3.3 stocks

Stocks (Equities)

Offer strong returns but with the risk of complete loss

No sure way to invest and make a profit

(Can drastically change day to day)

Stock Brokers

People who buy/sell stocks for their clients

What do stock brokers do?

Often make recommendations, give advice and in return, earn a fee based on the investor transactions (purchases and sales)

Investors

can open internet accounts w/ discount brokerage firm

What do investors do?

bypasses stockbrokers, charge less for every transaction and sometimes offer advice'

(access by either computer or smartphone)

Why does the value of stocks change daily?

stocks go up & down due to change in supply and demand

Why will investors buy/sell shares of a stock?

Will buy if they think the price will go up and sell if they think the price will go down

What happens if enough people buy stocks?

the supply of shares is low and prices go up

What happens if enough people sell stocks?

The supply of share is high and the price will go down

People follow companies closely to buy/sell before…..

Major changes

Stock acronyms

52wks, stock(sym), DIV, Y/D, PE, 100s, LIAST, and NET CHG

52 weeks

Highest (Hi) and lowest (lo) prices, typically doesn't tell you when it happened

Stock (SYM)

Name of the stock and symbol/acronym of the stock

Y/D

way to calculate dividend that is paid in equal installments

(a dividend of $0.32 would pay out $0.08 4 times a year)

PE

Last share of price to annual earnings per share

100s

Volume of shares traded that day in the hundreds

LIAST

Closing price of share for that day

NET CHG

Most recent closing price compared to the previous price

Efficient Market Hypothesis (EMH)

Argument that stocks are usually priced correctly and bargains are hard to find

What leads to efficient market hypothesis?

Too many investors following companies closely

If investors observe anything that might affect the fortunes of a company, they buy/sell immediately

Portfolio Diversification

the practice of holding a large number of different stocks so increases/decreases in certain fields can offset others

(If electric cars suddenly become free, oil markets would crash but having stocks in other things would offset the loss in oil)

Mutual Funds

A company that sells shares of securities to individual investors

What happens to the invested money in mutual funds in a diversified portfolio of stocks and bonds?

Reaps the maximum gains of diversification

Dividends that are received are passed on to mutual funds shareholder

Mutual funds can't protect investors against what?

Swings in the stock market as a a whole

What will the portfolio reflect over days or long periods of time?

If stocks rise/fall

Net Asset Value/Mutual Fund Share (NAV)

The net value of the mutual fund dividend by the # of shared issued by the mutual funds

401(k) Plans

Tax deferred investment and savings plans that acts as a personal pension fund for employees

How do you contribute to a company's 401(k)?

Employees must authorize regular payroll deduction

What happens to 401(k) contributions?

It's pooled and invested in mutual funds or other investments approved by the company

How do 401(k) plans lower taxes?

Because you don't pay income taxes on the contributions until you withdraw

What do employers usually do in 401(k)?

Usually match a portion of an employee's contributions

401(k) penalties

Occurs when $ is pulled out before you reach the age of 59.5

What is vesting?

The length of time you need to work at a company before you can take the employer's matching contributions.

If vesting is 3 years, how long must you work to receive the contribution match?

You must work 3 years.

What happens if you work one day less than the vesting period?

You do not get the contribution match.

New York Stock Exchange (NYSE)

Was the most prestigious stock exchange in the US

American Stock Exchange (AMEX)

started selling other assets such as options and futures to broaden its product line

What did NYSE acquire in 2008?

Euronext, a major Europeans equities and securities markets and is now known as NYSE Euronext

Why is NYSE and AMEX no longer separate exchanges?

Because NYSE acquired AMEX

What do investors consult?

One of two popular indicators

What happens if an indicator goes up/down?

Stocks go up/down

What are the popular indicators?

Dow Jones Industrial Average (DJIA) and Standard & Poor's 500

Dow Jones Industrial Average (DJIA)

The most popular and widely publicized measures of stock market performance

Present day DJIA still cover only 30 stocks, but some are added and deleted.

Standard & Poor's 500 (S&P 500)

Uses the price changes of 500 stocks as an indicator

What happen to DJIA in 1884?

Published average closing price of 11 active stocks

What happen to DJIA in 1928?

they expanded to over 30 stocks

Bull Markets

Strong markets w/ prices moving up for several months or years in a row

(1988 to 2000, Stock prices rose up to 500%)

Bear Market

A mean or nasty market where prices of equities fall sharply for several months or years in a row.

(Great Depression is the Great Recession when the DJIA last more than 1/2 its value in 2008-2009)

Trading in the Future

Most buying and selling takes place immediately in a spot market

(transaction is made immediately at the prevailing)

Futures Contract

an exchange that takes place later and is an agreement to buy or sell at a specific future date for a predetermined price hoping the actual price will be higher when the date arrives.

How are futures contract settled profit or loss?

It's settled w/ a cash payment rather than the buyer taking delivery

Call option

A special type of futures contract that gives the buyer the right to cancel the contract if it's not advantageous

Put option

The seller's version of a call option