Introduction to Investing

The Basics of Investing

2 Goals of a Company

1) Maximize Profits (each year)

2) Grow Profits (over time)

have the best stock performance

Companies that grow PROFITS the fastest

Price of a Share of Stock Determined by Supply & Demand

• Stocks are constantly searching for a NEW equilibrium

• macroeconomic & microeconomic factors affect stock prices

Ford Motor Company current events

Building a 100,000 Portfolio

• How many shares?– Depends on how many dollars you want to invest

• What types of companies?– Many sectors to choose from

• Do I spend all of my $100,000– No more than $20,000 in one stock!

Why Invest Money?• You must earn more than the rate of inflation to raise wealth

• Stocks & Bonds are common investment options– Bonds: a loan to a Gov’t or business where you earn interest– Stocks: You become part owner in a company

YourMoney

U.S. Gov’t 5-Year Bond

$1,000

You get 2% interest per year $20 per year

Plus $1,000 in 5 years

– Stocks = long term investment (5-years or longer) – Bonds = medium term investment ( 1-3 years)– Bank CD’s = short term investment (30 days to 2 years)

The longer the holding period----the more risk you should take!

Average return per year 1926 - 2000

3 Primary Asset Classes

The Power of Compounding

$10,000 invested today would be worth: Return 15-years 30-years

Per year |-------Holding Period----| 2.0% $13,459 $18,114 3.0% $15,580 $24,273 5.0% $20,789 $43,219 6.0% $23,966 $57,435 7.0% $27,590 $76,123

10.0% $41,772 $174,494 12.0% $54,736 $299,599 14.0% $71,379 $509,502 15.0% $81,371 $662,118

I need MONEY!

• How do YOU borrow Money?

• How do COMPANIES borrow money?

What is a share of stock?• It is ownership of a small

piece of the company.

Why Companies Issue Stock

• To raise money to expand/ run business– Investment Banks help companies issue stock

• IPO = initial public offering– When a new company sells stock for the 1st time

1.The Primary market: Company sells shares of stock to investors

--Example: PLX Technology Initial Public Offering (IPO)

2. The Secondary Market Investors buy & sell shares to other investors

Two Stages of Selling Shares

Key Stock Indices

• S&P 500 Index– Largest 500 companies by $ value

• Dow Jones– 30 very large American companies

• Nasdaq– primarily technology stocks

WHY INDICES:

There are over 5,000 stocks!

Indices give the average Performance of the overall

market

COMPANYNAME

3M Co. Alcoa Inc.

Altria Group Inc. American Express Co.

American International Group Inc. AT&T Inc.

Boeing Co. Caterpillar Inc. Citigroup Inc.

Coca-Cola Co. E.I. DuPont de Nemours & Co.

Exxon Mobil Corp. General Electric Co.

General Motors Corp. Hewlett-Packard Co.

Home Depot Inc. Honeywell International Inc.

Intel Corp.

International Business Machines Corp.

Johnson & Johnson JPMorgan Chase & Co.

McDonald's Corp. Merck & Co. Inc. Microsoft Corp.

Pfizer Inc. Procter & Gamble Co.

United Technologies Corp. Verizon Communications Inc.

Wal-Mart Stores Inc. Walt Disney Co.

Stocks in

Dow Jones Index

Sectors of Stock Market

• Technology• Transportation• Retail• Financials• Energy• Health Care

Industry Type

Market CapitalizationDollar value of a company = Current price per share of

company’s stock X number of shares the company has issued

Large Cap --over $10 Billion

Mid Cap --$2-10 Billion

Small Cap --$300 Million-$2 Billion

Delta Air Lines

Amazon

Cheesecake Factory

Recent Stock Market History

• Stock market hit a high in March of 2000– 3 years of negative returns followed [2000,2001,2002]

• 2003 SP500 +28.6% • 2004 SP500 +10.8%• 2005 SP500 +4.9%• 2006 SP500 +15.7%• 2007 SP500 +5.5%• 2008 -37.0%• 2009 +26.0%• 2010 +15.0%• 2011 +0.0

Top 10 things to know about Stocks

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