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An Introduction to Stocks

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Title: An Introduction to Stocks


1
An Introduction to Stocks

2
Stock Basics(What are stocks?)
3
What is the stock market?
  • Refers to buying and selling of shares, or stock,
    in all kinds of companies, both in the United
    States and around the world.
  • Anyone who owns purchases stock in a company is
    its stockholder (also called shareholder)

4
Stock Market Basics
  • Stock Certificates
  • A printed legal document showing ownership.
  • In our digital age they have become less common

5
What is a stock?
  • Stock symbols
  • Set of letters that represent a security traded
    on an exchange
  • Ex. MSFT, GS, AAPL, MA, BUD, LUV

6
How to Make Money on Stocks
  • Dividends
  • money given to stockholders by the company from
    company profits
  • NOT ALL STOCKS PAY DIVIDENDS
  • Stock Sell
  • Stock changes value based on what people are
    willing to pay for the stock
  • You can sell the stock through a brokerage firm
    and collect the cash value
  • You can sell the stock and buy other stocks in
    its place (called a trade)

7
Stock Types
  • Preferred Stock ownership in a corporation that
    gives you the first right to dividends
  • Common Stock basic form of ownership of a
    corporation

8
Stock Market Terms
  • Market Value the price at which a share of
    stock can be bought and sold in the stock market
  • Stockbroker a licensed specialist in buying and
    selling stocks and bonds

9
Stock Exchange
  • Business organization that accommodates the
    buying and selling of securities Exchanges
  • Lists stocks and sets policies for how stocks are
    traded
  • Major exchanges
  • New York Stock Exchange (NYSE)
  • American Stock Exchange (AMEX)
  • NASDAQ

10
The Indices (index)
  • Imaginary collection of stocks that is supposed
    to represent the stock market
  • SP 500
  • (500 largest companies on US stock Market)
  • Dow Jones
  • (30 most significant stocks in the stock market)
  • Nasdaq Composite
  • (index representing all the stocks on the
    Nasdaq(tech))

11
What Causes Stock Prices to Change?
  • Supply and Demand
  • Earnings (expectations)
  • Sentiments, attitudes, sense of greed
  • Economic Indicators
  • Follow the leader
  • Manipulation
  • LOTS of different theories

12
Economic Factors!
  • Inflation/Recession Higher prices can result in
    lower spending by consumers, reducing company
    profits.
  • Interest Rates As the cost of money changes,
    company profits can increase or decline.
  • Consumer Spending Profits of companies that
    sell products and services to households are
    directly affected by buying habits.
  • Employment As people obtain or lose jobs, the
    amount of money they have for spending will
    affect company profits.

13
Why invest? Why stocks?(What about my savings
account?)
14
Why Invest?
  • Opportunity to Make Money!!!
  • Short Term vs. Long Term Goals
  • Long Term
  • Buying a new house, car, etc.
  • Short Term
  • Buying food, gasoline, books, clothes, etc.

15
Determining Your Financial Goals
  • Investing is a long car trip. There needs to be a
    lot of planning that goes into it.
  • How much money do you want to make? By when?
  • Will you need to live off your investments in
    future years?
  • What will you be using your money for?
  • Having a good understanding of yourself will
    allow you to align your risk tolerance with
    various strategies
  • Think about your risk tolerance, time horizons
    for your investments, and your time commitment

16
Why the Stock Market?
1976-2000 1976-2000
Investment Average Annual Return Average Annual Return
SP 500 SP 500 11
Small-Company Stocks Small-Company Stocks 12
U.S. Treasury Bonds (short-term) U.S. Treasury Bonds (short-term) 4
U.S. Treasury Bonds (long-term) U.S. Treasury Bonds (long-term) 5
Savings Interest Rate Savings Interest Rate 1-3
Inflation Inflation 2-3
Source The Motley Fool Guide How to Start Investing Source The Motley Fool Guide How to Start Investing Source The Motley Fool Guide How to Start Investing
17
You can make good money (But dont forget, you
can lose a lot of it too)
NASDAQ (1999-2001)
50 loss in 1 year
136 Gain in less than 1 year
18
Apple Computers (750 in 24 months)
19
Urban Outfitters (330 in 23 months)
20
Advantages of Stock Market Investing
  • You can choose companies in which you want to
    invest money
  • Many companies pay a dividend
  • Opportunity to make money
  • You can track your investment growth on the
    Internet or newspaper
  • You can plan your future by investing
  • Support our economy

21
Disadvantages of Stock Market Investing!
  • Not guaranteed to make a profit
  • You may lose your future investment plan
  • Current events can play a major role in the
    market (September 11, 2001, etc)
  • Companies may lie about profits and sales to
    persuade investors (Enron, Martha Stewart, etc)

22
Mutual Funds
  • Funds in which investment professionals manage
    your money and decide on the investments
  • These funds often amount to millions and billions
    of dollars and come in a variety of types
  • Advantages
  • Simplicity / Professional Management /
    Diversification / Liquidity / Usually Low Risk
  • Disadvantages
  • Fees (and lots of them)

23
The Risk / Return Tradeoff
  • principle that potential return rises with an
    increase in risk
  • Low risk with lower returns, high risk with high
    returns
  • Important to know your personal risk tolerance
    when choosing investments
  • Balance between risk and reward

24
What is Your Risk Tolerance?
Source Investopedia. Determining Risk and The
Risk Pyramid. May 2 2003
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