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
• Reading:
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