Chapter 6 Section 7

Overview of Stock Markets

• Stock markets are platforms for buying and selling stocks, which are shares of ownership in corporations.

Understanding Stocks

• What is a Stock?

  • A stock represents ownership in a corporation.

  • Stocks can be bought and sold through stock exchanges.

Benefits of Investing in Stocks

• Profit Opportunities:

  • Dividends: Payments made to shareholders from corporate profits, usually quarterly.

  • Capital Gains: Selling stocks for more than the purchase price.

Types of Stock

• Common Stock:

  • Typically allows voting rights and dividends.

• Preferred Stock:

  • Generally does not allow voting but has priority over common stock in dividend payments.

Stock Splits

• Changes the number of shares outstanding without changing total equity value.

Risks of Investing in Stocks

• Stock investments carry risks due to price volatility and potential losses.

  • Example: If a company performs poorly, stock values may decrease.

Stock Market Trends

• Bull Market: Period of rising stock prices. Investors are optimistic.

• Bear Market: Period of declining prices. Investors expect downturns.

Stock Exchanges

• Major exchanges like NYSE and Nasdaq serve as marketplaces for trading stocks.

  • NYSE: Known for having stringent requirements for listing.

  • Nasdaq: Electronic exchange with different trading mechanisms.

Futures and Options

• Futures: Contracts to buy/sell assets at a future date at a predetermined price.

• Options: Contracts giving the owner the right, but not the obligation, to buy/sell stocks at a specific price before a certain date.

Historical Events in Stocks

• The Great Crash of 1929: Massive stock market drop leading to the Great Depression.

  • Speculation and buying on margin contributed to the crash.

• Subsequent Crashes: E.g., Black Monday (1987) and housing market crash (2008).

Investor Psychology and Market Behavior

• Market fluctuations greatly influence investor sentiment and decision-making.