3. Stocks and Bonds<br />Companies that need $$$ can borrow, but they can also issue Bonds<br />A bond is a document that formally promises to pay back a loan under specified terms and a given period of time.<br />
  4. 4. Bonds<br />Key Features of Bonds<br />Face value: Price of the bond. The amount that the buyer will pay/lend the issuer<br />
  5. 5. Bonds<br />Key Features of Bonds<br />Maturity date: The date when the Bond expires. The borrower pays back the lender. Bonds can also be sold prior to maturity.<br />
  6. 6. Bonds<br />Key Features of Bonds<br />A fixed payment: also known as a coupon; which is calculated at a set interest rate at the time of issue<br /><ul><li>Amount is known in advance and does not change once the bond is issued. (This is a VERY IMPORTANT feature)</li></li></ul><li>Bonds<br />Key Features of Bonds <br /><ul><li>Coupons stay the same
  7. 7. Interest rates change
  8. 8. The result is that bonds can rise or fall in value</li></li></ul><li>Why Bonds?<br />
  9. 9. Who issues Bonds?<br />Corporate<br />Government (Federal or Provincial)<br />Municipal<br />Financial Institutions –Mortgage Backed<br />
  10. 10. Benchmarks<br />Benchmarks serve the purpose of comparison. We compare a certain bond to a benchmark to see if it performs better or worse than the usual.<br />Click here to see a recent table of Canadian Benchmarks<br />http://www.tmxmoney.com/HttpController?GetPage=BondsAndRates&Language=en<br />
  11. 11. Bid/Ask Spread?<br />If you are buying a bond, you will pay the Ask Price (always higher)<br />If you are selling a bond, you will received the Bid Price (always lower)<br />The spread or (difference) is kept by the broker as profit. This is not the same as commission which you will have to pay as well.<br />
  12. 12. Yield to Maturity<br />Receive Coupon payment of 100$ each anniversary<br />100$<br />100$<br />100$<br />Today – Buy Bond 900$<br />Year 3 – Bond Matures 1000$<br />3 Coupon Payments = 300$<br />Gain from Bond Price = 100$<br />YTM = Gains/Price Paid<br />YTM = 400/900<br />YTM = 44% over 3 years<br />
  13. 13. Yield to Maturity<br />Receive Coupon payment of 100$ each anniversary<br />130$<br />130$<br />130$<br />Today – Buy Bond 980$<br />Year 3 – Bond Matures 1000$<br />3 Coupon Payments = <br />Gain from Bond Price = <br />YTM = Gains/Price Paid<br />YTM = / <br />YTM = % over 3 years<br />
  14. 14. Do You Recognize Any Companies?<br />
  15. 15. Stocks<br />A stock is a certificate that certifies ownership of a certain portion of a firm.<br />When a company issues stocks<br />It does not borrow funds/add to debt<br />Instead it increase the number of owners<br />
  16. 16. Stocks<br />Unlike bonds or direct borrowing, stocks do not promise a fixed annual payment. (Like the coupon)<br />Returns depend on company performance. If profits are high, the firm may pay dividends.<br />
  17. 17. Stocks<br />A capital gain is an increase in the value of an asset. <br />If you buy a share at 10$ and it increases to 15$, your capital gain is 5$<br />A realized capital gain occurs only when the owner sells the stock for a profit<br />
  18. 18. The Common Stock Market<br />Common Stock <br />Ownership<br />Distribution of earnings (variable)<br />Share of assets<br />Right to vote<br />Preferred Stock <br />Similar to Common stock with 2 main differences<br />+ fixed distribution of earnings<br />-- no voting right<br />
  19. 19. Types of Markets - Exchanges<br />Physical Location<br />Trading by members<br />Stocks traded are ‘listed’ companies<br />There are a number of exchanges around the world; you may have heard of the NYSE or the TSX<br />http://en.wikipedia.org/wiki/List_of_stock_exchanges<br />
  20. 20.
  21. 21. Bear and Bull<br />Describes upward and downward market trends. <br />Can be used to describe a security (company), sector or market as a whole<br />
  22. 22. Types of Orders of Stock<br />Market Order<br />Buy/Sell at market price<br />Limit Order<br />Buy/Sell at specific price<br />Stop Loss Order<br />Protect against big losses<br />Trailing Stop Order<br />Protect a profit<br />
  23. 23. Types of Orders of Stock<br />Good till Cancelled<br />Active until you cancel the order<br />Day Order<br />Must be re entered each day if not filled<br />All or None<br />The entire order must be filled<br />
  24. 24. Short Sales<br />Selling stock without actually owning it<br />You sell for 10$<br />Hopefully the price drops to 5$<br />Then you buy it back at 5$<br />Keep the profit <br />How is this risky?<br />
  25. 25. Short Sales<br />Short Sellers believe<br />Price will fall soon<br />They can deal with big losses if Price rises<br />This type of purchase is RISKY<br />Unlimited Losses<br />
  26. 26. Buying on Margin<br />Borrowing money to buy stock<br />Buyer must put up 50% cash MINIMUM<br />If Price falls, the 50% cash is worth LESS<br />Buyer will have to add money (Margin Call)<br />
  27. 27. Stock Market Indicators<br />Measures the average performance of a group of stocks on a market. <br />Gives an overall performance of the market.<br />Canada – S&P/TSX<br />US – NASDAQ, Dow Jones Industrial Average etc….<br />List of Indexes<br />http://en.wikipedia.org/wiki/List_of_stock_market_indices<br />
  28. 28. Full Index<br />Some Indexes include every single stock on a stock market<br />Canada – S&P/TSX Composite<br />US – NASDAQ Composite<br />
  29. 29. DJIA<br />Price Weighted <br />More expensive stocks makes up bigger portion<br />30 large blue chip companies<br />cross section of industries<br />Leaders<br />
  30. 30. NASDAQ Composite Index:<br />Based on the stock prices of over 5,000 companies traded on the NASDAQ stock market.<br />National Association of Securities Dealers Automated Quotation System.<br />
  31. 31. S&P 500 (Standard and Poor)<br />Value Weighted<br />Perceived value of company<br />500 large blue chip companies<br />Most popular benchmark for index funds<br />What Mutual Funds compare themselves against<br />
  32. 32. Determining the Price of Stock<br />Coca Cola vs Chunky Cola<br />What factors would you be considering when trying to decide between buying these two companies?<br />
  33. 33. Determining the Price of a Stock<br />Price affected by:<br />How much $$$ are you excepted to receive (dividends)<br />When are the dividends expected (Payouts, when companies make Profit, they pay dividends to their investors. The more Shares you have the more Dividends you get)<br />How much risk is involved in the company<br />
  34. 34. Determining the Price of a Stock<br />A stock will be worth less if we are unsure about dividends<br />A stock will be worth more if we are confident about dividends<br />
  35. 35. Determining the Price of a Stock<br />Price of a Stock should be the Present Value of the amounts we are expecting to receive in Dividends<br />Announcements of higher expected future dividends or perceived lower risk should increase the firm’s stock price.<br />
  36. 36. Determining the Price of a Stock<br />Another factor that can affect price is Peoples views of a company<br />One might call this a bubble because the stock price depends on what people expect that other people expect, etc.<br />
  37. 37. Market Efficiency<br />If information is truly public, market prices should reflect that and stock prices are efficient.<br />You are technically not able to ‘beat’ the market<br />Past Performance NEVER predicts the Future!!!<br />
  38. 38. General Market Strategies<br />
  39. 39. Market Crashes<br />The Great Wall Street Crash of 1929<br />Aka Black Tuesday<br />The Crash of 1987<br />Aka Black Monday<br />The Crash of 2008 (Oct 1 – Oct 10)<br />Black Week Oct 6-Oct 10<br />
  40. 40. Investment Sectors - Defensive<br />Defensive stocks include utilities and consumer staples. In a bear market these companies don’t usually suffer as much.<br />Portfolio protection in a sense<br />Because they are more safe, they fail to provide excessive gains.<br />Defensive stocks are just that, defensive<br />
  41. 41. Investment Sectors - Cyclical<br />Everything else, which can easily react to changes in the market.<br />The Nine Sectors:<br />Basic Materials Capital Goods<br />Communications Consumer Cyclical<br />Energy Financial<br />Health Care Technology<br />Transportation<br />
  42. 42. LHA Stock Market Game<br />You will make an Account on www.marketwatch.com<br />Search for and add yourself to the following game with the password below. <br />Term 1 Game : you will compete against your classmates, each of you has 100 000$ to invest!<br />Game:_______________________<br />Password:___________________<br />

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