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Investing 101


Investing in stocks, bonds, or mutual funds carries risks too. When you invest in a stock, you are taking a risk that the it will decline in value--with the ... – PowerPoint PPT presentation

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Title: Investing 101

Investing 101
  • Kentucky Council on Economic Education
  • 08/22/06

Power of Compounding
  • Interest on principal
  • plus interest earned
  • Rule of 72
  • Penny a dayor 1million?
  • The power of compounding was said to be deemed
    the eighth wonder of the world - or so the story
    goes - by Albert Einstein. 

  • A share in the ownership of a company. 100,000
    shares outstanding in companyYou own 1,000
    shares  (100,000/1000) 1 ownership. 
  • Types of Stock
  • Common Stock
  • Entitles the holder to one vote in the affairs of
    the company and one vote to elect the board
  • Preferred Stock
  • Usually doesn't come with the same voting rights
    as common stockholders. 
  • Receive a share of profits before common
  • In the event of company dissolution, preferred
    shareholders have a prior claim to assets ahead
    of common shareholders, but behind creditors.

Stock Classifications
  • Blue-Chip Stocks biggest companies in the country
  • Growth Stocks A growth company usually spends a
    lot of money on research and puts all its profits
    back into the company instead of paying dividends
  • Income Stocks stable companies that pay
    higher-than-average dividend
  • Cyclical Stocks move up or down in sync with the
    business cycle, i.e., automobile, housing, etc.
  • Defensive Stocks unaffected by changes in the
    business cycle,i.e., food, utilities. Etc.
  • Value Stocks considered undervalued by investors
  • Penny Stocks - low-priced, speculative stocks

Industries and Sectors
  • Industries - Companies are grouped by industry,
    based on the products or services they offer.
    Companies in the airline industry would be Delta,
    TWA, Southwest, etc. 
  • Sectors are broad groupings of similar
    industries. The airlines industry would be part
    of the transportation sector.
  • Industries/sectors are used by investors to
    compare similar companies

  • Offered by well established companies
  • Paid to investors
  • As cash or stock (usually quarterly)
  • Decided by the Board of Directors
  • Record Date/Distribution Date

Stock Splits
  • 2 for 1, 3 for 1
  • Reverse splits, i.e., 1 for 2
  • Example
  • Johnny holds 100 shares of GTD, currently valued
    at 60/share, so he has a 6,000 investment.
  • GTD announces a stock split of 2 for 1.
  • After the stock split, Johnny will hold 200
    shares of stock, and those 200 shares will be
    valued at 30/share. 200 shares X 30 share
    6,000. (Same value!)

IPO Initial Public Offerings
  • First sale of stock by a company to the public.
  • Distributed through investment bankers in the
    "primary market
  • Buyers (usually institutional investors) of these
    new shares of stock will sell to the public

Mutual Funds
  • Mutual fund company
  • Manager
  • Pooled money of investors
  • Investors buy shares of the mutual fund
  • Good way to get started in investing
  • In the Stock Market Game simulation, students can
    buy mutual funds in addition to stocks.   

  • IOU issued (debt securities)
  • Issued by governments and corporations to raise
  • Investor is the lender
  • Company/Govt repays principal plus interest
    (generally quarterly)
  • Students cannot invest in bonds in the Stock
    Market Game.

Forms of Business
  • Sole proprietorship
  • Partnership
  • Corporation

Public or Private Company?
  • Private company does not issue stock to the
    public, only privately.
  • Public company is a corporation that has "gone

How do businesses raise capital?
  • Three major sources of financial capital for
  • Retained earnings
  • Debt (loans, corporate bonds, etc.)
  • Equity (stock)

Parent Companies, Brands, Subsidiaries
  • Parent Company - A company that exercises control
    over one or more subsidiary enterprises.
  • Subsidiary - a wholly or partially owned company
    which is part of a large corporation (parent).
  • Brand - A name, term, symbol, design, or
    combination of these that identifies a seller's
    products and differentiates them from
    competitors' products, i.e., Taco Bell, Lands
    End, etc.

Mergers and Acquisitions
  • A merger is a form of corporate acquisition in
    which one firm absorbs another and the assets and
    liabilities of the two firms are combined. 
  • An acquisition is when one business takes
    possession of another business. This is also
    called a takeover or buyout.
  • Mergers are a way for a company to grow faster,
    to become more efficient, to acquire new product
    lines, to change its image, or to eliminate a
  • In many corporate mergers or acquisitions, the
    shares of one company are converted to shares of
    the other company.  In other cases, one company
    simply buys all of the other company's shares. It
    pays cash for these shares.

Market Exchanges
  • New York Stock Exchange NYSE
  • Oldest stock market in US
  • Auction market (with brokers on trading floor)
  • American Stock Exchange (AMEX)
  • NASDAQ (National Association of Securities
    Dealers Automated Quotation System), is an
    electronic market
  • Over the Counter Bulletin Board (OTBB) for
    companies that don't qualify to list on the major
    market exchanges because they are too small or
    their stock prices too low.

History of Stock Market
  • May 17, 1792
  • Buttonwood Tree Agreement
  • NYSE 1817
  • Curb trading AMEX
  • Securities Exchange Act of 1937

Stock Market Crash
  • October 29, 1929 - Black Tuesday
  • Set off the Great Depression
  • NPR Audio http//

  • A stock index is a measure of average stock
    prices in a group of individual stocks.
  • Reflect how the market is doing as a group
  • Examples
  • Dow Jones Industrials - which tracks 30 blue chip
    stocks (of well-known companies)
  • Standard Poor's 500- which tracks 500 stocks
    from industrial, transportation, utility and
    financial companies
  • Russell 2000- which tracks 2000 smaller company
  • NASDAQ Composite Index - which tracks all the
    stocks listed on the NASDAQ, almost 4,000 in all.

  • Dow Jones Industrial Average
  • 30 blue chip stocks
  • A stock market index
  • Most-quoted market indicator

Bull and Bear
  • Bear market describes a period of time when stock
    prices are falling.
  • Bull market is a period when stock prices are
    generally rising.

Factors Affecting the Stock Market
  • Health
  • company
  • industry
  • economy
  • Global
  • Good News/Bad News
  • Microeconomic variables - factors that can affect
    companies or industries
  • Macroeconomic variables - factors that affect the
  • Consumer confidence
  • Investor perception

Diversification "Don't put all your eggs in one
  • Strategy of spreading your investment dollars
    across various types of securities, i.e.,
  • several industry sectors (e.g., transportation,
    technology, airlines, retail, etc.)
  • large and small companies,
  • growth and income stocks,
  • cyclical and non-cyclical stocks,
  • blue chip companies, and
  • international companies. 
  • In the Stock Market Game,
  • 5 stock minimum rule
  • 30 maximum equity

Supply and Demand
  • Stock prices change because of supply and demand
  • more buyers than sellers price goes up!
  • More sellers than buyers price goes down!

Reading an Annual Report
  • Get from company website or call/write company
  • Chairman of the Board Letter
  • Sales and Marketing
  • 10 Year Summary of Financial Figures
  • Management Discussion and Analysis CPA Opinion
  • Financial Statements
  • Subsidiaries, Brands and Addresses
  • List of Directors and Officers
  • Stock Price History
  • from Annual Report Library (http//

Fundamental Analysis
  • Thorough review of company
  • Product
  • Operating efficiency
  • Management
  • Financial performance
  • Profit/Loss, EPS, P/E, etc.
  • Position in Industry

Technical Analysis
  • Used to evaluate the worth of a stock by studying
    market statistics.
  • Stock and stock market trends
  • Charting

Crunching the Numbers
  • Book value - This represents the different
    between the company's assets and liabilities. A
    low book value (from too much debt) could mean
    that the company's profits will be limited.
    However, a low value may also indicate that the
    assets are underestimated, and that the stock is
    a good value for potential investors.
  • Earnings Per Share (EPS) - This represents the
    company's net profit divided by the  number of
    shares outstanding.  Analysts typically look for
    steadily increasing EPS, which shows a pattern of
    consistent growth.

Crunching the Numbers
  • Price/Earnings (P/E) Ratio - company's stock
    price divided by its 12 month EPS.
  • High P/E means high projected earning
  • If a company has a PE of 10, that means that
    investors are willing to pay 10 for every 1 of
    last year's companies earnings.
  • Compare the PE ratios of other companies in the
    same industry, or to the market in general, or
    against the company's own historical P/E ratio.
  • Beta quantifies how volatile a stock is
    compared to the overall market
  • A stock that rises or falls in value at the same
    rate as the market has a beta of 1.0.
  • Beta below 1 - less volatile -- and potentially
    less risky
  • Beta above 1 - more volatile, meaning that
    investors might expect its price to rise or fall
    more quickly.

  • Going on Margin" borrowing money to invest
  • In SMG pay 7 interest (per annum) for any
    money spent over initial 100,000 cash. 
  • Very Risky not suitable for a long-term,
    buy-and-hold investor. 
  • Minimum Maintenance   If the Total Equity in your
    portfolio falls below 30 of the value of your
    long and short positions, your team will receive
    a margin call.  (Note In a margin call, the
    computer will automatically sell shares of stock
    in the portfolio to recoup its losses.)

Short Selling
  • Way to make money in the stock market--particularl
    y during a Bear market when prices are dropping. 
    It can also be effective if you know a company is
    headed in a downward spiral. 
  • Brokerage loans you stock from inventory
  • You sell the stock you borrowed
  • When stock value drops, you short cover buy
    the stock on the market
  • You give brokerage back their stock you borrowed,
  • You profit from the difference
  • Short Sell 100 shares _at_ 50.00       (you borrow
    100 shares of stock and sell it at 50/share
    and get                                          
                credited with 5,000)
  • Short Cover 100 shares _at_ 30.00      (you buy the
    stock at 30/share and your account is
    charged 3,000
  • You return this stock to the broker Your profit
    is 2,000.
  • You can lose more than you put in!
  • Students can short sell in the Stock Market Game.

Investing for the Long Term
  • 1) start with a plan
  • 2) understand your risk tolerance
  • 3) diversify
  • 4) keep track of your investments
  • 5) invest for the long term