Transcript Slide 1

Spring 2008
Economics 98 / 198 DeCal
`
Introduction to Stocks
Basics of Investing I
www.ocf.berkeley.edu/~jml/decal
Schedule Today



Administrative Issues
Current Events
Lecture content: Basics of Investing
–
–
–
–
–
–


What is a stock?
How are they traded?
What are brokerages?
Different types of orders
What is the market?
Terminology
Learning how to use the simulation; IBD
Assignments / Readings
Administrative Issues

Attendance & Sign-In

Name Tags

Enrollment

Emails

Webpage

Syllabus Review

News Presentation Sign Ups

Investor’s Business Daily Access
Current Events
Current Events

Troubled / volatile markets
–
–
Damages from sub-prime mortgages and
the housing sector
Fear of risk of recession


Fed (Federal Reserve) meeting next
week
–

Weak job reports
Rate cuts?
Apple releases new lines of iPod
Current Events
NASDAQ
S&P 500
Lecture Content
What is a stock?




Common stock – most “common”
type
Gives you a “share” of ownership of a
publicly traded company
Entitled to a portion of profits –
dividends
Stock ownership = claim on assets
and earnings
–
Also something called “preferred stock”
What is a stock?



Ticker symbols
– Set of letters that represent a security traded
on an exchange
– Ex. MSFT, GS, AAPL, MA, BUD, LUV
Stock quotes
– List of prices for a stock at a particular point
during the trading day
Stock tickers
– What do those green and red numbers mean?
Different Types of Stock

Preferred Stock
–
–

Common Stock
–
–
–
–

No voting rights to company issues
Issued fixed dividends forever – main form of return
Majority of stock we see and hear about in the news
Ownership of the company
Entitled to portion of the earnings
Earn returns mainly through capital gains
What are capital gains?
–
–
Increase in asset value relative to the purchases price
Not realized until asset is actually sold
Stocks vs. Bonds

Stocks are equity
–
–
–

Generally considered riskier
Quite possible to lose a significant
portion, if not all, of your money
Potential for much higher returns
Bonds are debt
–
–
Guaranteed a fixed return
Have a higher claim than stockholders

What does this mean?
Dividend Debate

Distribution of a portion of a
company's earnings to its
shareholders (usually cash)
What Can Cause Stock Prices to
Change?
Supply and Demand!
(What affects supply / demand of a stock?)
Two Markets

Primary Market – market in which investors
have first opportunity to buy newly issued shares
–

Initial Public Offering (IPO)
 First time that company offers its shares to public
markets (securities bought directly from company)
 Where private companies become public
Secondary Market – investors trade alreadyissued shares of companies with each other
–
–
Ie. The stock market
Trading of a company’s stock DOES NOT DIRECTLY
involve the company financially
How Stocks Are Traded

Major exchanges
–
Lists stocks (and other securities), sets
policies for how stocks are traded




New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
National Association of Securities Dealers
Automated Quotation
Only “publicly traded
companies” are listed
Market Indices (Index)

Definition
– Aggregate value of combining
several stocks together and
intended to represent entire or
portion of the stock market

S&P 500
–
500 stocks chosen by Standard &
Poor to represent US stock market
 NASDAQ Composite
 Dow Jones Industrial Average
–


30 most significant stocks traded
S&P 600 Small-Cap
Russell 3000
–
3000 of the largest stocks in the US
Stocks Markets & Animals

Bull Market
–

When everything in the market is going great
and stocks are generally heading upwards
Bear Market
–
When everything is NOT GOOD and stocks are
generally headed

NOTE: Nothing lasts forever! Good times
and bad times will end at some point

Other animal terms: pigs, chickens
Brokerages

Need a medium to trade
through – this is where
brokerages come in

Cash vs. margin account

Choosing a broker
–
full service vs. discount



Fees (Commission)
Services
Minimum balance
Opening an Account

Not a hard process- most of it just some
paperwork and mail
–
–
–

Cash accounts usually never turned down
–

Sign-up online and download forms
Mail checks, forms, and copy of ID
Accounts created within a couple of days
Margin accounts might be a problem if you
have pretty bad credit history
To start investing, won’t need much else
other than a computer, some money, and
investing know-how
Brokerages

Some links for brokerage comparisons
–
–
Find something that works for what YOU need
No one broker that is best for all investors

http://www.investingonline.org/gso/broker
_ratings.html

http://www.consumersearch.com/www/int
ernet/online-brokers/reviews.html

http://www.stockbrokerguide.com/
Different types of Orders



Market Order
Limit Order
 An order to buy or sell a set number of shares
at specified price of better. Limit orders usually
cost more, but useful for getting specified
price. By better I mean, lower.
Stop Order
 An order placed for a security for when the
price surpasses a particular point, which helps
buy or sell at a particular price. Limiting loss or
locking profits. Many people use this during
vacations if they can’t use it.
Different Types of Orders

Stop Limit Order
 Executed at a specified price (or better) after a
given stop price has been reached. Order
becomes then a limit order to buy (or sell) at
the limit price or better
 Precision purposes

Good Until Cancelled (GTC)

Good Until End of Day
Things to Internalize

Learn the basics!
–
–
Need to know what basic terms mean
Articles should help you

Advantages of starting young

Useful resources for stock tutorials
–
–
–
www.investorwords.com
www.investopedia.com
www.fool.com
Homework / Reading


Set up your account
Online articles (Course website)
–
–
–
–
–
“The Five Biggest Stock Market Myths”
“Getting Started”
“Brokers and Online Trading”
“Stocks”
Get started on “Investing 101”
IBD Subscription
Investopedia Simulation