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Stock Market Investing

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Title: Stock Market Investing


1
Stock Market Investing
  • Advanced

2
Proverbs 235
  • "Cast but a glance at riches, and they are
    gone, for they will surely sprout wings and fly
    off to the sky like an eagle."

3
Proverbs 810
  • "Choose my instruction instead of silver,
    knowledge rather than gold, for wisdom is more
    precious than rubies, and nothing you desire can
    compare with her."

4
REVIEW
  • Stocks (shares) are offered to enable a company,
    that is in need of long-term financing, to sell
    stocks in order to exchange for cash. This is the
    main method of raising business capital. The
    other is bonds.
  • When the corporations issue these stocks they are
    said to be publicly held. An IPO is an initial
    public offeringthe first time stocks are
    issued.
  • If you own shares of a company you may be
    entitled to vote, receive dividends, right to
    sell, liquidity or residual rights.

5
Stock market investing formula
  • Total Investment Value
  • (________)(________) ________ ________
  • ( of Shares)(Share price) dividend broker
    fee
  • Dividend a set price that the company pays its
    shareholders (a of their profits)
  • Broker Fee a fee that a stock broker charges for
    buying or selling stocks

6
Stock Markets
  • To trade stocks (buy or sell), you must purchase
    through a stock-broker who works with a stock
    exchange.

7
Bear vs Bull Market
8
Bear vs Bull Market
  • A market that is RISING is called a Bull Market

  • A FALLING market is called a Bear market.
  • The markets are bullish on gold means people
    are buying gold stocks because they are
    increasing steadily.

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11
Learning the Lingo
  • In your glossary, define each of the following.
  • Examples optional
  • Bear vs. Bull market
  • Diversification (as in Diversified portfolio)
  • Bid (High), Ask (Low) Prices Volume
  • Floor Trader vs. Stock Broker
  • Blue Chip Stocks vs. Growth Stocks vs. Penny
    Stocks
  • Small Cap vs. Large Cap
  • Dividend rate vs. Broker Fee
  • Common vs. Preferred stock
  • P/E Ratio
  • Stock splitting
  • Liquidity

12
High-risk strategies 1) Buy on Margin
  • Buying Stock on Margin
  • Purchase stock like normal, but you borrow the
    money to make the purchase
  • Advantages?
  • Get in on a good deal quickly
  • Dont need to sell other stock or have money
    up-front
  • Disadvantages?
  • Charged interest on loan
  • If share prices goes down, you still owe original
    amount, plus interest, plus broker fees!

13
High-risk strategies 2) Selling Short
  • Selling Short is the opposite of the usual buy
    low sell high strategy of buying stocks
  • Selling short is a bet by an investor that a
    stock will go down in price. Strategy Look for
    companies that are about to fall in price.
  • Advantages?
  • Can make money on stocks going down
  • Disadvantages?
  • If price goes up, you lose double

14
High-risk strategies 2) Selling Short
  • So how do short sellers make money? Well, they
    are betting that the stock they sell will drop in
    price. If the stock drops, the short sellers buy
    back the stock at a lower price and return it to
    the lender. For example, if an investor thinks
    Ben's Bowling Business (BBB) is overvalued at 25
    and is going to drop in price, he or she may
    borrow the stock and sell it for the 25. If the
    stock goes down to 20, the investor, after
    buying it off the TSX, and returning it, would
    make 5 per share. However, if the stock went up
    to 30, the investor would be at a loss of 5 per
    share.

15
High-risk strategies 3) Stock Options
  • A privilege, sold by one party to another, that
    gives the buyer the right to buy (call) or sell
    (put) a stock at a set price within a certain
    time period .
  • Advantages?
  • You have the option of buying more stock in the
    future at a set price, even if the market
    changes
  • Disadvantages?
  • It costs money to buy an option, on top of broker
    fee

16
High-risk strategies 3a) Call
  • An option contract giving the owner the right
    (but not the obligation) to BUY a stock, at a set
    price, within a set time period.
  • Advantages?
  • Ex XIU trades at 60.00 You can buy a call to
    purchase XIU at 62.00 for 3 months. If it goes
    up to 65.00, you can still buy it at 62.00
    make 3/share
  • Disadvantages?
  • If the price drops, your money used to buy the
    call option is wasted. You wouldnt want to buy
    it at 62

17
High-risk strategies 3b) Put
  • An option contract giving the owner the right
    (but not the obligation) to SELL a stock, at a
    set price, within a set time period.
  • Advantages?
  • Ex ACE.B trades at 35.00 You expect it go
    down, so you buy a put for the right to sell
    ACE.B at 33.00. If it goes down to 30, you can
    still sell it for 33!
  • Disadvantages?
  • If the price goes up, your money used to buy the
    put option is wasted. You wouldnt want to sell
    it at 33!

18
Graphical example
  • The possible payoff for a holder of a put option
    is shown by the following diagram

19
Strategies when using Options
  • Purchase a call when you expect the stock to go
    up in price. Wait, and then
  • 1) Exercise the call option. (buy more at a lower
    price!)
  • 2) Sell the call option to someone
  • Purchase a put when you expect the stock to
    drop in price. Wait, and then
  • 1) Exercise the put option. (sell at the higher
    price!)
  • 2) Sell the put option to someone

20
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