Stock Market Fundamentals

FUNDAMENTALS OF ECONOMICS

Financial Planning: The Stock Market

  • Big Idea: Economic decision making is affected by political values.
    • Political decision making can also be influenced by economic factors.

Framing Questions

  • What impact do people’s immediate and long-term financial goals have on their economic decisions?

Expectations and Goals

  • Overall Expectation: Analyze how different political and economic systems, including governments in Canada, make economic decisions.

    • Focus On: Stability and variability in economic perspectives.

  • Specific Expectation B4.4:

    • Compare various investment choices, such as stocks, bonds, guaranteed investment certificates, mutual funds, tax-free saving accounts, and registered retirement income funds.
    • Explain the importance of diversifying investments.

Success Criteria

  • Define key terms:

    • Common & preferred stocks
    • Initial Public Offering (IPO)
    • Primary & secondary markets
    • Indices
    • Dividend
    • Bull & bear markets
    • Short selling
    • Buying on margin

  • Provide examples of:

    • Publicly traded companies
    • Exchanges and indices

  • Explain:

    • Changes in the stock market
    • How to read a stock table
    • Importance of diversifying your portfolio

Stock Market Basics

  • What are Stocks?
    • Ownership in a publicly traded company.
    • Claim on the company’s assets and earnings.
    • More stock = greater claim as an owner.

Types of Stock

  • Common Stock:

    • Most common form of stock.
    • One vote per share.
    • Dividends are not guaranteed.

  • Preferred Stock:

    • Fixed dividend.
    • May not include voting rights.
    • Companies can customize other “classes” of stock.

Ticker Symbols

  • Securities traded on the stock exchange are identified by ticker symbols:
    • Microsoft (MSFT)
    • Southwest Airlines (LUV)
    • Ford Motor Company (F)
    • Google (GOOG)

Markets

  • Primary Markets:

    • Where new stocks are created.

  • Secondary Markets:

    • Investors trade previously issued stocks.
    • Companies may buy and sell their own stock.

Exchanges

  • Major Exchanges:
    • Toronto Stock Exchange (TSX)
    • New York Stock Exchange (NYSE)
    • American Stock Exchange (AMEX)
    • NASDAQ

Indices

  • What are Indices?
    • Collection of representative stocks.
    • Examples:
    • Dow Jones: 30 important stocks in the market.
    • S&P 500: 500 largest companies in the US market.
    • NASDAQ Composite: All NASDAQ stocks.

How Do You Make Money in the Market?

  1. Stock Price Increase: Sell when prices rise (buy low, sell high).
  2. Dividends: Income from stockholding (not all companies pay dividends).

What Causes Stock Prices to Change?

  • Factors include:
    • Supply and Demand
    • Earnings expectations
    • Market sentiments and attitudes
    • Economic indicators
    • Investor volume
    • Various unexpected events

Why Invest in Stocks?

  • Returns may exceed 3-4 times the annual return of inflation, savings, and treasury bonds.
  • Potential for significant profitability, but risk of loss exists.

How Should I Invest?

  • Determine financial goals and risk tolerance.
  • Understand that greater returns often come with higher risk.
  • Decide on active vs. passive portfolio management.
  • Diversification: Don’t put all eggs in one basket.

Where to Start?

  • Learn the basics of investing.
  • Set up a brokerage account:
    • Types: Full-service vs. discount brokers.
    • Consider website reviews for discount brokerage firms.
    • Be aware of fees, commissions, and minimum balances.
    • Keep investing strategies simple as you learn.

Reading a Stock Table

  • Key components of a stock table include:
    • Ticker Symbol: Identifier for the stock.
    • Price: Current stock price.
    • Open: Today's opening price.
    • Close: Last trading price from the previous day.
    • Net Change: Difference from the previous day's close.
    • Day’s Range: Price fluctuations for the current day.
    • 52-Week Hi/Low: Highest and lowest prices over the past year.
    • Trading Volume: Total shares traded for the day.
    • Market Capitalization: Total market value of the company.
    • Dividend Per Share: Annual dividend payment per share.
    • Price/Earnings Ratio: Current price divided by earnings per share.

Bulls and Bears

  • Bull Market: Economy is thriving; rising stock prices.
  • Bear Market: Economy is struggling; falling stock prices.

Beyond the Basics

  • Bonds: Debt investment for a defined period at fixed interest rates.
  • Buying on Margin: Using borrowed money to buy securities.
  • Selling Short: Borrowing security to sell it elsewhere in anticipation of lower prices.
  • Dollar Cost Average: Regularly investing a fixed amount in a specific investment.