The Stock Market. What It Is and How It Works. Ashlee Garn, Brokerage Consultant Fidelity Investments

Transcription

1 The Stock Market What It Is and How It Works Ashlee Garn, Brokerage Consultant Fidelity Investments

2 Topics We Will Cover: 1. How corporations raise money. Debt vs. Equity 2. How stocks are bought and sold 3. Reading a stock quote 4. Stock market vocabulary Mutual funds, ETFs, stock splits, margin, short selling, beta 5. Risk vs. Reward 6. Tools for stock analysis

3 1. How Corporations Raise Money. How do I raise the money to make my great business idea a success?

4 DEBT vs. EQUITY The Basic Equation of Accounting: ASSETS = LIABILITIES + OWNER S EQUITY Asset: Anything of Value Liability: What I Owe Equity: What I Own

5 DEBT vs. EQUITY The Basic Equation of Accounting: ASSETS = LIABILITIES + OWNER S EQUITY = + $100,000 Mortgage: $70,000 Equity: $30,000

6 1. How Corporations Raise Money. How do I raise the money to make my great business idea a success? DEBT: Borrow the money and promise to pay it back with interest. My company issues BONDS selling them for $100,000 and promising the bond holders 5% interest over 10 years.

7 1. How Corporations Raise Money. How do I raise the money to make my great business idea a success? EQUITY: I let people buy a small portion of my company and become part owners. My company issues STOCK selling 100,000 shares of stock for $1 each, raising a total of $100,000.

8 DEBT vs. EQUITY Advantages of DEBT (bonds) If business succeeds, after I pay off the debt I keep ALL the profits. I pay 5% interest, but generate a 10% return. You have up to 10 years before needing to return the $100,000. Advantages of EQUITY (stock) I have NO debt. Even if my great idea fails, I don t have to pay back the $100,000. You have no interest payments (cash flow) to make to anyone.

9 DEBT vs. EQUITY Disadvantages of DEBT (bonds) Even if my business isn t making money I still have to pay the lenders (bond holders). Company financial statements show a lot of debt and little equity. Can I borrow at an interest rate I can afford? Disadvantages of EQUITY (stock) I give up ownership. If the company succeeds, I own less of the profits. I have other owners who now have input on how I run the business. Is there enough demand for the stock for me to raise the money needed?

10 2. How Stocks are Bought and Sold The stock (equity) of most smaller companies is privately held and only changes hands occasionally in individually negotiated transactions. Larger companies go through an initial public offering (IPO) so that their stock can be traded on a public stock exchange.

11 2. How Stocks are Bought and Sold Stock Exchanges (or Stock Markets) are a place where people who want to buy or sell their stock come together and agree on a fair price. Today it s all done electronically.

12 2. How Stocks are Bought and Sold Buyers in the stock market BID for how much they are willing to pay to buy a stock. Sellers ASK for a price they will accept to sell their shares. Prices move up or down until there is a match between a buyer and seller.

13 2. How Stocks are Bought and Sold For the visual learners in the crowd: Video on how the stock market works.

14 3. Reading a Stock Quote

15 Prev Close: The final price of the stock on the last day that the stock was traded.

16 Open: The price of the first trade of the day.

17 Bid: The highest current price that any buyer is offering to pay.

18 Ask: The lowest current price that any seller is willing to accept.

19 1y Target Est: The average estimate by stock analysts on what the price of the stock will be in one year.

20 Beta: A measure of the volatility (movement) of a stock s price. A beta of 1.0 means the stock price will move about as much as the overall market. A beta of 2.0 should move twice as much as the market and a beta of 0.5 should move half as much as the market.

21 Next Earnings Date: Publicly traded companies report their earning (financial results) every three months. This is the next date when the company will report their earnings.

22 Day s Range: The lowest and highest price at which the stock has traded during today s trading session.

23 52wk Range: The lowest and highest price at which the stock has traded during the past year.

24 Volume: The number (quantity) of shares that have traded so far during today s trading session.

25 AvgVol (3m): The average daily number (quantity) of shares that have traded over the past three months.

26 Market Cap: The total value of all the company measured by multiplying the total number of outstanding shares of stock by the current stock price.

27 EPS: Earnings Per Share. The total profit (earnings) that the company generated over the past year divided by the number of outstanding shares.

28 P/E: The price to earnings ratio. The current stock price divided by the EPS (earnings per share). This ratio can be used to compare how expensive the stock is in comparison to other stocks.

29 Div & Yield: Dividends are the profits of the company that are distributed out to shareholders (usually on a quarterly basis). Some companies reinvest all profits and don t pay a dividend. The yield is a ratio of the amount of annual dividends paid out divided by the current stock price.

30 4. Stock Market Vocabulary Mutual funds Exchange Traded Funds (ETFs) Stock Splits Margin Short Selling

31 Mutual Funds An investment vehicle that invests in multiple stocks (or other assets). A mutual fund manager chooses which stocks to buy and sell in the fund (except for index funds). Individual investors own shares of the mutual fund itself and the fund owns the individual stocks. Many focus on a particular sector or theme. Provides greater diversification and usually lowers risk.

32 Exchange Traded Funds (ETFs) Similar to a mutual funds but can be traded during the day like a stock. (Mutual funds are re-priced daily at the close of each trading session.) Often used to track a particular index or sector (passive management).

33 Stock Splits When the price of an individual share of stock gets to high companies may split the stock. A 2 for 1 split means you now have two shares for every share you had before, but the stock price is halved. Usually a sign of successful company with exponential growth

34 Stock Split Example: Walmart during the 1980s and 1990s.

35 Margin: Trading with leverage Margin is using your stock as collateral to borrow money and buy more stock. The SMG rules allow you to start with $100,000, but you can borrow another $50,000 on margin to buy up to $150,000 worth of stock. Trading on margin increases your profits or your losses.

36 Margin: Examples $100,000 / $10 per share = 10,000 shares. Price goes from $10 to $15 per share. $150,000 or profit of $50,000. Borrow $50,000 and use $150,000. $150,000 / $10 per share = 15,000 shares Price goes from $10 to $15 per share. $225,000. Pay back $50,000 loan (with interest) = $175,000 Profit of $75,000.

37 Margin: Examples $100,000 / $10 per share = 10,000 shares. Price goes from $10 to $7 per share. $70,000 or loss of $30,000. Borrow $50,000 and use $150,000. $150,000 / $10 per share = 15,000 shares Price goes from $10 to $7 per share. $105,000. Pay back $50,000 loan (with interest) = $55,000 Loss of $45,000.

38 The foolproof way to make money in the stock market is to buy low and sell high. Short Selling But with short selling you can also make money in reverse by first selling high and then buying low.

39 Short Selling But... How do you sell something you don t already own? Simple... You borrow it. Broker-dealer firms have lots of stock shares just sitting in their inventory that you can borrow and later return (with a little interest).

40 Short Selling Short Selling Advantages: You can make money when stock prices are going down. You usually have as long as you need to return (pay back) the borrowed shares. You can use margin to magnify the results of short selling too. Short Selling Disadvantages: If the stock price goes up, you lose money. You still have to buy back the shares regardless of how expensive they are. Your potential losses are unlimited!!

41 Short Selling Short Selling Example: Borrow 1,000 shares and sell them for $50/share = $50,000. Price falls from $50 to $40/share. Buy 1,000 shares for $40,000 and give them back. You are left with $10,000 profit. Short Selling Example: Borrow 1,000 shares and sell them for $50/share = $50,000. Price increases from $50 to $65/share. Buy 1,000 shares for $65,000 and give them back. You are left with a $15,000 loss.

42 Short Selling

43 5. Risk vs. Reward Rule #1 for investing: Risk and Reward go together and cannot be separated. If you chase higher rewards, you will be taking on higher risks. High Risk High Reward is probably good for the game, but may not be so good for your own retirement investments.

44 6. Tools for Stock Analysis Moving Averages Stochastic MACD These are graduate level tools for determining the timing for buying or selling a stock. Often called technical analysis. Not recommended for elementary or middle school.

45 6. Tools for Stock Analysis Examples of stock screeners. Tools to find stocks with the characteristics you want.

46 Questions? Be Fearless and Have Fun. It s Just a Game! Brad Rayburn, Brokerage Sales Manager, CFP Fidelity Investments