A KIDS GUIDE TO STOCKS AND OTHER INVESTMENTS

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1 A KIDS GUIDE TO STOCKS AND OTHER INVESTMENTS Recommended for students ages nine through 12 ou can do many things with the money you will earn and save during your lifetime. For example, you can put it in the bank, spend it on things you need and want, or share it with your family, friends or a worthy charity. But did you know that you can invest your savings to potentially make more money than you would if you kept it in a savings account at a bank or in your piggy bank at home? This report will help you understand the basics of investing in stocks by teaching you: Some of the vocabulary of the stock market The differences among stocks, bonds and other investment choices

2 Why Do Companies Sell Stock? FLOUR ompanies sell stock to the public to raise money to expand and grow their businesses. Imagine if the owners of your favorite local pizza place wanted to open their shops all across the country. They would need lots of money to buy restaurant space, ovens, tables and chairs, ingredients, and more. The owners of the local pizza place might form a company and decide to offer ownership rights to the public by selling stock. The primary owners of the company decide how many shares to make available to the public based on how much money they need to raise. They would then take the money they receive from selling their stock and use it to buy the equipment they need and open more stores. A stock is a part of a company that may be purchased by the public. You own the stock like you own a bike or your tennis shoes. Shares represent the portion you own in a company. For example, you could own 100 shares of Nike s stock or 20 shares of McDonald s stock. 2

3 Why Would You Buy Stock? eople buy stock in the hope of making money. Imagine that you buy one share of stock in the pizza place for $30. Let s say the company makes good pizza and lots of people buy it so the company grows its revenues and earnings. Over time that $30 share would be worth more. For example, if your share in the company grows to $50, you ve earned $20 on your original investment ($30 + $20=$50). If you decide to buy more shares, your money could potentially grow even more. If the company does well, it may also pay cash back to shareholders. These payments are called dividends. Your dividends are part of your reward for investing in the company. In general, rising stock prices and larger dividends are signs of a bull market. Of course, it s important to remember that stocks lose value sometimes, too. This is known as investment risk. When a company s performance does not meet investors expectations, stock prices often go down, and that company may decrease its dividend or even stop paying it. For instance, the stock price of your pizza company could go down to $20 or less, and you may be tempted to sell your shares. Part of investing in stocks is understanding that the stock market has ups and downs, and as part owner of the company you must take the good with the bad. It is even possible to lose all of the money you invested. Just as you may choose to buy more shares of your company when times are good, you may choose to sell your shares when times are bad. Buying and selling stocks requires research and patience. Many investors work with a fi nancial advisor to help them with these decisions. The price of a stock can change every day. You can check the value of your stock by looking in the business section of the newspaper or checking online. Every stock has a one- to fi ve-letter symbol identifying it. For example, the symbol for Nike is NKE. Price PRICE of OF 1 1 Share SHARE $50 $40 $30 $20 $10 $ 0 UPS AND DOWNS OF STOCK PRICES As the pizza company in our example illustrates, a stock s value often goes up when a company is doing well and goes down when it is having problems. MAY May YEAR Year 1 Starting price NOV. YEAR 1 MAY YEAR 2 Stock is in demand price goes up and even pays dividends! NOV. YEAR 2 MAY YEAR 3 Company is losing business so stock is not in high demand 3

4 Investing Money in Other Ways Aside from stocks, there are other ways to invest your money. BONDS Bonds are issued by companies, cities, states and the federal government to raise money. When you buy a bond, you are lending your money to the bond issuer. Companies and governments use bonds to borrow money for a variety of reasons. For instance, a computer company may issue bonds to borrow money to build a new factory, whereas a city may use a bond to help pay for a new water system. SCHOOL The company or government (also known as the issuer) promises to pay you back the original amount of the loan (called the principal) after a certain amount of time. In return for your loan, the issuer pays you a part of the loan s value every year. This amount is called interest or the coupon rate. (The term coupon refers to the fact that the earliest bonds actually required the bond owner to turn in a coupon to receive his or her interest payments.) For example, let s say you buy a $1,000 bond that will pay back your principal in fi ve years and will pay you 5% in interest every year for those fi ve years ($1,000 x.05 = $50.) In this case, you would receive $50 in interest each year. If you hold the bond for all fi ve years, you would receive a total of $250 ($50 x 5 = $250) in interest payments plus the original $1,000 you lent to the issuer. The stock market is where people buy and sell stock. The stock markets are in actual buildings, such as the famous New York Stock Exchange, or they are electronic networks, such as the NASDAQ stock market. The first time a company offers its stock for the public to buy is called an initial public offering (IPO). 4

5 There are important differences between investing in stocks and bonds. Stock owners share in the profi ts of a company when the stock price goes up or by receiving dividends but may also see the value of their stock decline if the company does not deliver good results. INVESTOR HOW BONDS WORK LOAN ISSUER Bonds, on the other hand, generally carry less risk than stocks. Because a bond is a loan, it requires the issuer to make its interest payments as promised. If the issuer does not make the interest payments, it may not be able to issue more bonds or borrow more money in the future. In addition, companies are required to pay interest and principal to bondholders before paying dividends to stockholders. Original Loan Amount Interest Payments BOND MATURES Revenue is the amount of money a company receives for selling its products or services. Once a company pays its expenses and taxes, the money the company has left over is called profit or earnings. When a company has profits, stockholders may receive dividends, which are a portion of a company s profits. Not all companies pay dividends. 5

6 MUTUAL FUNDS utual funds are a way to own shares in many investments (such as stocks and bonds) without having to invest a lot of money at one time. So instead of investing in just the pizza place, which can be risky if its pizzas don t sell well, a mutual fund can help diversify your investment portfolio and reduce risk by buying stocks from many different companies. Mutual funds are run by professional managers who make buy and sell decisions on behalf of the investors. Investors have no say in which stocks are bought and sold. A bull market describes the stock market when stock prices generally are increasing. A bear market describes the stock market when stock prices generally are decreasing. A portfolio is a collection of investments (such as stocks, bonds and mutual funds) you own. Diversification is a strategy to reduce risk in a portfolio by holding a variety of investments. 6

7 OTHER KINDS OF INVESTMENTS BANK ACCOUNTS, MONEY MARKET ACCOUNTS, SAVINGS ACCOUNTS AND CDS hese investment choices let investors save money. Like a bond, they return back your principal to you which means they have lower risk. In return for this lower risk, they pay lower rates of interest. ome people buy property, art, precious stones and other collectibles as another way to diversify their investment portfolios or simply because they like to own and collect such items. Although a house, painting or diamond might not come to mind when you think about investing, these are also investments that can rise and fall in value. With these types of investments there is not a uniform, organized marketplace like there is for stocks and bonds. $ BANK A financial advisor helps people buy and sell their stocks and other investments. It is his or her job to help stockholders decide which stocks to buy and sell and when to buy and sell them. The Dow Jones Industrial Average, also called the Dow or the DJIA, is a number indicating the average closing prices of 30 industrial stocks. The 30 stocks are chosen by size and industry and generally show how well the stock market is performing overall. It s important to understand, though that there are actually thousands of companies in the United States that sell stock. 7

8 SOUND FINANCIAL FUTURES ARE BUILT ON KNOWLEDGE Wells Fargo Advisors recognizes the importance of establishing sound fi nancial habits early in childhood, and we remain committed to investing in the knowledge of future generations. We recommend Hands on Banking at wellsfargo.com/handsonbanking as an interactive and entertaining resource for learning the basics of money, budgeting and saving. Our online game Savings Quest also teaches money management concepts. You ll find it at mysavingsquest.com. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affi liates of Wells Fargo & Company. [58994-v3] e