Backto the

Future IV:i want those shoes...and hoverboard

the deal:

doc brown has come back for one final run: retirement, but he’s old so it’s up to you...

there’s only one problem; he can only fuel the flux capacitor to take you back on one more trip and then bring you back

your job is to take 10,000 dollars back in time and to invest in a single company in order to make the most money possiblethere’s only one catch...

you may only choose from these stocks:

Money Never SleepsMoney Never SleepsA Brief History and Explanation of the Stock MarketA Brief History and Explanation of the Stock Market

Most new investors (incorrectly) assume that playing the stock market is a lot like gambling.

Short Term Understanding = RouletteLong Term Understanding = $$$

The truth is that with a little information and patience,

you can earn large amounts of money.

Since 1926, even with depressions and recessions, the stock market has always

increased.

So where to begin? Let’s start with some definitions:

A share is literally a share in the ownership of a company. Owning shares entitles you to

assets and earnings of a company.

Assets are everything that the company owns (buildings, equipment, trademarks, etc.)

Earnings are all of the money that the company brings in from selling it’s products and

services.

But if a company’s goal is to make money (profit motive), why would it want to share its assets and earnings with the public?

MONEY.

When most companies want to start up, they need money, and they only usually have two options to get it:

Debt Financing: When a company borrows money from a bank (but has to pay it back with interest).

Equity Financing: When a company sells stock in order to raise money. There is no interest and really not even any requirement to pay anything back. It also distributes risk among a larger pool of investors.

OR

So how does this actually work? Let’s use an example to figure everything

out.

Yippee-kay-yay, an example.

Let’s pretend we want to open a store that sells tweets.

Sup, bro?If I open the store (regardless of how I get the money) I have formed a sole proprietorship. I own everything, I make all the decisions and I keep all the profits.

If I get a couple friends and we all pool our money together to open the store, we have then formed a partnership. We now share decision-making and profits.

But what if we start doing the math and we realize that we

don’t have the money to actually open the business?

We can sell stock!

But no so fast!

In order to sell stock, you have to go through the process of incorporation, which is just the process of turning your business into a corporation.

things we’ll need to incorporate:

- a lawyer- a sick logo- pop-tarts

This requires filing with several state offices, registering names, and acquiring licenses and permits to own this type of business.

Part of incorporation also requires creating a board of directors that will make decisions for the company; including hiring officers and setting company policy.

Incorporation will also limit the liability of a company. If sued, the corporation pays the settlement; it could go out of business but that’s the worst that can happen.

So now, we have a corporation. What’s next?

Now you need to raise money to cover start-up costs, so you have to find share holders*. These are people that actually own parts of the company (and can dictate how it is run).

To sell stock, you have to decide upon an Initial Public Offering (IPO) to decide how much money you want to raise -- 2 million shares at $20 a piece will raise $40 million.

There is an incentive to be a shareholder of good companies because it is likely that they will grow and make more money. If they get big enough, they will sometimes issue dividends (a check with your share of annual profits). Most companies are growth stocks which invest their profit back into the company.

*Share holders can be both public and private.

OK, so where do we find these “share holders?”

The best place is probably a stock market (aka stock exchange). This is a place where people meet to buy and sell shares of stock as their prices change due to free-market forces (kind of like a supermarket... but for stocks). Without stock exchanges, buying and selling shares would be really difficult.

There are 3 big stock exchanges in the United States:

- The New York Stock Exchange (NYSE)- The American Stock Exchange (AMEX)- National Association of Securities Dealers (NASDAQ)

Having “live” stock markets make it possible to observe (in real time) the market changing to even the slightest occurrences like news updates, media updates and many other factors.

Another cool component of modern stock markets is that digitization of these markets allows people to hire stock brokers to trade for them. They can also trade them online for a small fee.

Most people know that the basic premise of making money on the stock market involves buying low and selling high, but a lot depends on patience and luck.

In the short run, when you buy shares in new and cheap stocks, there is a lot of risk, but a lot of chance for reward. When you buy shares of established and more expensive stock there is less risk, but also less reward.

LOW RISK:

HIGH RISK:

Anything else I should know?

Those things on the news every night are market averages to let brokers and the general public know about the health of the market.

The Dow Jones Industrial Average is the sum of 30 major American companies (like

GM, Exxon-Mobile, etc.)

The S&P 500 is the average value of 500 of the top most

valuable companies.

When the market is doing really well, it is called a bull market (hence, the bull statue). During these periods, the economy is usually strong and investors are positive. People hold onto stocks and watch prices rise (this also creates scarcity, which only further inflates stocks). We also tend to see a higher incidence of risk-taking in this market because people feel lucky.

When the market is doing poorly, it is called a bear market, and it pretty much is the complete opposite of a bull market.

Anything else I should know?

Modern jobs will often offer stock options when they hire employees. This is the right to buy certain number of stocks at a special price as a reward to working for the company.

This helps attract and keep good workers (so their stock grows) and it vests people in their business (they receive a direct incentive for working harder).

The stock market originally used fractions (like you could own 84 and 1/8 shares) because in 1792, the NYSE was based on a stock exchange model from Europe that was based on Spanish currency (the “real”) which was divided into eight parts (it dealt with counting on fingers).

In 1997, the Common Cents Stock Pricing Act simplified this system by converting the stock market to a decimal system (which we still use today).