The Stock Market

Saving & Investing

Stock Shock:Stock Shock:

Understanding Understanding the Stock Marketthe Stock Market

The stock market The stock market appears in the appears in the news every day…news every day…

You hear You hear about it any about it any time it time it reaches a reaches a new high or new high or a new low…a new low…

and you also hear about it and you also hear about it daily in statements like "The daily in statements like "The Dow Jones Industrial Average Dow Jones Industrial Average rose 2 percent today, with rose 2 percent today, with advances leading declines by advances leading declines by a margin of..." a margin of..."

The front of the New YorkThe front of the New YorkStock ExchangeStock Exchange

In your neighborhood, you have a In your neighborhood, you have a "supermarket" that sells food. The "supermarket" that sells food. The reason you go the supermarket is reason you go the supermarket is because you can go to one place and because you can go to one place and buy all of the different types of food that buy all of the different types of food that you need in one stop -- it's a lot more you need in one stop -- it's a lot more convenient than driving around to the convenient than driving around to the butcher, the dairy farmer, the baker, etcbutcher, the dairy farmer, the baker, etc. .

The NYSE is a supermarket for The NYSE is a supermarket for stocks. The NYSE can be thought stocks. The NYSE can be thought of as a big room where everyone of as a big room where everyone who wants to buy and sell shares who wants to buy and sell shares of stocks can go to do their of stocks can go to do their buying and selling. buying and selling.

Stocks in publicly traded Stocks in publicly traded companies are bought and sold companies are bought and sold at a stock market (also known as at a stock market (also known as a stock exchange). The New York a stock exchange). The New York Stock Exchange is an example of Stock Exchange is an example of such a market.such a market.

Return is the money an investor receives above and beyond the sum of money initially invested.

Risk and Return

Return and LiquiditySavings accounts have greater liquidity, but in general have a lower rate of return.Certificates of deposit usually have a greater return but liquidity is reduced.

Return and RiskInvesting in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved.

Other Types of Financial Assets

Certificates of DepositCertificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time.CDs have various terms of maturity, allowing investors to plan for future financial needs.

Money Market Mutual FundsMoney market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.

What is the FDIC?

Ensures customer deposits if a bank failsInsure losses up to $100,000

What is the Federal Reserve?

Influences & controls the money supply

Financial intermediaries accept funds from savers and make loans to investors.

Financial Intermediaries

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

InvestorsSavers make deposits to…

The Flow of Savings and Investments

Diversification

Spread your money around to reduce the risk of losing your entire investmentMutual Funds are the best at this, since the investment can buy shares of up to 120 different companies

Investment Considerations

1.Risk v. Return, High Risk= High Return

2.Objectives: College, Retire, age

(1) Hi-Lo. The first column is (1) Hi-Lo. The first column is the highest and lowest prices the highest and lowest prices at which the stock traded in at which the stock traded in the past year (52 weeks). In the past year (52 weeks). In our example, the highest price our example, the highest price was $47 and the lowest was was $47 and the lowest was $37$37

(2) Company Symbol. The second (2) Company Symbol. The second column is the abbreviated name of column is the abbreviated name of the firm issuing the stock. The the firm issuing the stock. The symbol of the company stands next symbol of the company stands next to the abbreviated name. In our case, to the abbreviated name. In our case, it is "Z." This symbol is sometimes it is "Z." This symbol is sometimes referred to as the company's "ticker referred to as the company's "ticker symbol."symbol."

3) Dividends. Dividends are the 3) Dividends. Dividends are the amount a company pays to its amount a company pays to its stockholders. The third column is the stockholders. The third column is the annual dividend paid per share. In our annual dividend paid per share. In our example, it is $2.30example, it is $2.30

4) Volume. The fourth column, titled "VOL," 4) Volume. The fourth column, titled "VOL," lists the volume of shares (in hundreds) that lists the volume of shares (in hundreds) that were traded that day. In our example, on August were traded that day. In our example, on August 23, 1999, 33,500 shares were traded by XYZ. 23, 1999, 33,500 shares were traded by XYZ. Volume may give you an indication on the size Volume may give you an indication on the size of the breadth of the market for a company's of the breadth of the market for a company's sharesshares

5) The YLD column approximates the dividend 5) The YLD column approximates the dividend yield. The dividend yield is the current return on yield. The dividend yield is the current return on invested capital. We can use it to compare invested capital. We can use it to compare dividend returns for firms that have different dividend returns for firms that have different stock prices. We derive the dividend yield by stock prices. We derive the dividend yield by dividing the current dividend by the closing dividing the current dividend by the closing stock price. In our case the dividend yield is stock price. In our case the dividend yield is 5%, calculated as follows:5%, calculated as follows:   

Dividend Dividend     $2.30  $2.30   = 5.43% = 5.43% Price (8th column) Price (8th column) $42.375 $42.375

The sixth column is the price to earnings (P/E) The sixth column is the price to earnings (P/E) ratio. The P/E ratio compares the price per ratio. The P/E ratio compares the price per share to the earnings per share. It shows how share to the earnings per share. It shows how much an investor is willing to pay for $1 of much an investor is willing to pay for $1 of current earnings per share (EPS). The P/E ratio current earnings per share (EPS). The P/E ratio is calculated by dividing the price by the is calculated by dividing the price by the earnings per share (EPS). Applying this formula earnings per share (EPS). Applying this formula to our example we get the following:to our example we get the following:

Price (8th column) Price (8th column)     $42.375  $42.375   = 10  = 10          (the stock is selling for 10X the earning ratio) (the stock is selling for 10X the earning ratio) EPS EPS         $4.23 $4.23 (7) The seventh column, titled Hi-(7) The seventh column, titled Hi-

The seventh column, titled Hi-Lo, represents the The seventh column, titled Hi-Lo, represents the highest and lowest prices at which trades were highest and lowest prices at which trades were completed during the trading day. In our completed during the trading day. In our example, the high was at $43 and the low was at example, the high was at $43 and the low was at $40$40--

The eighth column, titled Close, is the last price The eighth column, titled Close, is the last price at which a trade was made during the trading at which a trade was made during the trading day. In our example it is $42 3/8 ($42.375).day. In our example it is $42 3/8 ($42.375).