1.12.2.G1

Corporation

Corporation: an institution granted a charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members. Securities: A document; historically, a physical certificate but increasingly electronic, showing that one owns a portion of a publicly-traded company or is owed a portion of a debt issue. Securities are tradable. At their most basic, securities refer to stocks and bonds.

Capital: Money a business gets in order to operate. • Equity Capital: Sale of stocks• Debt Capital: Sale of bonds

Public vs. Private Corporation

H28

1.12.2.G1

Stocks

Prospectus: Information about financial statements: earnings, assets, liabilities, products, services, and management.

Stock: Also known as an equity or a share is a portion of the ownership of a corporation and a claim on the company's earnings/assets

Exchange: A place where stocks, bonds, or other securities are bought and sold by brokers

H28

1. Create name & name board of directors

2. Articles of Incorporation & Write bylaws

3. Investment banker to buy their stock offering--IPO (initial public offering)

4. The investment banker sells the stock to the general public (secondary market) to make a profit.

1.12.2.G1

Common Stock

• Shares or units of ownership in a public corporation– Most basic form of ownership– One vote per share owned to determine company’s B.O.D– Right to vote on major issues

Preferred Stock• Preferred stock – shares which pay fixed

dividends and have priority– Less risk than common stock– No voting rights– More expensive– Dividends are stated as a percentage known as

the par value

1.12.2.G1

Stock s

NYSE: Oldest/largest by vol. traded & mkt. cap. (2,800 Companies)• Issued at least 1 million shares worth $100 million• Earned >$10 million in last 3 years

NASDAQ: Largest trading volume (over 2,900)- More volatile• Issued 1.25 million shares worth $70 million• Earned >$11 million in last 3 years

OTC: Smaller companies & bonds• Unable to meet exchange requirements

Stock ExchangesA place where securities are bought & sold by professional stockbrokers

Listing Requirements: Conditions imposed by a stock exchange upon companies that want to be listed on that exchange. (Min. # of shares, min. mkt. cap, & min. annual income

1.12.2.G1

Stock s

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

Index Funds & ETF’sIndex Fund: Mutual fund based on an index: Dow Jones or S&P 500 Index fund

Exchange-traded fund: A mutual fund that tracks an index, but is traded like a stock

Stock IndexAn imaginary portfolio of securities representing a particular market or a portion of it.• DJIA (The Dow Jones Industrial Average) – 30 Blue chip• Wilshire 5000 (NYSE, NASDAQ, AMEX)• NASDAQ Composite• S&P 500

1.12.2.G1

Stocks

Companies like to issue because there is no obligation to pay investors back.

Capital Gain/Loss: Difference between the purchase price & selling price when an investor buys a security and sells it later.

Dividends: Portion of the profits paid to the shareholders of a company. Decided by board of directors & not required.

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

What makes them move?

Company profit: Long term stocks grow w/ profit

Interest Rates: Higher rates = better returns on Bonds/Cds

Economy: How strong/weak the economy

Management: Company managers and CEOs

Industry: The other companies and markets

Technology: How technology is changing industries and consumers

T009-02.06

H22

Make stock price go up:• Strong economic growth•Low interest rates•Low inflation•Strong industry conditions•Proper decisions by firm

Make stock price go down:• Weak economy• High interest rates• High inflation• Weak industry conditions• Improper decisions made by the firm

1.12.2.G1

Stock Classifications

• A variety of type of stocks are necessary for a diversified portfolio

Seven basic classifications- Growth - Countercyclical- Income - Blue Chip- Value - Speculative- Cyclical

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Growth Stock

• Growth stocks: consistent record of relatively rapid growth and earnings in all economic conditions– New companies expending product

lines– P/E ratio of 15-25– Beta is 1.5 or higher– Examples include Coca-Cola and Wal-

Mart© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.12.2.G1

Income Stock

• Income stocks pay higher than average dividends– Company retains small portion of profits– Steady stream of income such as utility

companies– Beta is less than 1.0– Dividend Yield over 5% & predictable

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Value Stock

• Value stocks have a low market price considering historical earning records and value of assets– Viewed as investment bargains– Previous examples are Time Warner

and IBM– AKA Defensive Stock

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Cyclical Stock

• Cyclical stocks are influenced by changes in the economic business cycle– Companies which operate in major

consumer dependent industries •Automobiles, housing, airlines (Ford)

– Beta is generally 1.0– Reflects state of economy

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Countercyclical Stock

• Countercyclical stocks: consistent returns even when the economy is suffering– Products are always in demand– Good for investors who want

dividends– Examples are utility companies and

grocery stores– Beta is 1.0 or below, even negative

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Speculative Stock

• Speculative stocks are companies with potential for substantial earnings– Very high risk stocks– Examples include internet and

video game companies– Beta is 2.0

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Blue-chip Stock

• Blue-chip stocks: long records of profit, dividend payments, and a good reputation for management– Less risky– Grow at a consistent rate– Examples are McDonalds, Wal-Mart and

General Electric

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Reading Stock Quotes

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Year to Date Percent Change

YTD%

52-WeekHigh

Low

Stock

Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Year to date percent change is the stock price percent change from January 1st of the current year– If a stock was $43.00 on January 1st

and $36.00 on July 30th,, the percentage change would be -16.3%

1.12.2.G1

52-Week High Low

YTD%

52-WeekHigh Low

Stock

Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

52-Week High & Low shows the highest and lowest prices the stock was sold per share during the last

52 weeks

1.12.2.G1

Stock Name

YTD%

52-WeekHigh Low

Stock

Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

Stock – Each company’s stock is provided with an abbreviated

trading symbol name

1.12.2.G1

Dividends per share

YTD%

52-WeekHigh Low

Stock

Div YLD%

EPS P/E Vol100s

Close Net

Chg

-16.3 43 36 AAR .33 2.5 22 1479 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Dividends per share is the total cash paid to common stockholders per share annually– Helpful when determining the type

of stock– If a company paid $10,000 in

dividends for 30,000 shares, the dividends per share would be $0.33

1.12.2.G1

Earnings per share

YTD%

52-WeekHigh Low

Stock

Div YLD%

EPS P/E Vol100s

Close Net

Chg

-16.3 43 36 AAR .33 2.5 22 1479 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Dividends per share is the total cash paid to common stockholders per share annually– Helpful when determining the type

of stock– If a company paid $10,000 in

dividends for 30,000 shares, the dividends per share would be $0.33

1.12.2.G1

Earnings per Share

• How much income a company has available to pay in dividends and reinvest as retained earnings on a per share basis After tax annual earnings

= Earnings per shareTotal number of shares of common stock

– Information can be found in the business section of many newspapers

– Indicates how well a company is doing (the quality of products, customer service, and operations management)

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Dividend Yield Percentage

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Dividend yield percentage is the dividend expressed as a percentage of the price of the share– If a company paid $1.25 in dividends for a

stock with a market price of $50.00, the dividend yield percentage would be 2.5% (1.25/50)

– Helpful to know how much income to expect. A company paying high dividends is not reinvesting money to grow.

YTD%

52-WeekHigh Low

Stock

Div YLD%

EPS P/E Vol100s

Close Net

Chg

-16.3 43 36 AAR .33 2.5 22 1479 42 .027

1.12.2.G1

Price/Earnings Ratio

YTD%

52-WeekHigh Low

Stock

Div

YLD%

EPS P/E Vol100

s

High

Close

NetChg

-16.3

43 36 AAR .33 2.5 22 1479

40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Price/earnings ratio is the closing price of the share compared to the annual earnings per share– If the stock’s market price is $50.00 and the

earnings per share is $2.25, the P/E ratio is 22.2• For every dollar the company earns, the

stock’s market price is worth $22.00– A high number indicates people are optimistic

about the company and health of the market.

1.12.2.G1

Price/Earnings Ratio

• Price/earnings ratio is the relationship between the price of one share of stock and the annual earnings of the company (P/E ratio)

Price per share = P/E ratio

Earnings per share of stock

– Information can be found in a newspaper– Most widely used critical measure of a stock’s

price– Represents how much an investor is willing to

pay for each dollar of a company’s earnings© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.12.2.G1

P/E Ratio Continued

– Most companies have between a 5-25 P/E ratio•7-10 P/E ratios are financially successful

companies•15-25 P/E ratios are rapidly growing companies•40-50 P/E ratios are speculative companies

– Lower P/E stocks pay higher dividends and have less risk, lower prices, and slow growth

– High P/E ratios indicate the firm is expected to have a lot of growth in the future

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Volume

YTD%

52-WeekHigh Low

Stock Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Vol 100’s is the number of transactions to the share on the reported day– Represented in hundreds (take the

number and add two zeros)

1.12.2.G1

High and Low

YTD%

52-WeekHigh Low

Stock

Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• High and low entries represent the high and low selling price of one share for the previous day

1.12.2.G1

Close

YTD%

52-WeekHigh Low

Stock

Div YLD%

P/E Vol100s

High Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Close is the price of the last share sold for the day

1.12.2.G1

Net Change

YTD%

52-WeekHigh Low

Stock

Div YLD%

P/E Vol100s

High

Close

NetChg

-16.3 43 36 AAR .33 2.5 22 1479 40 42 .027

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

• Net change is the difference between the closing price of the share from the prior day and the current day

1.12.2.G1

Ups and Downs• The term bull market means the market

is doing well because investors are optimistic about the economy and are purchasing stocks

• The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned

1.12.2.G1

Book Value

• Book value is the net worth of a company

Assets-Liabilities = Book value

– Information can be found in the company’s annual report

– Indicates what would happen if a company’s assets were sold, debts paid, and proceeds distributed to stockholders

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Beta

• Beta measures a stocks volatility compared to overall changes in the stock market– If a stock has a beta of +1.5 and the

market went up 10%, the value of the stock is expected to rise 15%

– Average beta is between +0.5 - +2.0– A higher beta indicates more risk because

the stock price change will be more drastic

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.2.G1

Stock Split

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock MarketFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

Shares Issued:Value:Your Shares:Your Value:

2 For 1 Split

Before After10,000 20,000$50/share $25/share200 shares 400 shares$10,000 $10,000

Types of Orders

Market Order: Auction, buy or sell at current value

Limit Order: Buy or sell at a specific price

1.12.2.G1

Things to remember…

1. High P/E ratio indicates that the stock is expensive to invest

2. If the stock price is close to the 53 week high, you may want to hold off

3. High dividend=profit4. You want your closing price and

dividend to be close when looking at yield %

5. Yield refers to the return to investors6. Stocks are fairly priced if the PE ratio

& EPS are equal 7. Profits are recorded as earnings

1.12.2.G1

Business and Personal Finance Unit 3 Chapter 9 © 2007 Glencoe/McGraw-Hill