Stock Market Basics
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Transcript of Stock Market Basics
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Stock Market Basics
Financial Literacy
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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
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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
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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)
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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
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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
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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 ___________________________
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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 ___________________________
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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 ___________________________
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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
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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 = _____%
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Reading Stock Quotes
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Stock Quote
Company Name, Ticker Symbol and Stock Exchange
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Stock Quote
Current Price (Last Trade Price), up (green) or down (red) for the day in dollars and percent; last trade
time
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Stock Quote
Last price at the end of trading yesterday
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Stock Quote
Price the stock opened at this morning at beginning of trading time
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Stock Quote
The price buyers are willing to pay (bid) and the price sellers are asking (ask)
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Stock Quote
The price analysts think the stock will be at a year from now
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Stock Quote
The volatility index: how much the stock is predicted to move as compared to the market as a whole
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Stock Quote
The next day the company will report earnings (or report profit for the previous three months)
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Stock Quote
The highest and lowest prices the stock has traded TODAY
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Stock Quote
The highest and lowest prices the stock has traded during the PAST YEAR
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Stock Quote
The number of shares traded so far TODAY
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Stock Quote
The number of shares traded on an average day
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Stock Quote
The total value of all the stock outstanding
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Stock Quote
The price/earnings ratio (see definition below)
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Stock Quote
The net income the company earned for each share of stock
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Stock Quote
The dividend the company pays per year in dollars and as a percentage of stock value
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Stock Quote
A chart of how the stock price has changed today
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Stock Quote
Charts of price changes for various time periods in the past
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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))
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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
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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
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How Well the Stock Market is Doing Overall
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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
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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
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Purchasing Stock
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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
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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
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How Do Stock Prices Change?Supply vs. Demand
O The stock exchange is organized based upon the laws of supply and demand
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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.