UNIT 2 The Stock Market and Investing

UNIT 2The Stock Market and Investing

Quiz Question 1 - $1 Pontieri Name two famous actors who starred in the movie Boiler Room about a stock brokerage that used high pressure sales tactics and misleading information to scam unsuspecting investors?

What is a stock? Suppose a company wishes to raise $900 in cash. They can offer to sell 9 shares at $100. This offer is called an Initial Public Offering (IPO) and is called market capitalization. On a balance sheet, it looks like this: Assets = Liabilities + Shareholder’s Equity $900 $0 $900 (9 shares issued) Debt Equity This is an example of a Primary Market. This process only occurs once and the holder of the share is called the shareholder.

Private versus Public Companies • A public company is listed on a Stock Exchange. The company's shares are available for the public to invest in. If listed on a stock exchange, there are usually many owners of the company. The term public is also used to describe government owned companies. These are not listed on a Stock Exchange. • Meanwhile, a private company does not sell shares on a stock exchange and are usually owned by a smaller number of private owners. Example: a family owned business. What are some advantages/disadvantages of being a public or private company?

But what is the trading of stocks? The trading of stock occurs in the secondary marketwhere a shareholder wishes to sell their share. This selling of stock occurs on a listed stock market or stock exchange. Examples of stock exchanges include: TSE, NYSE, NASDAQ, VENTURE MARKET, SHANGHAI, NIKKEI, LONDON, DAX Trading on the secondary market does not affect the original company or the owner’s equity.

What is the stock market? • The stock market or stock exchange manages the trading process of a buyer and a seller. Step 1: Order is placed Step 2: Order is matched electronically by the Exchange computer system Step 3: When a match is found, the broker informs the client of the price plus the commission Buy Sell Bid Ask $102 $102 $100 $103 $99 $104 The matching price is based on supply and demand

The Trading Floor: When large ‘lots’ of shares are traded, the trade is actually executed by a person on the trading floor of a stock exchange (Ask and Bid)

How do I understand how a stock is doing? Bid: What price people would like to buy a ‘lot’ of 100 shares for Ask: What price that share owners are willing to sell a ‘lot’ of shares for 52wk Range: The high price and low price in 1 year Volume: The number of shares traded that day P/E: Price Per Earnings, the expected earnings per share in the coming year. The higher the number, the better the outlook for profits

Quiz Question 2 - $1 Pontieri Which stock ticker symbol is not real? • CHIC • GEEK • HOPE • LUV

How do I read the overall strength of the stock market? You can find out the price of a particular stock or find out how a ‘market’ is doing by reading the results of a market index. “The S&P/TSX Composite Index went up 20 points today to 8,702.” What does this mean? The Index is a bucketof stocks of important companies that have broad economic sector coverage. They generally are the companies from various industries that play a vital role in the success of our economy. Examples include Banks, natural resources, large manufacturers and large technology companies. There are many different Indexes out there with different buckets of companies

Different Products that are sold on Stock Exchanges Stock– a security that is offered by a company for financing which gives the stock holder part ownership of a company. 2 types of stocks exist: Common and Preferred • Common shares representownership in a company and generally carries voting privileges. Owning a common share gives the shareholder part ownership of the company. Most shares bought, are common shares. • Preferred shares generally do not come with voting privileges and get their dividends first over common share holders at a fixed rate. Dividends – Companies have the option to offer their shareholders dividends to entice them to buy their shares. Dividends are money distributed out of a company's profits to its shareholders in proportion to the number of shares the share holder owns. A company is under no legal obligation to pay dividends on common shares, but do for preferred shares. You do not purchase dividends… you purchase a stock in which a company pays dividends

Different Products that are sold on Stock Exchanges (cont’d) Options– Calls and Puts These are derivates of actual stocks and trade on their own market. They allow a buyer to the right to buy a stock at a future price… this is called the ‘strike price’. A Call is when you are buying the option to buy a stock at a particular price in a specified point in time… when you think the stock price is going up… On the reverse side, you buy a Put when you believe the stock price is going down and you want the option to buy the stock at a certain price at a specific point in time. These are risky as you risk losing all of the investment into the derived option.

Different Products that are sold on Stock Exchanges (cont’d) Mutual Funds - These are not listed on a stock exchange but can be purchased much like a stock. They are issued by companies who then use your money to invest in stock exchange listed companies. • The mutual fund company tries to make the best return on your investment. Mutual Fund Manager’s analyze the market and use their expert knowledge to invest your money in a bucket of stocks. Mutual Fund companies charge their investors a fee. • Mutual Funds can be good investments because your investment is DIVERSIFIED.

Example of a Mutual Fund • TD Balanced Growth, Fund Code TDB970, • Minimum Investment: $100, MER 2.14% Buying a Mutual Fund keeps you from putting all your eggs in one basket

Bonds There are 2 major types of bonds: • Government Bonds: These are guaranteed where the investor is paid a return on investment after a certain amount of time. Example: Canadian Savings Bond purchased for $1000 for a 1 year term with a 5% interest rate. Owner receives back from the government, the guarantee of $1050. That is principal and interest. • Corporate issued bonds: These are not guaranteed but offer a premium interest rate because of the higher risk. The value of corporate bonds.

There are many other types of investments. Some are traded on a stock exchange, and some are investments that you can buy from a bank or financial institution Purchased through a stock exchange/broker • Stocks - Blue Chip, Small Cap, Large Cap • Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign • Indexes – Sector • Options/Derivatives • Venture Market offerings • Company issued Bonds • Money Market/T-Bills (Government lending, 90 day investment) Purchased through a financial institution • Canadian Savings Bonds • GIC’s – Guaranteed Investment Certificate • Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign

When deciding the type of product to buy, you must first assess your risk What is risk? Higher Risk of making money = higher potential return Lower risk of losing money = lower potential return Buying a Lottery Ticket = 1 in 16 million chance of winning Risk assessment is highly individual. Your personal risk could be influenced by current world events, your own investment experiences or your inherited views on saving and investing, and by poor advice.

Using the risk equilibrium, determine where each investment opportunity sits Higher Risk = higher potential return Lower risk = lower potential return

Possible Investments: Purchased through a stock exchange/broker Stocks - Blue Chip, Small Cap, Large Cap Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign Indexes – Sector Options/Derivatives Venture Market offerings Company issued Bonds Money Market/T-Bills (Government lending, 90 day investment) Purchased through a financial institution Canadian Savings Bonds GIC’s – Guaranteed Investment Certificate Mutual Funds - Value, Growth, Biotech, Energy, Financial, Domestic, Foreign

Quiz Question 3 - $1 Pontieri Which one of these following items can be purchased on the Chicago Mercantile Exchange: • Chicken Feet • Pork Bellies • Goose Feathers • Cow Tongues

Why invest today? Time is worth money!!! Whenever interest is calculated, it is based not only on the original principal, but on the previous unpaid interest. Interest on interest… it’s free money! The theory of compounding… Year Investment Interest Rate Interest Paid Total Value Year 1 $1000 5% $50 $1050 Year 2 $1050 5% $53 $1103 Year 3 $1103 5% $55 $1158 Year 4 $1158 5% $58 $1216 Year 5 $1216 5% $61 $1276 Year 6 $1276 5% $64 $1340 Year 7 $1340 5% $67 $1407

What is a RRSP? • Registered Retirement Savings Plan Tax free investment in a locked account that is to be saved until retirement. When you remove the money from the RRSP account, that tax paid will be based on your tax rate at the time of removal. Also, capital gains are not taxable within your RRSP account.

Last words… • Buy low and sell high… or even better, buy high, and sell higher! • Know your own risk tolerance. Do not invest money that you can’t afford to lose. • Take advantage of your life time by investing early and taking advantage of compounding interest. • Learn about investing as very few people make it rich simply by working for a paycheck.

Quiz Question 4 – $1 Pontieri These 2 terms are used to describe a rising and declining stock market: • Cat and Mouse • Bull and Bear • Hot and Cold • Sweet and Sour

Answers to the Quiz Questions • 1. Vin Diesel and Ben Affleck • 2. Hope is not real. • CHIC = Charlotte Russe Holdings Inc, Geek = Internet America Inc., Luv = Southwestern Airlines • 3. Pork Bellies. Other include oranges, coffee, livestock, soya beans, cocoa, cotton • 4. Bull and Bear

UNIT 2 The Stock Market and Investing