Market Overview Fal 2015

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1 Market Overview Fall 2015

2 Agenda Equities o What is a stock/etf? o Why do companies issue stock? o Debt vs Equity o Different types of stocks o How stocks trade Derivatives o Futures/Forwards o Options o Forex

3 Equities What is a stock?

4 Stock/ETFs Stock: Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. ETFs: A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

5 Buy/Sell vs. Short/Cover Buying/Selling (Going long) Investing in an equity How to make a profit: Buy low, sell high Short/Cover (Going short) Sell the equity, with the intension of buying it back in the future ( covering ) How to make a profit: Sell high, buy back low How can you sell something you don t have?

6 Why do companies issue stock?

7 The Need for Capital There are no interest payments There is no obligation to issue dividends

8 Why Would Anyone Issue Debt? When a company issues equity it is subject to the whims of the market The more equity a company issues the more the company liquidates its value, which will displease current investors Which pie would you prefer as an investor?

9 Different Types of Stocks Common Stock o o o Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Unfortunately, if a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock o o Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed.

10 How Stocks Trade Open Outcry trading Automated trading

11 What Makes Stock Prices Move? Prices are determined by the forces of supply and demand Investors typically have different opinions on individual stocks or the market itself The difference in these opinions causes price movement Demand > Supply = Upward movement Demand < Supply = Downward movement

12 How to Buy a Stock The most common method of buying stocks is to use a brokerage There are two types of brokerages: o Full service brokerages Offer advice to clients & Manage client accounts o Discount brokerages Offer little advice to clients but are extremely cheap Short guide to opening a brokerage account:

13 Equity Exchanges TSX Big 5 banks, Energy, Mining NYSE Physical location, trading floor in NYC. Coca-Cola, General Electric, McDonalds, Banks NASDAQ No physical trading floor Microsoft, Facebook, Apple, Dell, RIM

14 Derivatives A financial instrument whose value is based on one or more underlying assets In practice: a contract between two parties that specifies conditions (dates, underlying variables) under which payments are to be made between the parties. Derivatives: Forwards, futures, options, swaps Underlying assets: Commodities, Equities, bonds, interest rates, currencies

15 Futures and Forwards Future: a standardized contract (Exchange traded) between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed today with delivery and payment occurring at a specified future date. Long Position Buyer of the asset in the future Short Position Seller of the asset in the future Underlying assets: traditionally commodities. Could also be: currencies, securities, financial instruments Forward: private agreements (not exchange traded), not standardized.

16 Options Typical options derive their price from an underlying equity Give the owner of the option the right to buy or sell the underlying asset at a specific price (strike price) Price of the option depends on many factors: Current market price of underlying security Strike price Time until expiration Volatility of security

17 Foreign Exchange (Forex) Exchange for trading international currencies Open 24 hours a day (weekdays) Highly leveraged trading Variety of factors affect exchange rates Largest and Most liquid financial market in the world

18 Questions?

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