Stock Market Basics

Financial Literacy

What We Will CoverO Stock SplitsO Beta ValuesO Reading a Stock QuoteO Price/Earnings RatioO The Stock Market in GeneralO Purchasing a StockO Supply vs. Demand

Stock SplitO Sometimes the price of a stock gets high,

and the company wants to lower the price to be more attractive to investors, so they split their shares

Stock Split - ExampleO Example: You own 100 shares of

Company A, worth $10 each for a total portfolio value of $1000 (100 shares X $10/share)

O Company splits 2 for 1O You now have 200 shares (100 X 2)O But they are worth half as much

($10/2)O Your portfolio value stays the same:

$1000 (200 shares X $5/share)

Stock Split- ExampleCompany A:Your Beginning Portfolio Value:100 shares X $10/share = $1,000 total value

Stock splits 2 for 1:Now you have 100 X 2 shares = 200 sharesBut they are worth half as much= $5.00/share

Ending Portfolio Value:200 shares X $5.00/share = $1,000 total value

The total portfolio value didn’t change

Stock Split – Another Example

O Company B:O Your Beginning Portfolio Value:O 200 shares X $33/share = $6,600 total

value

O Stock splits 3 for 1:O Now you have 200 X 3 shares = 600 sharesO But they are worth 1/3 as much= $11.00/share

O Ending Portfolio Value:O 600 shares X $11.00/share = $6,600 total value

O The total portfolio value didn’t change

Practice Stock Split Problems:

Company XXX (Pre-split):Shares: X Price:

=Total Value

1,000 X $5.00 = $5,000Stock splits 2 for 1After Split:

(Number of Shares X 2=)

______X

(Price / 2=)$_______ = $_______

_Total Portfolio Value stays ___________________________

Another Stock Split Problem:

Company YYY (Pre-split):Shares: X Price:

=Total Value

300 X $30.00 = $________

Stock splits 3 for 1After Split:

(Number of Shares X 3=)

______X

(Price / 3=)$_______ = $_______

_Total Portfolio Value stays ___________________________

And Another….

Company ZZZ (Pre-split):Shares: X Price:

=Total Value

200 X $21.00 = $________

Stock splits 3 for 1After Split:

Shares:______ X

Price:$_______ = $_______

_Total Portfolio Value stays ___________________________

Beta ValueO The beta value measures a stock’s

volatility compared to overall changes in the stock marketO If a stock has a beta of +1.5 and the market goes

up 10%, the value of the stock is expected to rise 15% (multiply the increase in the stock market X the beta value)

O Average beta is between +0.5 - +2.0O Beta value can be found under “Key Statistics” or

on the main stock pageO A higher beta indicates more risk because the

stock price change will be more drastic

Practice Beta Values:Stock Market

Increase/Decrease

X Stock’s Beta Value =

Anticipated Stock Price

Change10% X .9 = 9%8% X 1.2 = _____%12% X 3.0 = _____%5% X .5 = _____%-9% X 1.0 = _____%-3% X 2.1 = _____%

Reading Stock Quotes

Stock Quote

Company Name, Ticker Symbol and Stock Exchange

Stock Quote

Current Price (Last Trade Price), up (green) or down (red) for the day in dollars and percent; last trade

time

Stock Quote

Last price at the end of trading yesterday

Stock Quote

Price the stock opened at this morning at beginning of trading time

Stock Quote

The price buyers are willing to pay (bid) and the price sellers are asking (ask)

Stock Quote

The price analysts think the stock will be at a year from now

Stock Quote

The volatility index: how much the stock is predicted to move as compared to the market as a whole

Stock Quote

The next day the company will report earnings (or report profit for the previous three months)

Stock Quote

The highest and lowest prices the stock has traded TODAY

Stock Quote

The highest and lowest prices the stock has traded during the PAST YEAR

Stock Quote

The number of shares traded so far TODAY

Stock Quote

The number of shares traded on an average day

Stock Quote

The total value of all the stock outstanding

Stock Quote

The price/earnings ratio (see definition below)

Stock Quote

The net income the company earned for each share of stock

Stock Quote

The dividend the company pays per year in dollars and as a percentage of stock value

Stock Quote

A chart of how the stock price has changed today

Stock Quote

Charts of price changes for various time periods in the past

Price/Earnings Ratio O P/E ratio is the most commonly used

measurement of how expensive a stock is

O Formula: price of stock divided by earnings per shareO For ZION, it is closing price (23.86) divided

by earnings per share (.97) = 24.59 (approximately))

P/E Ratio – What Does It Mean?

O It is the price investors are willing to pay for each dollar of profit in the company

O The higher the P/E ratio, the more investors are willing to pay for the profits of a company– it becomes a more expensive stock

O Companies with high P/E ratios are more risky because there are higher investor expectationsO If the company doesn’t meet

expectations, the stock price will drop, sometimes drastically

P/E Ratios:O N/A: a company with no earningsO 0-10: a stock is either undervalued (cheap)

or the company’s earnings are decliningO 10-17: For many companies, this is

considered fair (accurate) valueO 17-25: The stock may be overvalued

(expensive), or it may be a company expected to have future high growth

O Over 25: Investors have high expectations for future growth; may be overvalued and risky

How Well the Stock Market is Doing Overall

3 Basic Indicators (Indexes)ODow Jones Industrial Average (“DOW”)

O Lists the 30 leading industrial blue chip stocksOStandard and Poor’s 500 Composite Index

O Covers market activity for 500 stocksO More accurate than DOW because it evaluates a

greater variety of stockONational Association of Security Dealers

Automated Quotations (“NASDAQ”)O Monitors fast moving technology companiesO Speculative stocks, show dramatic ups and downs

Ups and Downs

O The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks

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

Purchasing Stock

BrokersO A Broker is a person who is licensed

to buy and sell stocks, provide investment advice, and collect a commission on each purchase or saleO Purchases stocks on an organized

exchange (stock market)O The vast majority of all stocks are

bought and sold on an organized exchange

Organized ExchangesO A stock exchange is a place where

stocks are bought and sold.O There are minimum requirements for a

stock to be on an exchange, to ensure only reputable companies are listed

O Each exchange has a limited number of seats available which brokerage firms purchase to give them the legal right to buy and sell stocks on the exchangeO NYSE, Nasdaq, and American Stock

Exchange

How Do Stock Prices Change?Supply vs. Demand

O The stock exchange is organized based upon the laws of supply and demand

Stock Supply vs. Demand

O With a limited number of shares of stock,

O If the demand is high:O Share prices will rise because

investors are willing to pay more to get the stock.

O If the demand is low:O Share prices will drop because

investors are willing to take a lower price to get rid of their shares.