investing in stocks
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Investing in Stocks. Personal Finance Holmen High School. Objectives. Understand the stock market's function for both owners and investors Understand what drives prices up and down Recognize and apply the concepts of Earnings Per Share (EPS) Price/Earnings Ratio (P/E) - PowerPoint PPT PresentationTRANSCRIPT
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Investing in StocksPersonal FinanceHolmen High School
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ObjectivesUnderstand the stock market's
function for both owners and investors
Understand what drives prices up and down
Recognize and apply the concepts of◦Earnings Per Share (EPS)◦Price/Earnings Ratio (P/E) ◦Factoring growth in the valuation of a
company
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Meet VelmaVelma owns a small
cupcake shop
Velma makes a profit of $5,000 a year
Business is growing, but she needs cash to expand
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Velma’s OptionsLoan from a Bank
Issue Bonds◦Borrow from
Investors
Find Private Investors
Find Public Investors
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Velma and DaphneVelma needs to
borrow moneyDaphne has money
to lend
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Velma and DaphneVelma Gets a Loan
from a Bank
Pays 7% Business Loan
Daphne Puts Her Money in Checking Account or CD
Earns 1%-3% in Interest
7% 2%
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Velma and DaphneVelma Issue
Bonds
Pays 6% to Investors
Daphne Invests in a Bond
Receives 6% Interest
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Velma and DaphneVelma seeks
private investors
FamilyFriendsBusiness People
Daphne wants to buy 50% of the company
Velma’s Company makes $5,000 a year
Daphne wants half the profit ($2,500)
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How Much Should Daphne Pay?
If Daphne wants 50% of the business, how much should she pay Velma?
What is Velma’s business worth?
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Issuing Stock- Going Public
Allows public to invest in Velma’s company
Issue shares to investors
Profits are shared among investors
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Public vs Private
Private Public
Does not need to disclose◦ Revenue◦ Profits◦ Expenses◦ Salary
Kwik TripMenardsFestival
Need to disclose◦ Revenue◦ Profits◦ Expenses◦ Salary
BPHome DepotPublix
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What is the Stock Market?Just like a farmer’s
market
Buy and sell shares of stock in public companies
Companies recognized by Ticker Symbols◦SBUX WMT◦MCD MSFT
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Benefits of the Stock MarketOwners Raise
Money
Investors become Owners
Allows businesses to grow and expand
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Why Go PublicVelma’s
business has grown to 10 stores
Wishes to expand to 200 stores
Needs to raise money to expand
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Velma’s CupcakesValue determined by
Wall Street
Issues 500,000 shares at $5/share
Raises $2.5 million to expand her business
Ticker Symbol: VCUP
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What causes the price to change?After six months:
Demand for Cupcakes is High
Sales are GrowingProfits are Rising
VCUP Price:$8.00
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What causes the Price to Change?After 12 Months:
Demand for Cupcakes is Low
Economy is BadSales are SlowingProfits are Falling
VCUP Price$3.00
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What causes the Price to Change?Supply and Demand
High Demand-Low Supply- Price Rises
Low Demand-High Supply- Price Falls
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Total ProfitQuarter1 $200,000Quarter 2 $350,000Quarter 3 $150,000Quarter 4 $300,000Total Profit $1,000,000Number of Shares
500,000
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Earnings Per ShareQuarter Profit Shares EPS
Quarter 1 $200,000 500,000 $.40
Quarter 2 $350,000 500,000 $.70
Quarter 3 $150,000 500,000 $.30
Quarter 4 $300,000 500,000 $.60
Year 1 $1,000,000
500,000 $2.00
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What’s a Fair Price?Is $8.00
Expensive for VCUP
Is $3.00 Cheap for VCUP
We don’t know until we look at the P/E Ratio
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Price to Earnings RatioPrice- Current Share
Price
Earnings- Earnings Per Share
VCUP Price- $8.00ESP- $2.00
P/E 4
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Price to Earnings RatioNot represented in
dollars
Lower the better
High numbers mean a stock could be expensive
Look at Competitors
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Price to EarningsPepsi P/E 20Coke P/E 15
Coke is a better value because the P/E ratio is lower
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Ways to Profit from StockCapital GainBuy 1,000 Shares of MSFT @ $20Sell 1,000 Shares of MSFT @ $35
Profit- 1,000 x $15= $15,000DividendsOwn 200 Shares of Nike. Nike
pays a dividend of $3/share.Profit- 200 x $3= $600
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Question 1Jerry's Juice Company has 500,000 shares outstanding Listed below are the quarterly EPS for the company.Q1 $.60Q2 $.40Q3 $.75Q4 $.25
What are the total earnings for the past year? A. $125,000B. $1,000,000 C. $2.00 D. $250,000
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Question 2All other things being equal, it is best to look for a company with a low P/E.
TrueFalse
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Question 3Name one thing that could cause stock prices to fall.
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Question 4Calculate the EPS from the following information:
Total Profit: $3,000,000Total # of Shares: 1,000,000
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Question 5What is one difference between a privately and publically owned company?