Introduction to Stocks

1. Spring 2008 Economics 98 / 198 DeCal ` Introduction to Stocks Basics of Investing I www.ocf.berkeley.edu/~jml/decal

2. Schedule Today Administrative Issues Current Events 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 Assignments / Readings

3. Administrative Issues • Attendance & Sign-In • Name Tags • Enrollment • Emails • Webpage • Syllabus Review • News Presentation Sign Ups • Investor’s Business Daily Access

4. Current Events

5. Current Events • Troubled / volatile markets • Damages from sub-prime mortgages and the housing sector • Fear of risk of recession • Weak job reports • Fed (Federal Reserve) meeting next week • Rate cuts? • Apple releases new lines of iPod

6. Current Events

7. NASDAQ

8. S&P 500

9. Lecture Content

10. What is a stock? • Common stock – most “common” type • Gives you a “share” of ownership of a publicly traded company • Entitled to a portion of profits – dividends • Stock ownership = claim on assets and earnings • Also something called “preferred stock”

11. 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?

12. 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

13. Stocks vs. Bonds • Stocks are equity • Generally considered riskier • Quite possible to lose a significant portion, if not all, of your money • Potential for much higher returns • Bonds are debt • Guaranteed a fixed return • Have a higher claim than stockholders • What does this mean?

14. Dividend Debate • Distribution of a portion of a company's earnings to its shareholders (usually cash)

15. What Can Cause Stock Prices to Change? Supply and Demand!(What affects supply / demand of a stock?)

16. 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

17. 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

18. 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

19. 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, chickens

20. Brokerages • Need a medium to trade through – this is where brokerages come in • Cash vs. margin account • Choosing a broker • full service vs. discount • Fees (Commission) • Services • Minimum balance

21. 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 might be a problem if you have pretty bad credit history • To start investing, won’t need much else other than a computer, some money, and investing know-how

22. 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/reviews.html • http://www.stockbrokerguide.com/

23. Different types of Orders • Market Order • Limit Order • An order to buy or sell a set number of shares at specified price of better. Limit orders usually cost more, but useful for getting specified price. By better I mean, lower. • Stop Order • An order placed for a security for when the price surpasses a particular point, which helps buy or sell at a particular price. Limiting loss or locking profits. Many people use this during vacations if they can’t use it.

24. 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

25. 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 • www.investopedia.com • www.fool.com

26. Homework / Reading • Set up your account • Online articles (Course website) • “The Five Biggest Stock Market Myths” • “Getting Started” • “Brokers and Online Trading” • “Stocks” • Get started on “Investing 101”

27. IBD SubscriptionInvestopedia Simulation