Unit 4, Lesson 9

An Introduction to the Stock Market

AOFApplied Finance

Copyright © 2007–2012 National Academy Foundation. All rights reserved.

Stocks represent part ownership of a company

Once a company goes public, all ownership is in the form of shares of stock.• The original owners hold

some of it.• Some may go to top

executives.• Some may be offered to

employees for purchase.• The rest may be offered

to the public.

What percentage of its stock would the company need to hold to keep control?

If a company decided to have 10 shares of stock and you bought one, you would own one-tenth of the company.

The stock market has “stores” around the globe

• Stocks are sold at stock exchanges all over the world.

• A company decides where it wants to be listed to sell its stock.

• Stock prices are displayed on a board and constantly updated.

• Each stock has a distinctive abbreviation.

The New York Stock Exchange, above; the Bourse (stock exchange) in Copenhagen, Denmark, below.

How do you know how the market is performing?

• Market indexes measure how a segment of the market is doing. For example:• The Dow Jones

Industrial Average lists 30 major companies.

• The Morgan Stanley Biotech Index lists 36 American biotech firms.

• A rising market is a “bull market.”

• A falling one is a “bear market.”

If the Dow were at 100 and it fell 12 points, what would the new Dow index be?

Why would a company sell off part of itself as stock?

• It needs cash for capital investment.• It doesn’t

want to repay a loan.

• Expansion would mean more sales and higher profits.

• Higher profits would boost its stock price and company value.

Why would someone buy part of a company?

• Investors want their money to earn more money.

• Over time, stocks give greater payback than bonds, savings, and other investments.

• Shareholders get a say in how the company is managed.

If you owned a stock that fell in price, would you sell it or hold on to it? Why?

How do you join the club?

• Stock sales are arranged through stockbrokers, who charge a commission.

• The more service you get, the higher the fees the broker charges.

• You can research new stocks by reading the company prospectus.

Front page of a prospectus

Would you prefer to do your own research or rely on a broker?

What affects stock prices?

Investors look at:• How well the

company is doing• Price-earnings ratio• Capitalization• Supply and demand

—of a stock or a commodity

• Current events—politics, the economy, natural disasters, terrorist attacks

How would hurricane damage affect the stock of a construction firm?

Stocks are just one part of a balanced financial plan

The stock market isn’t for the timid. • Growth potential

comes with risk.• Remember that your

investments are not insured.• Diversify your

portfolio (have a mix of investment types).• Have clear goals

geared to your stage of life.

How well do you think you could tolerate a loss of value in your stock investments?