Abeles_Intro to the stock market

Stock

• Def. A portion of ownership in a

corporation. It is a way for a corporation to
raise money. Also known as shares or
equities.

Why should I buy stock?

Stockowners can earn a profit in two ways:
1. Dividends: portions of a corporation’s

profit. They are paid out to stockholders
of many corporations every quarter (3
months). The higher the corporate profit,
the higher the dividend. If a corporation
makes no profit, there is no dividend.

How to make a lot of money in the

Stock Market

The second way stockholders earn money:
2. Capital Gain: When a stock holder sells

stock for more than he or she paid for it.
Ex. I buy a share of Kodak stock for $20.
The value of the stock increases to $21,
and I sell it for a profit of $1.

When a stock holder sells stock for less
than he or she paid, it is a capital loss.

Stock goes up and down

Stock value increases and decreases

according to the company’s performance
and how people think the company will do
in the future.

Stock value goes up when a company has

good sales or invented a new product.

Stock value goes down if a company has to

lay off people, doesn’t sell much or does
not make a profit.

Making and losing money

Can you lose everything in the market?
• If you are foolish, yes. If you invest more

than you can afford to lose, and the stock
loses value, you are in trouble.

• But, if you invest only what you can afford,

and diversify your investments (buy stock
of many different companies), you can do
very well. If you diversify, even if one
investment loses money, the others will
still be okay. And, stock prices go up and
down a lot. If you lose money today, the stock can still
go up tomorrow. You only lose if you sell!

So how do I make money?

• The smart stock strategy is to invest over

the long term. Diversify your portfolio (buy
a lot of different stock) and let the stock
price increase over time. Even if stocks go
down, it is okay- just wait until they go
back up. The market as a whole always
goes back up.

• Some people play the market like a

casino; they gamble on quick money. They
may get lucky, but it is VERY RISKY! One
bad move, and you lose all you invest.

Types of Stock

• Income Stock: stock that pays dividends at

regular times in a year

• Growth Stock: pays few to no dividends.

All profits are reinvested in the business.
Owners of growth stock are interested in
making money through capital gains.

• The company determines what stock it

offers.

Ownership of a Company

Stockholders are part owners of the

company, and as such have a say in
decisions the company makes. But, since
most companies have thousands of
shareholders with millions of shares, most
stockholders have little say in the
company.

• Controlling Share: Owning 50% of a

company’s stock. This person controls the
company.

Making ownership decisions

Common Stock: stockholders are voting

owners of the company.

But, most people own such a small percent

of a company’s shares, they do not wish to
vote on company decisions.

Preferred Stock: stockholders do not vote in

company decisions, but receive dividends
before owners of common stock.

Where are stocks traded?

• Stock Exchanges: markets where

businesses buy and sell stock. Most
industrialized nations have one. The U.S.
has several.

• In the U.S. the two largest are The New

York Stock Exchange (aka. Wall Street),
which represents the oldest and largest
corps. in the country. The NASDAQ in
Chicago represents newer companies.

How are stocks traded?

• Stockbroker: licensed intermediary

between buyers and sellers of stock

• Brokerage Firms: businesses which

specialize in trading stock.

• Daytrader: stockbrokers who buy and sell

large amounts of stock very quickly to turn
a profit in one day’s trading. (get it?)

Bull and Bear Markets

• Economists describe the stock market

activity as being a:

–Bull Market: steadily rising stock market

over time

–Bear Market: steadily falling stock

market over time

Stock Performance Indexes

• With thousands of publicly owned

corporations, selling billions of shares of
stock, it is impossible to keep track of how
the market is doing as a whole. Stock
Performance Indexes are used to look at
parts of the stock market to make a
generalization about the market as a
whole.