JA Take Stock In Your Future Session One

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1 JA Take Stock In Your Future Session One

2 Objectives You will be able to: Identify why the stock market is an integral part of our free enterprise system and why corporations issue stock (Section 2); Accurately predict the impact of given scenarios on stock prices (Section 3); Recognize their risk management strategy in comparison to other strategies (Section 4); and Explain how and why stocks are bought and sold (Section 5)

3 What is the JA Stock Market Challenge? Before we dive in. Watch this two-minute video created by students at Mountain Range High School about the November event.

4 Ownership Structures

5 Private Companies A sole proprietorship is a company owned by a single individual. There are no shares of stock. If you want to own an existing sole proprietorship, you have to buy the company from the current sole proprietor (the current owner). A partnership is a company owned by more than one individual. The owners are known as partners, and there are no shares of stock. If you want to be an owner of an existing partnership, you have to buy some of the ownership from an existing partner or partners. Another form of ownership is a corporation. Corporations are owned by stockholders. Stockholders are individuals who have purchased a share (or many shares) of stock issued by the corporation. The initial offer of stocks is known as an initial public offering

6 Public Corporations Public corporations are owned by stockholders Stockholders are individuals who have purchased stocks (shares) in the company The corporations are public because anyone can buy stock in the company

7 Private Companies: Pros and Cons What do you think?

8 Private Companies: Pros and Cons Pros Greater control over the company More personal profits Don t have to please external shareholders Cons Reduces ability to raise money for expansion or improvement Owners would have to use their own money, borrow from a bank or use the profits to expand/improve

9 Public Companies: Pros and Cons What do you think?

10 Public Companies: Pros and Cons Pros Increase ability to obtain money for expansion, conduct research, and purchase equipment Cons Less individual profit Financial statements available to the public

11 Stock Basics

12 What is a Stock? A stock is a piece of ownership in a public corporation

13 What do you think? Why do people purchase stock? Why would we want to make money in the short term? In the long term? Why do you invest in stocks?

14 Benefits of Owning Stock Companies compensate their stockholders in two ways: Payment of dividends dividends are a percentage of the company s earnings Increasing the price of the stock Not all of the company s money goes to stockholders Retained earnings are held by the company to pay for growth

15 Dividends (detailed)

16 What Causes a Stock Price to Rise A stock s price is based on how well the corporation is doing for example: if the corporation is doing well, its price will rise More Buyers than Sellers = Bull Market

17 What Causes a StockPrice to Rise (cont d) Reasons for increase in stock price include: introduction of new product cheaper production than expected economic trends have positive effect for company s product

18 What Causes a Stock Price to Fall On the flip side if a corporation is doing poorly, its price will fall More Sellers than Buyers = Bear Market

19 What Causes a Stock Price to Fall (cont d) Reasons for decrease in stock price include: corporation s product gets undercut cost of production is higher than expected economic trends prohibit product sales

20 Partner Activity A - Apple ipods are introduced to the market for the first time. What happens to Apple s stock? B - Gas prices rise. What happens to the stock for Tesla (the electric car maker)? A - Knockoff Hollister shirts are released. They are cheaper than Hollister brand shirts. What happens to the stock for Hollister? B - Florida has unusually cold weather, negatively impacting the crop of oranges, making oranges more rare and more expensive. What happens to Tropicana stock? A - A serious hurricane hits and many buildings are damaged. What happens to Home Depot stock?

21 Partner Activity, Continued B - Tax on cigarettes is increased by the federal government. What happens to Malboro stock? A - An electronics company improves its assembly line to reduce the cost of production. What happens to its stock? B - Enron is accused of insider trading (an illegal activity by the executives). What happens to its stock? A - The U.S. declares a new military venture in response to civil unrest in the Middle East. What happens to the stock of a military equipment manufacturer? B - How did the BP Oil Spill impact the stock of BP?

22 Minimize Risk Diversify

23 Minimizing Risk To minimize risk, avoid putting all of your investments in one place You can spread out your investments by investing in multiple companies, which is called diversification When you invest in stock, you are taking a risk on the probability of making a profit or losing money on your investment The collection of stock that you own is called a portfolio

24 Mutual Funds Another way to lower risk is to invest in a mutual fund Mutual funds are managed collections of stocks which allow investors to purchase stocks in multiple companies

25 What s Your Risk Question 1 When do you plan to use the money from your investment? A. When I retire in roughly 40 years. B. When I send my kids to college in roughly 25 years. C. In my twenties (for example, for a down payment on a house) in roughly 10 years?

26 What s Your Risk Question 2 Do you have other investments? A. Yes. OR Although I don t now, I will have savings set aside as soon as I finish college. B. No, but I might eventually. C. No. Actually, I expect to have a lot of debt after school, which will make it even harder for me to invest!

27 What s Your Risk Question 3 Do you think you would sell your investments if your stock value started to decrease? A. No, I can ride out the natural ups and downs of the market. B. Probably, depending on how bad it got or was forecasted to get. C. YES!! I hate the idea of losing my money!

28 What s Your Risk - Results A aggressive Risk tolerant investors are typically saving for the distant future, so they can handle more ups and downs. They would invest 95%- 100% of their portfolio in stocks perhaps 50% in large companies, 20% in small companies, and 25% in international companies. B moderate C conservative Example possibly your parents

29 Buying & Selling Stocks

30 Buying and Selling Stocks How to buy stock: find someone who is willing to sell the stock, or buy the stock from the company directly In trading between the buyer and seller, there is usually a broker who conducts the transaction The broker charges a fee for the transaction, which is called the brokerage commission

31 Stock Certificates

32 Stock Markets A stock market is a place where stocks are bought and sold Exchanging of stock is usually done electronically One of the last stock exchanges that still offers face-to-face trades is the New York Stock Exchange (NYSE)

33

34 Stock Indexes Stock indexes help manage the overall stock market performance A stock index (or average) is a group of companies in different industries whose performance represents the market trend and is tracked to gauge the movement of the market The most quoted stock index is the Dow Jones Industrial Average, which is a group of 30 companies in different industries traded on the NYSE

35 DJIA (sample)

36 Discussion 1. A buyer has $10,000 to invest, and would like to buy 100 shares at $100 each of Feel Good Pharmaceuticals 2. The buyer tells the trader. 3. The trader then asks a seller if they would like to sell their stock. The seller agrees to sell 100 shares of Google for $100 per share. Then, the buyer gives the trader $10,000 for the seller. The trader keeps $20 for the trading fee.

37 What should the buyer do? In the newspaper the next day, there is an article stating that Feel Young Pharmaceuticals has found a cure for cancer. This doubles their stock price and each share is now worth $200. What are the pros and cons of selling? Not selling?

38 Thank you! Next time: how to research stocks and play the game

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