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Investing in Stocks

Investing in Stocks. Personal Finance Holmen High School. Objectives. Understand the stock market's function for both owners and investors Understand what drives prices up and down Recognize and apply the concepts of Earnings Per Share (EPS) Price/Earnings Ratio (P/E)

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Investing in Stocks

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  1. Investing in Stocks Personal Finance Holmen High School

  2. Objectives • Understand the stock market's function for both owners and investors • Understand what drives prices up and down • Recognize and apply the concepts of • Earnings Per Share (EPS) • Price/Earnings Ratio (P/E) • Factoring growth in the valuation of a company

  3. Meet Velma • Velma owns a small cupcake shop • Velma makes a profit of $5,000 a year • Business is growing, but she needs cash to expand

  4. Velma’s Options • Loan from a Bank • Issue Bonds • Borrow from Investors • Find Private Investors • Find Public Investors

  5. Velma and Daphne • Velma needs to borrow money • Daphne has money to lend

  6. Velma and Daphne • Velma Gets a Loan from a Bank • Pays 7% Business Loan • Daphne Puts Her Money in Checking Account or CD • Earns 1%-3% in Interest 7% 2%

  7. Velma and Daphne • Velma Issue Bonds • Pays 6% to Investors • Daphne Invests in a Bond • Receives 6% Interest

  8. Velma and Daphne • Velma seeks private investors • Family • Friends • Business People • Daphne wants to buy 50% of the company • Velma’s Company makes $5,000 a year • Daphne wants half the profit ($2,500)

  9. How Much Should Daphne Pay? • If Daphne wants 50% of the business, how much should she pay Velma? • What is Velma’s business worth?

  10. Shark Tank

  11. Issuing Stock- Going Public • Allows public to invest in Velma’s company • Issue shares to investors • Profits are shared among investors

  12. Private Public • Does not need to disclose • Revenue • Profits • Expenses • Salary • Kwik Trip • Menards • Festival • Need to disclose • Revenue • Profits • Expenses • Salary • BP • Home Depot • Publix Public vs Private

  13. What is the Stock Market? • Just like a farmer’s market • Buy and sell shares of stock in public companies • Companies recognized by Ticker Symbols • SBUX WMT • MCD MSFT

  14. Benefits of the Stock Market • Owners Raise Money • Investors become Owners • Allows businesses to grow and expand

  15. Why Go Public • Velma’s business has grown to 10 stores • Wishes to expand to 200 stores • Needs to raise money to expand

  16. Velma’s Cupcakes • Value determined by Wall Street • Issues 500,000 shares at $5/share • Raises $2.5 million to expand her business • Ticker Symbol: VCUP

  17. What causes the price to change? • After six months: • Demand for Cupcakes is High • Sales are Growing • Profits are Rising • VCUP Price: $8.00

  18. What causes the Price to Change? • After 12 Months: • Demand for Cupcakes is Low • Economy is Bad • Sales are Slowing • Profits are Falling • VCUP Price $3.00

  19. What causes the Price to Change? • Supply and Demand • High Demand-Low Supply- Price Rises • Low Demand-High Supply- Price Falls

  20. Total Profit • Quarter1 $200,000 • Quarter 2 $350,000 • Quarter 3 $150,000 • Quarter 4 $300,000 • Total Profit $1,000,000 • Number of Shares 500,000

  21. Earnings Per Share

  22. What’s a Fair Price? • Is $8.00 Expensive for VCUP • Is $3.00 Cheap for VCUP • We don’t know until we look at the P/E Ratio

  23. Price to Earnings Ratio • Price- Current Share Price • Earnings- Earnings Per Share • VCUP Price- $8.00 • ESP- $2.00 • P/E 4

  24. Price to Earnings Ratio • Not represented in dollars • Lower the better • High numbers mean a stock could be expensive • Look at Competitors

  25. Price to Earnings • Pepsi P/E 20 • Coke P/E 15 • Coke is a better value because the P/E ratio is lower

  26. Ways to Profit from Stock • Capital Gain • Buy 1,000 Shares of MSFT @ $20 • Sell 1,000 Shares of MSFT @ $35 • Profit- 1,000 x $15= $15,000 • Dividends • Own 200 Shares of Nike. Nike pays a dividend of $3/share. • Profit- 200 x $3= $600

  27. Question 1 Jerry's Juice Company has 500,000 shares outstanding Listed below are the quarterly EPS for the company. Q1 $.60 Q2 $.40 Q3 $.75 Q4 $.25 What are the total earnings for the past year? A. $125,000 B. $1,000,000 C. $2.00 D. $250,000

  28. Question 2 All other things being equal, it is best to look for a company with a low P/E. True False

  29. Question 3 Name one thing that could cause stock prices to fall.

  30. Question 4 Calculate the EPS from the following information: Total Profit: $3,000,000 Total # of Shares: 1,000,000

  31. Question 5 What is one difference between a privately and publically owned company?

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