Gary W. Tapp, Ph.D. gt454bb@hotmail

1. Gary W. Tapp, Ph.D.gt454bb@hotmail.com • Investor Education • Financial Fitness for Lifeand • Georgia Council on Economic Education • w w w . g c e e . o r g

2. Why Invest? You can earn income by receiving dividends. Owning stock can supplement your job income. Rewards last a lifetime. Investing provides assets that grow over time.

3. Why Invest? Be a part owner of America’s economic growth. Investing helps companies to grow and provide more jobs and income. Investing helps create new goods and services for consumers.

4. POWER OF COMPOUND INTEREST Huge Advantage From Starting Early (Saving $100/month at age 25, assumes 8% return/year vs. starting at age 35) • Source: Massena Education

5. Keys to Investment Success Use the Incredible Power of Compound Interest: (Be an investor, not a trader). PLAN Ahead: Identify your goals and risk tolerance. UNDERSTAND the risk/return trade-off. DIVERSIFY your holdings: Rebalance your portfolio regularly. Participate in GLOBAL GROWTH. Be DISCIPLINED! (Not emotional.) Don’t underestimate the power of the U.S. economy to regenerate itself!

6. IV. Intro to Markets: Basic Kinds of Investment Assets • Stocks (Equities) • Mutual Funds, index funds (one way to diversify) • Exchange Traded Funds (ETFs: another way) • Individual Stocks • Bonds (Fixed Income) • Government • Corporate • High Yield • Commodities • Mutual funds, ETFs • Real Estate • Direct Investment • ETFs, REITs • Cash

7. Not A Gamble: U.S. Stock Market History

8. Stock Prices Reflect Earnings and Dividend Growth

9. How the company makes money 52-week price range Projected 3-5 year earnings growth rate Forward P/E and P/E to growth rate Dividend yield and when dividends are paid Date and consensus estimate for next quarterly earnings report Chief competitors and their valuations on P/E and PEG. Research: Before you buy an individual stock, know as many of these as you can:

10. Mutual funds: A portfolio of stocks (some include bonds) run by a manager who tries to beat the market (fee is about 1.0-1.5%). You get the end of day price. Only 25-30% of mutual funds beat the market average. Exchange Traded Funds (ETFs): a basket of stocks that replicates a market index (S&P 500, S&P 400 Midcap index, Russell 2000 Small cap index, etc.): Fees typically are 0.15%-0.50%. You can buy or sell during the trading day and get intra-day prices. Two Ways to Diversify in Stocks

11. Projected Long-Term Returns and Risk (assuming 3% inflation)

12. Framework: We live in an interdependent world economy A doubling of world labor force has lowered the returns from low wage labor and boosted returns from knowledge-based jobs. China and other developing countries need U.S. spending to keep their exports growing. With its dollars, China buys U.S. securities, which offer superior safety and comparable rates. U.S. borrows China’s surplus savings to help finance U.S. growth at rates lower than they would be without China. Result: a symbiotic world economy, with a higher premium on education than ever before. Biggest risks are likely to come from this global linkage.

13. Emerging Countries Outpacing Developed Countries • Real GDP, percent change • Developing countries • High-income countries

14. One Way to Participate: Largest U.S. Companies Are Already Global (pct of employees abroad) Coca-Cola: 81% United Technologies: 67% Alcoa: 65% Hewlett-Packard: 62% Johnson & Johnson: 60% McDonald’s: 58% Procter & Gamble: 57% American Express: 56% IBM: 54% Citigroup: 53% 3M: 52% Merck: 52% Exxon Mobil: 50% Intel: 50% General Electric: 49%

15. US Industries with Most Foreign Revenues Electronic equipment: 72% Energy equip/services: 69% Personal products: 61% Computers & periph.: 55% Chemicals: 54% 71% of Fortune 100 CEO’s have Tobacco: 51% experience working overseas. Communic.Equip.: 51% Household Prods.: 50% Leisure products: 47% Office electronics: 47% Auto components: 45% Industrial conglomerates: 44% Beverages: 43% Pharmaceuticals: 43% Machinery: 41% Healthcare equipment: 40% A Global Economy: 47% of the Revenues of S&P 500 Companies Come from Overseas • Source: Factset, Baseline, U.S. News & World Report

16. Where Are We Now? Buy Low, Sell High? • Georgia Council on Economic Education • w w w . g c e e . o r g

17. The Wall of Worry: Secular Risks Governmental Disputes Could Threaten Financial System Global Markets Linked More Than Ever U.S. Current Account and Budget Deficits Increase Vulnerability to Shock from Foreign Markets Internet + Increased Global Capacity Pressuring Profit Margins Since 9/11/01, New Risk of Catastrophic Events Since October ‘08, New Risk of Financial System Disruption

18. Seven Keys to Investment Success Use the Incredible Power of Compound Interest: (Be an investor, not a trader). PLAN Ahead: identify your goals and risk tolerance. UNDERSTAND the risk/return trade-off. DIVERSIFY your holdings: Rebalance your portfolio regularly. Participate in GLOBAL GROWTH. Be DISCIPLINED! (Not emotional.) Don’t underestimate the power of the U.S. economy to regenerate itself!

19. Rules for Improving Your Financial Life Get a good education Work long, hard, and smart Learn money-management skills Live below your means Buy a home (you can afford) • Save early and often • Invest in common • stocks for the • long term (diversify) • Gather information • before making • decisions • Get married and stay married • Georgia Council on Economic Education • w w w . g c e e . o r g

20. V. • Register at www.smgww.org • Georgia Council on Economic Education • w w w . g c e e . o r g

21. V. Stock Market Game: The Basics You can: Buy Stocks, Mutual Funds, Exchange-Traded Funds, Bonds; You can short-sell Stocks. What is a stock? An ownership share, or shares of ownership, in a corporation. What is a bond? You lend the company money in return for its promise to pay you a set rate of interest for the life of the bond. • Georgia Council on Economic Education • w w w . g c e e . o r g

22. Can You Buy Stock in or • Georgia Council on Economic Education • w w w . g c e e . o r g

23. What is an ETF (Exchange-Traded Fund)? A basket of stocks that tracks an index; you get a diversified portfolio. Examples: SPY: (S&P 500) XLE: S&P Energy Sector XLK: (S&P Technology Sector) EEM: (Emerging Markets Index) EWJ: Japan Index FXI: China Index EWZ: Brazil Index • Georgia Council on Economic Education • w w w . g c e e . o r g

24. The Different Markets New York Stock Exchange The oldest stock exchange in the United States, founded in 1792 and stocks are still traded on the floor. Traditionally for large corporations with large volumes of shares. • Georgia Council on Economic Education • w w w . g c e e . o r g

25. NASDAQ An electronic marketplace enabling buyers and sellers to get together via computer to trade stocks. Traditionally high-tech firms that are very active. Created in 1971. • Georgia Council on Economic Education • w w w . g c e e . o r g

26. American Stock Exchange (AMEX) Located in New York, handles about 10% of all securities exchange. Has mostly small-cap stocks, exchange-traded funds and derivatives. • Georgia Council on Economic Education • w w w . g c e e . o r g

27. National Rules $100,000 to Invest for 10 Weeks NYSE, AMEX, NASDAQ Must Purchase Minimum of 10 Shares Minimum Share Price of $3 Margin Line of Credit is $50,000 So your buying power is $150,000. 4 pm Closing Price (not real-time) • Georgia Council on Economic Education • w w w . g c e e . o r g

28. Georgia 3x3x3 Rules Purchase a stock before end of third week Must purchase at least three stocks Must hold three stocks for 3 weeks SUGGEST DOING THIS RIGHT AWAY! • Georgia Council on Economic Education • w w w . g c e e . o r g

29. Game Transaction Fees Game Transaction Costs: .75% Interest (annual rate) Earned on Unspent Cash 1% Transaction Fee (all transactions) 7% Interest Charged on Margin Loans >>>>>>>Hardest thing to do? <<<<<<<< Get them to spend the $100,000! • Georgia Council on Economic Education • w w w . g c e e . o r g

30. VI. How to Play: Buying, Selling, Selling Short Buy ↑ Sell [Long position] Short Sell ↓ Short Cover [Short position] • Georgia Council on Economic Education • w w w . g c e e . o r g

31. What is a Short Sale?What is a Short Sale? Your friend loans you this- • Georgia Council on Economic Education • w w w . g c e e . o r g

32. You immediately turn around and sell the thing for $200.00. (the $200.00 goes in your pocket) • Georgia Council on Economic Education • w w w . g c e e . o r g

33. What do you owe your friend at this point? • Georgia Council on Economic Education • w w w . g c e e . o r g

34. Georgia Council on Economic Education • w w w . g c e e . o r g

35. You expect leather briefcases to be on clearance sale at Macy’s for $150.00 • Georgia Council on Economic Education • w w w . g c e e . o r g

36. When they go on sale, you buy your friend a new briefcase for $150.00. She gets her briefcase back and you just made $50.00! • Georgia Council on Economic Education • w w w . g c e e . o r g

37. Your broker loans you this- 100 shares • Georgia Council on Economic Education • w w w . g c e e . o r g

38. You immediately turn around and sell it for $50.00 per share. (the $5,000 goes in your pocket) • Georgia Council on Economic Education • w w w . g c e e . o r g

39. What do you owe your broker at this point? • Georgia Council on Economic Education • w w w . g c e e . o r g

40. 100 shares of Coca-Cola • Georgia Council on Economic Education • w w w . g c e e . o r g

41. You expect the CDC to announce that Coke causes cancer… Coke can clean a car battery! …so you wait. • Georgia Council on Economic Education • w w w . g c e e . o r g

42. Instead, the CDC announces that Coke cures cancer! What happens to the price of Coke stock? • Georgia Council on Economic Education • w w w . g c e e . o r g

43. The Risk of Short Selling? If the price of the stock goes up before you return the stock to your broker, you will lose money. (Remember the Market’s Long-Term Trend!) • Georgia Council on Economic Education • w w w . g c e e . o r g

44. VII. Practice: How to Research and Trade • Georgia Council on Economic Education • w w w . g c e e . o r g

45. SIA_2_A206 • COMK8131 • Georgia Council on Economic Education • w w w . g c e e . o r g

46. Georgia Council on Economic Education • w w w . g c e e . o r g

47. Let’s Select a Stock and Make a Trade! Research: Yahoo Finance (See Summary page, Profile, Key Statistics, Analyst Estimates, Competitors) CNBC, Bloomberg, Buy or Short-Sell? Why do we think it is a buy or a sell? How much will 10 shares cost us? 100 shares? How many shares to buy? • Georgia Council on Economic Education • w w w . g c e e . o r g

48. Research Activities: See Handouts For ticker symbols: www.marketwatch.com/tools/quotes/lookup.asp For most other info:Use Yahoo Finance web site. • Georgia Council on Economic Education • w w w . g c e e . o r g

49. Two Basic Valuation Measures • P/E: Current price per share/TTM earnings per share (EPS): What earnings per share are we getting for our price? • If price is $20 and TTM EPS is $2.00, P/E is ______? • P/E/G: P/E to Growth: Forward P/E/Projected 3-5 Year EPS Growth • If fwd P/E is 20 and projected growth is 10%, the PEG is ____?

50. Current price and 52 week range (are we buying high or low?) Forward P/E and PEG ratio NOTE: Many co’s will report 3rd quarter results in October or November. Know the reporting date and estimate! (Yahoo Finance: Analysts’ estimates) Projected earnings growth rate (you can calculate from forward P/E and PEG ratio) Chief competitors, their earnings growth rates, and their valuations on P/E and PEG. Another source: www.investeens.com/ 10 steps to evaluating corporations.html Research: Before you buy, know as many of these as you can (use Yahoo Finance):