Transcript smginvestingintro

Investing 101
Kentucky Council on Economic Education
08/22/06
Power of Compounding
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Interest on principal
plus interest earned
Rule of 72
Penny a day…or $1million?
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The power of compounding was said to be deemed the
eighth wonder of the world - or so the story goes - by
Albert Einstein.
Stocks
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A share in the ownership of a company.
100,000 shares outstanding in company
You own 1,000 shares (100,000/1000) = 1% ownership.
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Types of Stock
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Common Stock
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Entitles the holder to one vote in the affairs of the company and
one vote to elect the board members.
Preferred Stock
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Usually doesn't come with the same voting rights as common
stockholders.
Receive a share of profits before common stockholders.
In the event of company dissolution, preferred shareholders
have a prior claim to assets ahead of common shareholders,
but behind creditors.
Stock Classifications
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Blue-Chip Stocks biggest companies in the country
Growth Stocks A growth company usually spends a lot
of money on research and puts all its profits back into the
company instead of paying dividends
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Income Stocks
stable companies that pay higher-than-
average dividend
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Cyclical Stocks
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Defensive Stocks
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Value Stocks
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Penny Stocks -
move up or down in sync with the
business cycle, i.e., automobile, housing, etc.
unaffected by changes in the
business cycle,i.e., food, utilities. Etc.
considered undervalued by investors
low-priced, speculative stocks
Industries and Sectors
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Industries
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Sectors
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- Companies are grouped by
industry, based on the products or services
they offer. Companies in the airline industry
would be Delta, TWA, Southwest, etc.
are broad groupings of similar
industries. The airlines industry would be part
of the transportation sector.
Industries/sectors are used by investors to
compare similar companies
Dividends
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Offered by well established companies
Paid to investors
As cash or stock (usually quarterly)
Decided by the Board of Directors
Record Date/Distribution Date
Stock Splits
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2 for 1, 3 for 1
Reverse splits, i.e., 1 for 2
Example:
 Johnny holds 100 shares of GTD, currently
valued at $60/share, so he has a $6,000
investment.
 GTD announces a stock split of 2 for 1.
 After the stock split, Johnny will hold 200
shares of stock, and those 200 shares will be
valued at $30/share. 200 shares X $30
share = $6,000. (Same value!)
IPO – Initial Public Offerings
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First sale of stock by a company to
the public.
Distributed through investment
bankers in the "primary market”
Buyers (usually institutional
investors) of these new shares of
stock will sell to the public
Mutual Funds
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Mutual fund company
Manager
Pooled money of investors
Investors buy shares of the mutual
fund
Good way to get started in investing
In the Stock Market Game simulation,
students can buy mutual funds in
addition to stocks.
Bonds
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IOU issued (debt securities)
Issued by governments and corporations
to raise money
Investor is the lender
Company/Govt repays principal plus
interest (generally quarterly)
Students cannot invest in bonds in the
Stock Market Game.
Forms of Business
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Sole proprietorship
Partnership
Corporation
Public or Private Company?
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Private company does not issue stock to
the public, only privately.
Public company is a corporation that has
"gone public“.
How do businesses raise capital?
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Three major sources of financial
capital for companies
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Retained earnings
Debt (loans, corporate bonds, etc.)
Equity (stock)
Parent Companies, Brands,
Subsidiaries
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Parent Company - A company that exercises
control over one or more subsidiary enterprises.
Subsidiary - a wholly or partially owned company
which is part of a large corporation (parent).
Brand - A name, term, symbol, design, or
combination of these that identifies a seller's
products and differentiates them from competitors'
products, i.e., Taco Bell, Lands’ End, etc.
Mergers and Acquisitions
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A merger is a form of corporate acquisition in which
one firm absorbs another and the assets and
liabilities of the two firms are combined.
An acquisition is when one business takes
possession of another business. This is also called a
takeover or buyout.
Mergers are a way for a company to grow faster, to
become more efficient, to acquire new product lines,
to change its image, or to eliminate a rival.
In many corporate mergers or acquisitions, the
shares of one company are converted to shares of
the other company. In other cases, one company
simply buys all of the other company's shares. It
pays cash for these shares.
Market Exchanges
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New York Stock Exchange NYSE
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Oldest stock market in US
Auction market (with brokers on trading floor)
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American Stock Exchange (AMEX)
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NASDAQ (National Association of Securities Dealers
Automated Quotation System), is an electronic market
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Over the Counter Bulletin Board (OTBB) for
companies that don't qualify to list on the major market
exchanges because they are too small or their stock prices
too low.
History of Stock Market
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May 17, 1792
Buttonwood Tree Agreement
NYSE – 1817
Curb trading – AMEX
Securities Exchange Act of 1937
Stock Market Crash
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October 29, 1929 - Black Tuesday
Set off the Great Depression
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NPR Audio
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http://www.npr.org/templates/story/story.php?storyId=4134779
Indices
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A stock index is a measure of average stock prices
in a group of individual stocks.
Reflect how the market is doing as a group
Examples:
 Dow Jones Industrials - which tracks 30 blue
chip stocks (of well-known companies)
 Standard & Poor's 500- which tracks 500
stocks from industrial, transportation, utility and
financial companies
 Russell 2000- which tracks 2000 smaller
company stocks
 NASDAQ Composite Index - which tracks all
the stocks listed on the NASDAQ, almost 4,000
in all.
The DOW
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Dow Jones Industrial Average
30 blue chip stocks
A stock market index
Most-quoted market indicator
Bull and Bear
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Bear market describes a period of
time when stock prices are falling.
Bull market is a period when stock
prices are generally rising.
Factors Affecting the Stock Market
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Health
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company
industry
economy
Global
Good News/Bad News
Microeconomic variables - factors that can
affect companies or industries
Macroeconomic variables - factors that
affect the economy
Consumer confidence
Investor perception
Diversification
"Don't put all your eggs in one basket."
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Strategy of spreading your investment dollars
across various types of securities, i.e.,
 several industry sectors (e.g., transportation,
technology, airlines, retail, etc.)
 large and small companies,
 growth and income stocks,
 cyclical and non-cyclical stocks,
 blue chip companies, and
 international companies.
In the Stock Market Game,
 5 stock minimum rule
 30% maximum equity
Supply and Demand
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Stock prices change because of
supply and demand
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more buyers than sellers – price goes
up!
More sellers than buyers – price goes
down!
Reading an Annual Report
Get from company website or call/write company
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Chairman of the Board Letter
Sales and Marketing
10 Year Summary of Financial Figures
Management Discussion and Analysis CPA Opinion Letter
Financial Statements
Subsidiaries, Brands and Addresses
List of Directors and Officers
Stock Price History
from Annual Report Library
(http://www.zpub.com/sf/arl/)
Fundamental Analysis
Thorough review of company
 Product
 Operating efficiency
 Management
 Financial performance
 Profit/Loss, EPS, P/E, etc.
 Position in Industry
Technical Analysis
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Used to evaluate the worth of a stock by
studying market statistics.
 Stock and stock market trends
 Charting
Crunching the Numbers
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Book value - This represents the different between
the company's assets and liabilities. A low book
value (from too much debt) could mean that the
company's profits will be limited. However, a low
value may also indicate that the assets are
underestimated, and that the stock is a good value
for potential investors.
Earnings Per Share (EPS) - This represents the
company's net profit divided by the number of
shares outstanding. Analysts typically look for
steadily increasing EPS, which shows a pattern of
consistent growth.
Crunching the Numbers
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Price/Earnings (P/E) Ratio - company's stock price
divided by its 12 month EPS.
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High P/E means high projected earning
If a company has a PE of 10, that means that investors are willing
to pay $10 for every $1 of last year's companies earnings.
Compare the PE ratios of other companies in the same industry, or
to the market in general, or against the company's own historical
P/E ratio.
Beta – quantifies how volatile a stock is compared to
the overall market
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A stock that rises or falls in value at the same rate as the market
has a beta of 1.0.
Beta below 1 - less volatile -- and potentially less risky
Beta above 1 - more volatile, meaning that investors might expect
its price to rise or fall more quickly.
Margin
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Going on Margin" borrowing money to invest
In SMG – pay 7% interest (per annum) for any money spent over
initial $100,000 cash.
Very Risky – not suitable for a long-term, buy-and-hold investor.
Minimum Maintenance If the Total Equity in your portfolio falls
below 30% of the value of your long and short positions, your team
will receive a margin call. (Note: In a margin call, the computer will
automatically sell shares of stock in the portfolio to recoup its
losses.)
Short Selling
Way to make money in the stock market--particularly during a Bear market
when prices are dropping. It can also be effective if you know a company
is headed in a downward spiral.
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Brokerage loans you stock from inventory
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You sell the stock you “borrowed”
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When stock value drops, you “short cover” – buy the stock on the market
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You give brokerage back their stock you borrowed, and
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You profit from the difference
Short Sell 100 shares @ $50.00
(you borrow 100 shares of stock
and sell it at $50/share and get
credited with $5,000)
Short Cover 100 shares @ $30.00
(you buy the stock at $30/share and
your account is charged $3,000
You return this stock to the broker
Your profit is $2,000.
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You can lose more than you put in!
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Students can short sell in the Stock Market Game.
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Investing for the Long Term
1) start with a plan
2) understand your risk tolerance
3) diversify
4) keep track of your investments
5) invest for the long term