Ch. 11.3: The Stock Market

Transcription

1 Ch. 11.3: The Stock Market

2 How does the stock market work?

3 Corporations raise funds by issuing stock, which represents ownership in the corporation. Sept. 12, 2013, private to public Initial Public Offering (IPO) Hire an investment bank to handle to IPO underwriting; figure out how much $ can be raised from the IPO File with the SEC and submit financial statements and other details of the IPO

4 Stock Exchange Markets Stocks are registered with a particular exchange. Over 100 markets worldwide Largest New York Stock Exchange NYSE (hours: 9:30-4 EST) 6:30-1 PST NASDAQ (National Association of Securities Dealers Automated Quotations) (hours: 9:30-4 EST) Tokyo Stock Exchange London Stock Exchange Shanghai Stock Exchange Hong Kong Stock Exchange

5 Owning a stock means becoming a fractional owner of a company. If the company thrives, the price of the stock will rise and if you sell the stock, your profit is the difference between what you paid for the stock the price you sold it at.

6 How do you invest in stocks? Which company shows the most short-run/long-run promise? Why? 8/15 Stock Price: $ $ $ You have $10,000, what will you buy and how many shares will you buy?

7 Why do stock prices go up and down? Stock prices are driven by supply and demand. If a company is doing well or its shares are selling at fair price, many investors may buy its stock, creating demand, which drives up the price. But when demand decreases, so does the price. Stock prices reflect what investors think a company will be worth. That demand depends on the company s past performance, current profits, the industry, upcoming products, the health of the economy and current events.

8 How is the market is doing? Index = the value of a specific group of stocks provide a basic signal of how specific markets perform during the day Dow Jones Industrial Average The Dow is an average of the price of 30 largest and most widely traded stocks (blue chips) in the United States (Boeing, IBM, GE )

9 The editors of The Wall Street Journal decide which companies are included in the Dow Jones Industrial Average. There are no rules for inclusion, just a set of broad guidelines that require large, respected, substantial enterprises that represent a significant portion of the economic activity in the United States.

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11 S&P 500 (Standard & Poor s) tracks the stock prices of 500 large U.S. companies How is the market is doing?

12 NASDAQ Composite Index all of the companies (approx. 3,100) traded on NASDAQ. Mostly tech companies. How is the market is doing?

13 Dow Jones S&P 500 NASDAQ AUG 2017

14 Evaluating a Company USING DATA TO DRIVE YOUR DECISION

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16 Stock Table As of Aug 17, 2017

17 52-Week High/Low = $ = $368.50

18 Income Stock = pays dividends (share of the profits) usually 4 times a year. Usually expressed at an annual rate. Growth Stock = pays few or no dividends. Instead the company reinvests its profits and thus the company and its stock will increase in value over time. Apple pays a dividend of $2.28/year. If you own 10 shares, you would earn $22.80/year.

19 Stock Table continued. Yield = dividend price x100 % of return from the dividend. If you purchase Apple, $2.28 is 2.09% of $ In 47.8 years, your dividend will pay for your purchase. Are you better off purchasing Adidas ($88.65) which has a annual dividend of $3.64 and a yield of 1.02 or American Eagle ($19.03), which has an annual dividend of $2.00 and a yield of 2.67? Adidas: 100/1.02 = 98 years AE: 100/2.67 = 37.5 years

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21 EPS (earning-per-share) = company net earnings dividends # of outstanding shares Shares outstandingrefers to allsharescurrently owned by stockholders, company officials, and investors in the public domain, but does not include shares repurchased by a company is a measure of a company's profit Company ABC has 1000 shares in the market. Last quarter, it earned a profit of $25,000. Each share is worth $25 of profit. As the company earns more $, the value of the stock increases, so will the price of the stock. When the price of the stock increases, you will have a capital gain.

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23 P/E ratio (price-to-earning ratio) = current price earning per share You must compare P/E ratios of companies in the same industry (similar production costs, consumer base and risk). the P/E tells us how much an investor is willing to pay for $1 of a company's earnings. For example, if the P/E is 15, then investors are willing to pay $15 for every dollar of earnings. A lower P/E ratio means that you will pay less for the same amount of earnings. A sign of whether a company is overvalued or undervalued. Companies that are losing money do not have a P/E ratio.