UNIT 2UNIT 2The Stock Market and The Stock Market and

InvestingInvesting

Name two famous actors who starred in the movie Boiler Room about a stock brokerage that used high pressure sales tactics and misleading

information to scam unsuspecting investors?

Quiz Question 1 - $1 Pontieri

What is a stock?What is a stock? Suppose a company wishes to raise $900 Suppose a company wishes to raise $900 in cash. They can offer to sell 9 shares at in cash. They can offer to sell 9 shares at $100. This offer is called an $100. This offer is called an Initial Public Initial Public OfferingOffering (IPO) (IPO) and is called and is called market market capitalization.capitalization. On a balance sheet, it looks On a balance sheet, it looks like this:like this:Assets = Liabilities + Shareholder’s Equity

$900 $0 $900 (9 shares issued)

Debt Equity

This is an example of a Primary Market. This process only occurs once and the holder of the share is called the shareholder.

Private versus Public CompaniesPrivate versus Public Companies A A public companypublic company is listed on a Stock Exchange. The is listed on a Stock Exchange. The

company's shares are available for the public to invest in. If company's shares are available for the public to invest in. If listed on a stock exchange, there are usually many owners listed on a stock exchange, there are usually many owners of the company.of the company.

The term The term publicpublic is also used to describe government owned is also used to describe government owned companies. These are not listed on a Stock Exchange.companies. These are not listed on a Stock Exchange.

Meanwhile, a Meanwhile, a private companyprivate company does not sell shares on a does not sell shares on a stock exchange and are usually owned by a smaller number stock exchange and are usually owned by a smaller number of private owners. of private owners. Example: a family owned businessExample: a family owned business. .

What are some advantages/disadvantages of being a public or private company?

But what is the trading of stocks?But what is the trading of stocks?

The trading of stock occurs in the The trading of stock occurs in the secondary secondary marketmarket where a shareholder wishes to sell where a shareholder wishes to sell their share. This selling of stock occurs on a their share. This selling of stock occurs on a listed stock market or stock exchange.listed stock market or stock exchange.Examples of stock exchanges include: TSE, NYSE, NASDAQ, VENTURE Examples of stock exchanges include: TSE, NYSE, NASDAQ, VENTURE

MARKET, SHANGHAI, NIKKEI, LONDON, DAXMARKET, SHANGHAI, NIKKEI, LONDON, DAX

Trading on the Trading on the secondary marketsecondary market does not does not affect the original company or the owner’s affect the original company or the owner’s equity.equity.

What is the stock market?What is the stock market? The stock market or stock exchange manages The stock market or stock exchange manages

the trading process of a buyer and a seller.the trading process of a buyer and a seller.

Step 1: Order is placed

Step 2: Order is matched electronically by the Exchange computer system

Step 3: When a match is found, the broker informs the client of the price plus the commission

Buy Sell

Bid Ask

$102 $102

$100 $103

$99 $104

The matching price is based on supply and

demand

The Trading Floor:The Trading Floor: When large ‘lots’ of shares are traded, When large ‘lots’ of shares are traded, the trade is actually executed by a person on the trading the trade is actually executed by a person on the trading

floor of a stock exchange floor of a stock exchange (Ask and Bid)(Ask and Bid)

How do I understand how a stock is How do I understand how a stock is doing?doing?

Bid: What price people would like to buy a ‘lot’ of 100 shares for

Ask: What price that share owners are willing to sell a ‘lot’ of shares for

52wk Range: The high price and low price in 1 year

Volume: The number of shares traded that day

P/E: Price Per Earnings, the expected earnings per share in the coming year. The higher the number, the better the outlook for profits

Quiz Question 2 - $1 Pontieri

Which stock ticker symbol is not Which stock ticker symbol is not real?real?

a)a) CHICCHIC

b)b) GEEKGEEK

c)c) HOPEHOPE

d)d) LUVLUV

How do I read the overall strength of How do I read the overall strength of the stock market?the stock market?

You can find out the price of a particular You can find out the price of a particular stock or find out how a stock or find out how a ‘market’‘market’ is doing is doing by reading the results of a by reading the results of a market indexmarket index. .

““The S&P/TSX Composite Index went up 20 The S&P/TSX Composite Index went up 20 points today to 8,702.” What does this mean?points today to 8,702.” What does this mean?

The Index is a bucket of stocks of important companies that have broad economic sector coverage. They generally are the companies from various industries that play a vital role in the success of our economy. Examples include Banks, natural resources, large manufacturers and large technology companies. There are many different Indexes out there with different buckets of companies

Different Products that are sold on Different Products that are sold on Stock ExchangesStock Exchanges

StockStock – a security that is offered by a company for financing which – a security that is offered by a company for financing which gives the stock holder part ownership of a company.gives the stock holder part ownership of a company.

2 types of stocks exist:2 types of stocks exist: Common and Preferred Common and Preferred

Common sharesCommon shares represent represent ownership in a company and generally carries ownership in a company and generally carries voting privileges. Owning a common share gives the shareholder part voting privileges. Owning a common share gives the shareholder part ownership of the company. Most shares bought, are common shares.ownership of the company. Most shares bought, are common shares.

Preferred sharesPreferred shares generally do not come with voting privileges and get their generally do not come with voting privileges and get their dividends first over common share holders at a fixed rate. dividends first over common share holders at a fixed rate.

DividendsDividends – Companies have the option to offer their shareholders dividends to – Companies have the option to offer their shareholders dividends to entice them to buy their shares. Dividends are money distributed out of a entice them to buy their shares. Dividends are money distributed out of a

company's profits to its shareholders in proportion to the number of shares the company's profits to its shareholders in proportion to the number of shares the share holder owns. A company is under no legal obligation to pay dividends on share holder owns. A company is under no legal obligation to pay dividends on

common shares, but do for preferred shares. common shares, but do for preferred shares. You do not purchase You do not purchase dividends… you purchase a stock in which a company pays dividendsdividends… you purchase a stock in which a company pays dividends

Different Products that are sold on Stock Exchanges Different Products that are sold on Stock Exchanges (cont’d)(cont’d)

OptionsOptions – Calls and Puts– Calls and Puts

These are derivates of actual stocks and trade on their own These are derivates of actual stocks and trade on their own market. They allow a buyer to the right to buy a stock at market. They allow a buyer to the right to buy a stock at a future price… this is called the ‘strike price’. A a future price… this is called the ‘strike price’. A CallCall is is when you are buying the option to buy a stock at a when you are buying the option to buy a stock at a particular price in a specified point in time… when you particular price in a specified point in time… when you think the stock price is going up…think the stock price is going up…

On the reverse side, you buy a On the reverse side, you buy a PutPut when you believe the when you believe the stock price is going down and you want the option to buy stock price is going down and you want the option to buy the stock at a certain price at a specific point in time.the stock at a certain price at a specific point in time.

These are risky as you risk losing all of the investment into the derived option.

Mutual FundsMutual Funds - These are not listed on a stock exchange but can be - These are not listed on a stock exchange but can be purchased much like a stock. They are issued by companies who purchased much like a stock. They are issued by companies who then use your money to invest in stock exchange then use your money to invest in stock exchange listedlisted companies. companies.

The mutual fund company tries to make the best return on your The mutual fund company tries to make the best return on your investment. Mutual Fund Manager’s analyze the market and use investment. Mutual Fund Manager’s analyze the market and use their expert knowledge to invest your money in a their expert knowledge to invest your money in a bucket of stocksbucket of stocks. . Mutual Fund companies charge their investors a fee. Mutual Fund companies charge their investors a fee.

Mutual Funds can be good investments because your investment is Mutual Funds can be good investments because your investment is DIVERSIFIEDDIVERSIFIED. .

Different Products that are sold on Stock Exchanges Different Products that are sold on Stock Exchanges (cont’d)(cont’d)

Example of a Mutual FundExample of a Mutual Fund TD Balanced Growth, TD Balanced Growth, Fund Code TDB970, Fund Code TDB970, Minimum Investment: $100, MER 2.14% Minimum Investment: $100, MER 2.14%

Buying a Mutual Fund keeps you from putting all your eggs in one basket

BondsBonds

There are 2 major types of bonds: There are 2 major types of bonds:

Government Bonds:Government Bonds: These are guaranteed where the These are guaranteed where the investor is paid a return on investment after a certain investor is paid a return on investment after a certain amount of time. amount of time. Example: Canadian Savings Bond Example: Canadian Savings Bond purchased for $1000 for a 1 year term with a 5% interest purchased for $1000 for a 1 year term with a 5% interest rate. Owner receives back from the government, the rate. Owner receives back from the government, the guarantee of $1050. That is principal and interest.guarantee of $1050. That is principal and interest.

Corporate issued bonds:Corporate issued bonds: These are not guaranteed These are not guaranteed but offer a premium interest rate because of the higher but offer a premium interest rate because of the higher risk. The value of corporate bonds.risk. The value of corporate bonds.

There are many other types of investments. There are many other types of investments. Some are traded on a stock exchange, and some Some are traded on a stock exchange, and some are investments that you can buy from a bank or are investments that you can buy from a bank or

financial institutionfinancial institution

Purchased through a stock exchange/brokerPurchased through a stock exchange/broker1.1. Stocks - Blue Chip, Small Cap, Large CapStocks - Blue Chip, Small Cap, Large Cap2.2. Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, ForeignMutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign3.3. Indexes – SectorIndexes – Sector4.4. Options/DerivativesOptions/Derivatives5.5. Venture Market offeringsVenture Market offerings6.6. Company issued BondsCompany issued Bonds7.7. Money Market/T-Bills (Government lending, 90 day investment)Money Market/T-Bills (Government lending, 90 day investment)

Purchased through a financial institutionPurchased through a financial institution1.1. Canadian Savings BondsCanadian Savings Bonds2.2. GIC’s – Guaranteed Investment CertificateGIC’s – Guaranteed Investment Certificate3.3. Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, ForeignMutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign

When deciding the type of product to When deciding the type of product to buy, you must first assess your riskbuy, you must first assess your risk

What is risk?

Lower risk of losing money = lower potential

return

Higher Risk of making money = higher potential

return

Risk assessment is highly individual. Your personal risk could be influenced by current world events, your own investment experiences or your inherited views

on saving and investing, and by poor advice.

Buying a Lottery Ticket = 1 in 16 million chance of

winning

Using the risk equilibrium, determine Using the risk equilibrium, determine where each investment opportunity sitswhere each investment opportunity sits

Lower risk = lower potential return

Higher Risk = higher potential return

Possible Investments:Possible Investments:

Purchased through a stock exchange/brokerPurchased through a stock exchange/brokerStocks - Blue Chip, Small Cap, Large CapStocks - Blue Chip, Small Cap, Large CapMutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic,

ForeignForeignIndexes – SectorIndexes – SectorOptions/DerivativesOptions/DerivativesVenture Market offeringsVenture Market offeringsCompany issued BondsCompany issued BondsMoney Market/T-Bills (Government lending, 90 day investment)Money Market/T-Bills (Government lending, 90 day investment)

Purchased through a financial institutionPurchased through a financial institutionCanadian Savings BondsCanadian Savings BondsGIC’s – Guaranteed Investment CertificateGIC’s – Guaranteed Investment CertificateMutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic,

ForeignForeign

Quiz Question 3 - $1 Pontieri

Which one of these following items can Which one of these following items can be purchased on the be purchased on the Chicago Mercantile Exchange::

a)a) Chicken FeetChicken Feet

b)b) Pork BelliesPork Bellies

c)c) Goose FeathersGoose Feathers

d)d) Cow TonguesCow Tongues

Why invest today?Why invest today?

The theory of compounding… The theory of compounding… YearYear InvestmentInvestment Interest RateInterest Rate Interest PaidInterest Paid Total ValueTotal Value

Year 1Year 1 $1000$1000 5%5% $50$50 $1050$1050

Year 2Year 2 $1050$1050 5%5% $53$53 $1103$1103

Year 3Year 3 $1103$1103 5%5% $55$55 $1158$1158

Year 4Year 4 $1158$1158 5%5% $58$58 $1216$1216

Year 5Year 5 $1216$1216 5%5% $61$61 $1276$1276

Year 6Year 6 $1276$1276 5%5% $64$64 $1340$1340

Year 7Year 7 $1340$1340 5%5% $67$67 $1407$1407

Time is worth money!!! Whenever interest is calculated, it is based not only on the original principal, but on the previous unpaid interest. Interest on interest… it’s free money!

What is a RRSP?What is a RRSP? Registered Retirement Savings PlanRegistered Retirement Savings Plan

Tax free investment in a locked account that is to be saved Tax free investment in a locked account that is to be saved until retirement. When you remove the money from the until retirement. When you remove the money from the RRSP account, that tax paid will be based on your tax RRSP account, that tax paid will be based on your tax rate at the time of removal.rate at the time of removal.

Also, capital gains are not taxable within your RRSP Also, capital gains are not taxable within your RRSP account.account.

Last words…Last words…

Buy low and sell high… or even better, buy high, Buy low and sell high… or even better, buy high, and sell higher!and sell higher!

Know your own risk tolerance. Do not invest Know your own risk tolerance. Do not invest money that you can’t afford to lose.money that you can’t afford to lose.

Take advantage of your life time by investing Take advantage of your life time by investing early and taking advantage of compounding early and taking advantage of compounding interest.interest.

Learn about investing as very few people make Learn about investing as very few people make it rich simply by working for a paycheck.it rich simply by working for a paycheck.

Quiz Question 4 – $1 Pontieri

These 2 terms are used to describe a These 2 terms are used to describe a rising and declining stock market:rising and declining stock market:

a)a) Cat and MouseCat and Mouse

b)b) Bull and BearBull and Bear

c)c) Hot and ColdHot and Cold

d)d) Sweet and SourSweet and Sour

Answers to the Quiz QuestionsAnswers to the Quiz Questions

1. Vin Diesel and Ben Affleck1. Vin Diesel and Ben Affleck

2. Hope is not real. 2. Hope is not real. CHIC = Charlotte Russe Holdings Inc, Geek = Internet America Inc., CHIC = Charlotte Russe Holdings Inc, Geek = Internet America Inc.,

Luv = Southwestern AirlinesLuv = Southwestern Airlines

3. Pork Bellies. Other include oranges, coffee, livestock, soya beans, 3. Pork Bellies. Other include oranges, coffee, livestock, soya beans, cocoa, cottoncocoa, cotton

4. Bull and Bear4. Bull and Bear