Business and Economics Reporting

Professor Lou Ureneck

Stocks and stock markets

• Corporations• How corporations raise capital• Initial public offering• Secondary market for stocks• How markets operate• Putting a value on a share of stock• Regulation of markets• Issues for journalists

What is a corporation?

A business enterprise in which the ownership of the company is not the same as the management.

The ownership is expressed in shares of stock.The liabilities of the company remain with the

company and do not adhere to the owners.

More about corporations

For-profit corporations: Google, Microsoft, Nokia

Not-for-profit corporations: Universities, museums, charity organizations.

Among for-profit corporations:Publicly traded corporationsPrivately held corporations.

For-profit public corporationsThe stock is traded on stock exchanges – or it has

more than a few stockholders.It is required to report important business

information to the government and the public.

U.S corporations or corporations whose stock is traded in the US report to the Securities and Exchange Commission.

LinkUkraine corporations: Securities Commission.

Why form a corporations?

One reason is to raise capital for growth.

Corporations raise capital in three ways:They earn it (profit)They borrow it. (Short-term loans or bonds)They sell stock – ownership in the company.

The process for raising capital through the sale of stock

Somebody has an idea for a business. The business is started but it quickly discovers that it needs capital to build factories, hire people, buy marketing campaigns, etc.

It retains an investment bank, which helps it launch an Initial Public Offering. IPO

A prospectus is written, the number and price of the shares of stock are determined.

The stock is sold.

But we are not done yet …

Once the stock is in circulation, it no longer belongs to the “corporation.” It belongs to the owner of the shares, who is a proportionate owner of the company.

Owners are free to sell the stock. This selling and buying is called the secondary market. IT IS THE STOCK MARKET.

The example of baseball cards

A corporations sells them to children. The corporation gets the money from the sale of the cards.

Once children own the cards, they can sell and buy them to other children. The transaction is between the children – not the company.

This is a secondary market in baseball cards.

What is a company worth?

Many ways to answer the question.

One way –

Number of shares of stock X price per share.

This is called the company’s “market capitalization.”

http://finance.yahoo.com/q?s=MSFT&ql=0.

Who determines the price of a share of stock?

The market – a willing seller and a willing buyer. They agree on a price. Each time there is a new transaction with a new agreement, there is a new price. So the prices goes up and down depending on the perceived value of the stock.

Nobody sets the price. The market determines the price.

How is the transaction handled

Sellers and buyers work through brokers who take a fee for the transaction.

The brokers bundle sell and buy requests and work through representatives of the many exchanges around the world.

How much is a share of stock worth?

It all depends on future profit.

A buyer is paying for a profit stream.

Two ways to make money on shares of stock:The stock prices goes up, and the stock is sold.The corporation distributes its profit – dividends.

• Price per share• Earnings per share

• Price per share/ earnings per shareThis is an expression of how much we are willing

to pay for each dollar (or grivna) of profit

A closer look – three ratios

An example

Microsoft

http://finance.yahoo.com/q?s=MSFT&ql=0.

Today’s price per shareEarnings per share

Price to earnings ratio:

Why would we pay so much?

For future profits…

It’s all about earnings, usually

Fundamental analysis: Predicting a company’s future earnings.

But there is also speculation based in momentum ---

Technical analysis: Predicting the behavior of the herd.

Fundamental analysis

What are the factors that we can examine to understand the future strength and profits of the company?

The New York Stock Exchange

Individual stocksOpen price, closing price, change in price.

http://www.nyse.com/

IndexesBaskets of stocks.Dow Jones IndustrialsStandard and Poor’s 500

An exercise

Go to Yahoo finance page:

Get the following information

Share priceEarnings per shareP/E ratio

Other markets

Debt (including CDO’s)CommoditiesCurrencies

Stock stories

Principally for investors … should they buy, sell or hold the stock?

But also – stock stories are a window into understanding the company. How well is it managed, what are its challenges?

Stock trades

Selling long

Selling short

Writing about your local business

1. Get an idea2. Conduct your research3. Tighten your focus4. Develop a plan for organization5. Write the first draft6. Revise and polish the draft

Writing about your local business

1. Get an idea2. Conduct your research3. Tighten your focus4. Develop a plan for organization5. Write the first draft6. Revise and polish the draft