Stocks, Banks and Supply and Demand

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Stocks, Banks and Supply and Demand
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Copy the following questions and answer them as
we go

• 1. How are banks important to an economy?
• 2. What are stocks?
• 3. Why does the price of stocks change?

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Lets start with stocks/shares

• Stocks/shares are
• A. pieces of a company that can be bought and
  sold
• B. a slowdown in the economy
• C. the goods and services that a company produces
• D. loans that you can give to the government in
  exchange for some extra money later

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Heres how it works

• I love to cook. Not just any food, I love to
  cook tasty gourmet Puerto Rican food.

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From good food to business

• My friends tell me I should start a restaurant
  because they have never eaten anything as good
  as my food.
• So I take their advice. I decide to start my own
  restaurant.
• Ive heard, however, that starting a restaurant
  costs a lot of money. And that restaurants
  arent profitable until the 2nd or 3rd year.

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What kinds of things do I need to start a
restaurant?

• Name some things
• So how much money are we talking about?

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Where do I get the money?

• A. Personal savings
• B. Wealthy friends/private investors
• C. A bank
• D. sell stocks
• E. all of the above

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• All are right except for selling stocks. In most
  cases a company must have some history in order
  to sell stock publicly.

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Lets talk about banks

• The following statements are true about banks
  except
• A. It is a place in which people can safely keep
  their money and make financial transactions
• B. banks pay interest and charge interest
• C. banks use their customers money to make loans
  to other people
• D. banks have all of their customers money
  safely stored in a safe in the bank

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Lets talk about banks

• Banks are perhaps the most important institution
  of an economy
• They borrow money but more importantly, they LEND
  money
• Without the help of a bank, starting my small
  restaurant would be nearly impossible
• And my small business creates jobs for the
  economy

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Back to my restaurant

• So the bank liked my idea for the restaurant (it
  helped that I had 100,000 of my own money.
  Banks want to know that you have an incentive
  motivation to take care of their money)
• They lent me money because they think my
  restaurant will succeed. Eventually, I will have
  to pay back the money with interest.

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My restaurant is booming

• Five years have passed and my restaurant is
  booming
• The bank has financed my expansion and I have
  over 50 restaurants in 5 states (think a Puerto
  Rican Chipotle)

Ajo Dulce
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I have some options

• If I want to keep growing and keep the company in
  the family, then I can continue to find the
  financing for expansion. Since the company is
  doing well, many large banks and private
  investors would be happy to do this for me.
• I have another option, however, I can sell my
  company to the public.

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Why go public?

• The 1 Reason Money
• (Other reasons prestige, name brand recognition,
  liquidity)
• I can divide my company into 30 million pieces
  called stocks or shares.
• I can then sell these shares in a stock market
• I announce to the world the day that I will sell
  my stock

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My IPO (Initial Public Offering)

• Listen world! My name is Ajo Dulce. Im a
  wonderful little restaurant that sells great
  gourmet Puerto Rican food. I have a great
  product, a great lively setting and a solid
  customer base. I will continue to grow as a
  company. If you would like to buy a piece of me
  you can find me at the New York Stock Exchange (a
  stock market) on March 13, 2008. Ill start
  selling at 50 a share.

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Then what?

• Lets say the IPO went well and the company sold
  30 million shares at 50
• Thats 1.5 billion that the company can use to
  grow
• Drawbacks It is no longer my company. It is the
  company of the people who bought shares in my
  company and it is managed by a group of people
  (which probably includes me) called a board of
  directors
• By the way not only people can buy stocks. Most
  stocks are owned by institutions banks, other
  companies, retirement funds, etc.

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• All right so the company was sold to the public
  and now it is a large commercial restaurant like
  McDonalds, Chillis or TGI Fridays.
• What about the people who bought the shares in my
  company. What happens to those shares?

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Why do people buy shares/stock in a company?

• 1 You get a cool certificate showing how many
  shares you own in the company

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What do you get if you buy a share of a company?

• 2, and more importantly, a share is an
  investment--a way for your money to make money (
  or lose money)
• How you ask?
• The most common way is by watching the value of
  the share/stock rise. An example

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Google

• Google went public in October of 2004. Google
  set its price at 85 a share. Lets say I bought
  100 shares for 8500.
• At its highest point (Dec 7, 2007), a share of
  Google was worth 714. On this date my
  investment was worth 71,400. If I was lucky
  enough to sell all my shares on that date, I
  would have made about 63,000. This is money I
  didnt have to work for. Its an investment.
• Any questions?

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Why do stock prices change?

• Supply and demand the more something is demanded
  the higher its price the less its demanded, the
  lower the price
• Whats the price of the fly here?

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• Its the same for anything bought and sold in a
  market where there are no fixed prices. Why is
  less more for this oil executive?

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This cartoon suggests that building a border wall
is an economic problem. Explain.
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Supply and Demand

• If investors believe that Google is a great
  company and continue to buy its stock, its price
  will continue to rise.
• If all of a sudden they believe Google sucks and
  begin selling their shares, the price of the
  stock will fall

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Review

• Why are banks especially important to an economy?
• They print money
• They lend money to start businesses
• They always have peoples money when they need it
• They pay people interest for saving their money
  in their institution

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Why are small businesses important to an economy?

• A. they add some values (a unique product or
  service)
• B. they create jobs for the economy
• C. they create wealth for the city, state and
  nation
• D. all of the above

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What is a share/stock?

• A. a piece of a company
• B. a piece of the government
• C. a loan from a bank
• D. all of the above

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Why do people/institutions buy stocks?

• A. as an investmenta way to have your money make
  money
• B. it helps the economy by creating jobs
• C. to grow your own company like in the case of
  Ajo Dulce
• D. all of the above

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Why do stock prices go up and down?

• A. the company changes the prices
• B. Supply and demand
• C. Banks and small businesses negotiate the price
• D. all of the above

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Based on what you have learned...

• Write your answer on your paper.
• If stocks are bought and sold at a place called
  the stock market, what do you think happens when
  a stock market crashes?