Stocks, Banks and Supply and Demand

1. Stocks, Banks and Supply and Demand

2. Copy the following questions and answer them as we go • 1. How are banks important to an economy? • 2. What are stocks? • 3. Why does the price of stocks change?

3. Let’s start with stocks/shares… • Stocks/shares are… • A. pieces of a company that can be bought and sold • B. a slowdown in the economy • C. the goods and services that a company produces • D. loans that you can give to the government in exchange for some extra money later

4. Here’s how it works… • I love to cook. Not just any food, I love to cook tasty gourmet Puerto Rican food.

5. From good food to business… • My friends tell me I should start a restaurant because they have never eaten anything as good as my food. • So I take their advice. I decide to start my own restaurant. • I’ve heard, however, that starting a restaurant costs a lot of money. And that restaurants aren’t profitable until the 2nd or 3rd year.

6. What kinds of things do I need to start a restaurant? • Name some things • So how much money are we talking about?

7. Where do I get the money? • A. Personal savings • B. Wealthy friends/private investors • C. A bank • D. sell stocks • E. all of the above

8. All are right except for selling stocks. In most cases a company must have some history in order to sell stock publicly.

9. Let’s talk about banks… • The following statements are true about banks except • A. It is a place in which people can safely keep their money and make financial transactions • B. banks pay interest and charge interest • C. banks use their customer’s money to make loans to other people • D. banks have all of their customer’s money safely stored in a safe in the bank

10. Let’s talk about banks… • Banks are perhaps the most important institution of an economy • They borrow money but more importantly, they LEND money • Without the help of a bank, starting my small restaurant would be nearly impossible • And my small business creates jobs for the economy

11. Back to my restaurant… • So the bank liked my idea for the restaurant (it helped that I had $100,000 of my own money. Banks want to know that you have an incentive [motivation] to take care of their money) • They lent me money because they think my restaurant will succeed. Eventually, I will have to pay back the money with interest.

12. My restaurant is booming • Five years have passed and my restaurant is booming • The bank has financed my expansion and I have over 50 restaurants in 5 states (think a Puerto Rican Chipotle) Ajo Dulce

13. I have some options • If I want to keep growing and keep the company in the family, then I can continue to find the financing for expansion. Since the company is doing well, many large banks and private investors would be happy to do this for me. • I have another option, however, I can sell my company to the public.

14. Why go public? • The #1 Reason: Money • (Other reasons: prestige, name brand recognition, liquidity) • I can divide my company into 30 million pieces called stocks or shares. • I can then sell these shares in a stock market • I announce to the world the day that I will sell my stock

15. My IPO (Initial Public Offering) • Listen world! My name is Ajo Dulce. I’m a wonderful little restaurant that sells great gourmet Puerto Rican food. I have a great product, a great lively setting and a solid customer base. I will continue to grow as a company. If you would like to buy a piece of me you can find me at the New York Stock Exchange (a stock market) on March 13, 2008. I’ll start selling at $50 a share.

16. Then what? • Let’s say the IPO went well and the company sold 30 million shares at $50 • That’s $1.5 billion that the company can use to grow • Drawbacks: It is no longer my company. It is the company of the people who bought shares in my company and it is managed by a group of people (which probably includes me) called a board of directors • By the way not only people can buy stocks. Most stocks are owned by institutions: banks, other companies, retirement funds, etc.

17. All right so the company was sold to the public and now it is a large commercial restaurant like McDonalds, Chillis or TGI Fridays. • What about the people who bought the shares in my company. What happens to those shares?

18. Why do people buy shares/stock in a company? • #1 You get a cool certificate showing how many shares you own in the company

19. What do you get if you buy a share of a company? • #2, and more importantly, a share is an investment--a way for your money to make money ( or lose money) • How you ask? • The most common way is by watching the value of the share/stock rise. An example:

20. Google • Google went public in October of 2004. Google set its price at $85 a share. Let’s say I bought 100 shares for $8500. • At its highest point (Dec 7, 2007), a share of Google was worth $714. On this date my investment was worth $71,400. If I was lucky enough to sell all my shares on that date, I would have made about $63,000. This is money I didn’t have to work for. It’s an investment. • Any questions?

21. Why do stock prices change? • Supply and demand: the more something is demanded the higher its price; the less it’s demanded, the lower the price • What’s the price of the fly here?

22. It’s the same for anything bought and sold in a market where there are no fixed prices. Why is less more for this oil executive?

23. This cartoon suggests that building a border wall is an economic problem. Explain.

24. Supply and Demand • If investors believe that Google is a great company and continue to buy its stock, it’s price will continue to rise. • If all of a sudden they believe Google sucks and begin selling their shares, the price of the stock will fall

25. Review Why are banks especially important to an economy? • They print money • They lend money to start businesses • They always have people’s money when they need it • They pay people interest for saving their money in their institution

26. Why are small businesses important to an economy? • A. they add some values (a unique product or service) • B. they create jobs for the economy • C. they create wealth for the city, state and nation • D. all of the above

27. What is a share/stock? • A. a piece of a company • B. a piece of the government • C. a loan from a bank • D. all of the above

28. Why do people/institutions buy stocks? • A. as an investment—a way to have your money make money • B. it helps the economy by creating jobs • C. to grow your own company like in the case of Ajo Dulce • D. all of the above

29. Why do stock prices go up and down? • A. the company changes the prices • B. Supply and demand • C. Banks and small businesses negotiate the price • D. all of the above

30. Based on what you have learned... Write your answer on your paper. • If stocks are bought and sold at a place called the stock market, what do you think happens when a stock market crashes?