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STOCKS What is a stock? Why do we need a stock market? Where do stocks come from? Why do people buy and sell it?
Determining Value Let’s say you open up a restaurant Costs you $250,000 At the end of the year, you add all your
money and you have $300,000 $300,000(Income) -
$250,000(expense)= $50,000 (profit)
Determining Value Second year You bring in $325,000 Profit of $75,000 (325,000-250,000) Now your restaurant starts to mellow
out. You start to make $75,000 consistently.
Determining Value If you were making $75,000 consistently,
someone might be WILLING pay $750,000 for your restaurant.
Why? With a $750,000 investment, and a restaurant
making $75,000/year…You are making a 10% rate of return.
$75,000 $750,000
Determining Value Let’s say someone is WILLING to pay
you $1,500,000 for your restaurant. What kind of rate of return do they
expect? 5% $75,000 $1,500,000
Selling Shares Now that you know what people are
WILLING to pay, you can set the price accordingly.
You would price the restaurant for $1,500,000
Selling Shares Price of restaurant $1,500,000 10 people want to buy the restaurant,
but don’t have $1,500,000. This is where SHARES are formed! You divide the company into 10 pieces
(shares), and sell each piece for $150,000. ($1,500,000 10)
Selling Shares Since 10 people own all the shares… Each person receives 1/10 of profits.
(10%) And each person would have 1 out of
10 votes for business decisions.
Selling Shares DIVIDENDS If the restaurant had the 10 owners and
it made $75,000 that year, then each owner would receive…
$7,500 in dividends
Selling Shares To make it even more affordable, you
could sell 1,500 shares for $1,000 each. (1,500 1,000 = $1,500,000)
OR, sell 3,000 shares, keep 1,500 for yourself, and sell the extra 1,500 for $500. (3,000 $500 = $1,500,000)
(Or divide shares however you want)
Selling Shares Stocks follow the same guidelines as
the restaurant example. The difference…The number of shares Example had 10 - 3,000 shares, real life
it can be in the BILLIONS.
Stock Market Let’s say you have your “share” of the
restaurant, and you want to sell it. Instead of going out and finding a buyer,
there is THE STOCK MARKET. The buyer is already found and just waiting
for you to sell. The New York Stock Exchange (NYSE) is
an example of a stock market.
Stock Market In Craig, we have “supermarkets” that sell
food. The reason we go to the supermarket is
because it’s more CONVENIENT. We shop at supermarkets instead of going
to… The butcher, baker, dairy farmer, etc… It’s all in ONE PLACE
Stock Market The NYSE is a supermarket for
STOCKS. It’s just like a supermarket, investors go
to one place to buy and sell stocks
Stock Market How do you buy and sell stock if it’s in
New York? Stock Broker: a stock broker does
business with the NYSE and he/she will buy or sell stocks on your behalf.
Stock Market Because all the buying and selling of
stocks are in ONE place, it allows the price of the stock to be known every second!
Stock Market Example: If your restaurant announced
it was making hamburgers out of rat meat, you could literally watch your stock plummet.
It would go down because everyone would be selling it.
Why would the price of the stock go down if people were selling it?
Corporations Any company that wants to sell shares
of stock to a number of different people must turn itself into a Corporation.
Corporations A corporation is a “virtual person” It has a Social Security Number It can… Own Property Go to court and sue people Be sued Make contracts
Corporations A corporation must have a “Board of
Directors.” Board of Directors: the people who make
the decisions for the corporation. It also decides on the major positions of the
company…CEO, COO, CFO etc… Every year, shareholders meet and vote on
the board of directors. (Board of directors are the “brain” of the
virtual person.)
Shareholders A corporation is an easy way to gather
large amounts of investment capital. Investment Capital: Money from
investors
Shareholders Example: A corporation is just formed. It decides to sell 1 million shares Each share is selling for $20 The corporation just raised $20 million They take the $20 million and invest it
within the company Buy equipment, hire employees
Shareholders
With that new equipment and the better employees, the corporation looks to make a profit.
With the profit, shareholders make money by the company paying DIVIDENDS!
Stock Prices How do people make money buying
stocks? After the company bought the new
equipment and hired the new employees, it made $1 Million.
Stock Prices With that $1 Million the corporation
can… 1) It could put it in the bank. 2) Give it back to the shareholders. 3) Expand the company. 4) Combination of the three
Stock Prices If the corporation does option 2, and
gives back to shareholders, then this is called Income Stock. The company does NOT grow, it pays all of
it’s profits back to shareholders (dividends) If the corporation does option 3, and
invests back into the company, then this is called Growth Stock.