Introduction to StocksBasics of Investing I

Spring 2008Economics 98 / 198 DeCal

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www.ocf.berkeley.edu/~jml/decal

Schedule Today Administrative Issues Lecture content: Basics of Investing

– What is a stock?– How are they traded?– What are brokerages?– Different types of orders– What is the market?– Terminology

Learning how to use the simulation; IBD

Current Events Assignments / Readings

Administrative Issues

Attendance & Sign-In

Name Tags

Enrollment

Emails

Webpage

Syllabus Review

News Presentation Sign Ups

Investor’s Business Daily Access

Lecture Content

What is a stock?

Common stock

Gives you a “share” of ownership of a publicly traded company

Stock ownership

– Voting rights

– Claim to assets (behind debt holders) and earnings

– Potentially entitled to dividends

What is a stock? Ticker symbols

– Set of letters that represent a security traded on an exchange

– Ex. MSFT, GS, AAPL, MA, BUD, LUV Stock quotes

– List of prices for a stock at a particular point during the trading day

Stock tickers– What do those green and red numbers

mean?

Basic Stock Quote

More Stock Quotes

Different Types of Stock Preferred Stock

– No voting rights to company issues– Issued fixed dividends forever – main form of return

Common Stock– Majority of stock we see and hear about in the news– Ownership of the company– Entitled to portion of the earnings– Earn returns mainly through capital gains

What are capital gains?– Increase in asset value relative to the purchases

price– Not realized until asset is actually sold– Example.

Stocks vs. Bonds

Stocks are equity– Generally considered riskier– Quite possible to lose a significant

portion, if not all, of your money– Potential for high returns

Bonds are debt– Lower and usually fixed return– Higher claim than stockholders

What does this mean?

Dividend Debate

Distribution of a portion of a company's earnings to its shareholders (usually cash)

Bad or Good?– Why?

What Can Cause Stock Prices to Change?

EASY! Supply and Demand!But…what affects supply / demand of a

stock?

What Can Cause Stock Prices to Change?

Earnings & growth expectations

Positive / negative news

Economy sentiment

Investor sentiments & attitudes

Irrational exuberance / behavior

Two Markets Primary Market – market in which

investors have first opportunity to buy newly issued shares– Initial Public Offering (IPO)

First time that company offers its shares to public markets (securities bought directly from company)

Where private companies become public

Secondary Market – investors trade already-issued shares of companies with each other– Ie. The stock market– Trading of a company’s stock DOES NOT

DIRECTLY involve the company financially

How Stocks Are Traded

Major exchanges – Lists stocks (and other securities),

sets policies for how stocks are traded

New York Stock Exchange (NYSE) American Stock Exchange (AMEX) National Association of Securities

Dealers Automated Quotation

Only “publicly traded companies” are listed

Market Indices (Index) Definition

– Aggregate value of combining several stocks together and intended to represent entire or portion of the stock market

S&P 500– 500 stocks chosen by Standard &

Poor to represent US stock market NASDAQ Composite Dow Jones Industrial

Average– 30 most significant stocks traded

S&P 600 Small-Cap Russell 3000

– 3000 of the largest stocks in the US

Stocks Markets & Animals

Bull Market– When everything in the market is going

great and stocks are generally heading upwards

Bear Market– When everything is NOT GOOD and stocks

are generally headed

NOTE: Nothing lasts forever! Good times and bad times will end at some point

Other animal terms: pigs, chickenshttp://www.investopedia.com/university/stocks/stocks7.asp

Brokerages Need a medium to

trade through – this is where brokerages come in

Cash vs. margin account

Criteria– Full service vs. discount– Fees (commission)– Services / tools– Minimum balance

Opening an Account Not a hard process- most of it just some

paperwork and mail– Sign-up online and download forms– Mail checks, forms, and copy of ID– Accounts created within a couple of days

Cash accounts usually never turned down– Margin accounts difficult if you have pretty

bad credit history

What you will need: a computer, starting capital, and investing know-how

Brokerages Some links for brokerage comparisons

– Find something that works for what YOU need

– No one broker that is best for all investors

http://www.investingonline.org/gso/broker_ratings.html

http://www.consumersearch.com/www/internet/online-brokers/

http://www.stockbrokerguide.com/

http://online-stock-trading-review.toptenreviews.com/

Different types of Orders Market Order

Limit Order

Order executes to buy / sell at specified price of better (lower). Limit orders usually cost more, but useful for getting specified price

Stop Order

Order executes when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits

Different Types of Orders Stop Limit Order

Executed at a specified price (or better) after a given stop price has been reached. Order becomes then a limit order to buy (or sell) at the limit price or better

Precision purposes

Good Until Cancelled (GTC)

Good Until End of Day

Things to Internalize Learn the basics!

– Need to know what basic terms mean– Articles should help you

Advantages of starting young

Useful resources for stock tutorials– www.investorwords.com– http://www.investopedia.com/

university/– www.fool.com

Current Events

Investopedia Simulation

Homework / Reading

Set up simulation account & start trading

Online articles (Course website)– “The Five Biggest Stock Market

Myths”– “Getting Started”