Investing 101Investing 101

Mark AmeeraliMark Ameerali

Bcom FinanceBcom Finance

A Bit About MeA Bit About Me

Born New Westminster 1983Born New Westminster 1983 Grew up in the Fraser ValleyGrew up in the Fraser Valley Graduated HCHS hon. 2001Graduated HCHS hon. 2001 Entered CCCEntered CCC Transferred to UBC Arts 2002Transferred to UBC Arts 2002 Completed CSC Completed CSC Entered SauderEntered Sauder Completing FinanceCompleting Finance

The Class Is About YOU!The Class Is About YOU!

Congratulations on doing something Congratulations on doing something to inform yourself!to inform yourself!

Who are you? Where do you come Who are you? Where do you come from? And why are you here?from? And why are you here?

What do you hope to learn here?What do you hope to learn here?

Lesson 1: StocksLesson 1: Stocks

Main Teaching PointsMain Teaching Points What is a stock?What is a stock? Where do stocks come from?Where do stocks come from? What are the benefits/rights of What are the benefits/rights of

ownership?ownership? What are the risks of ownership?What are the risks of ownership? What is a stock exchange?What is a stock exchange? What is a Mutual fund?What is a Mutual fund?

What is a stock?What is a stock?

A stock is OWNERSHIP in a company.A stock is OWNERSHIP in a company.

A stock is a SAY in how the company A stock is a SAY in how the company is run (AGM)is run (AGM)

A stock is PARTICIPATION in the A stock is PARTICIPATION in the profits AND losses of the companyprofits AND losses of the company

Unlimited Life (never dies)Unlimited Life (never dies)

Where do stocks come from?Where do stocks come from? Not from a mommy Not from a mommy

and daddy stock!and daddy stock!

Stocks are ISSUED Stocks are ISSUED from companies.from companies.

These issues are These issues are handled by the handled by the Investment Bankers of Investment Bankers of the world IE Morgan the world IE Morgan Stanley, Merrill Lynch, Stanley, Merrill Lynch, Goldman Sachs, TD, Goldman Sachs, TD, RBC, CIBC etc.RBC, CIBC etc.

Birth of a StockBirth of a Stock

Non-Corporations or PRIVATE companies Non-Corporations or PRIVATE companies that do very well need external financing to that do very well need external financing to grow to the point where the world is at their grow to the point where the world is at their fingertips. (ie Starbucks)fingertips. (ie Starbucks)

You CANNOT simply BORROW all the money You CANNOT simply BORROW all the money

you need to run a PUBLIC company. (why?)you need to run a PUBLIC company. (why?)

These companies decide to sell their These companies decide to sell their company (or portion of it) to the PUBLIC, company (or portion of it) to the PUBLIC, and (usually) commit to running the and (usually) commit to running the company. company.

ConceptionConception

Company will approach investment bank Company will approach investment bank i.e. RBCi.e. RBC

Investment bankers research the market, Investment bankers research the market, the company and (attempt to) price the the company and (attempt to) price the security.security.

Investment banks purchase shares and Investment banks purchase shares and hold them in preparation to sell to the hold them in preparation to sell to the general public. general public.

Pay day comes and stocks are traded Pay day comes and stocks are traded publicly.publicly.

InfancyInfancy Stock is sold to the general public.Stock is sold to the general public.

Traded on either one or many exchanges. Traded on either one or many exchanges.

Initially it will usually not pay a dividend Initially it will usually not pay a dividend because the company is still growing.because the company is still growing.

The value of the stock depends on many The value of the stock depends on many many things. i.e. Global economy, many things. i.e. Global economy, domestic economy, commodity prices, domestic economy, commodity prices, labour conditions, market valuation labour conditions, market valuation techniques, projected earnings.techniques, projected earnings.

AdolescenceAdolescence

When the stock grows up enough and the When the stock grows up enough and the earnings of the companies are large earnings of the companies are large enough to distribute, (as opposed to enough to distribute, (as opposed to saving to re-invest in the company) the saving to re-invest in the company) the earnings are distributed to the share earnings are distributed to the share holders.holders.

There are different ways and times when There are different ways and times when this will happen. i.e. Tech VS Utility stocks.this will happen. i.e. Tech VS Utility stocks.

MaturityMaturity

Shares are either much higher than Shares are either much higher than at issue (or much lower).at issue (or much lower).

Stocks have grown (or shrunk) to Stocks have grown (or shrunk) to such a degree that the price is such a degree that the price is getting too high/low.getting too high/low.

A stock split is required to balance A stock split is required to balance out. (what is a split?)out. (what is a split?)

Pricing a StockPricing a Stock

Dividend Discount ModelDividend Discount Model D1/K-g or D1/KD1/K-g or D1/K Stock is worth the PRESENT VALUE of Stock is worth the PRESENT VALUE of

its future payouts (Utility Vs Tech)its future payouts (Utility Vs Tech) Stock is worth the Price Earnings Stock is worth the Price Earnings

ratio. P/E * X (where X = some #)ratio. P/E * X (where X = some #) Castles in the air. (IPOs)Castles in the air. (IPOs)

Stocks Are Risky!? Stocks Are Risky!? Systematic and Unsystematic RiskSystematic and Unsystematic Risk

SystematicSystematic

Effects entire mkt Effects entire mkt i.e. 9/11i.e. 9/11

Can’t Diversify Can’t Diversify awayaway

Can’t escape it Can’t escape it

UnsystematicUnsystematic

Effects only 1 Effects only 1 company (or very company (or very few) i.e. CEO few) i.e. CEO leaves.leaves.

Can diversify awayCan diversify away Can escape it. Can escape it.

(Chart)(Chart)

Systematic

Unsystematic

10 30 100 1000

BreakBreak

Take 10. Availability reminder. Take 10. Availability reminder.

BEFORE you run off, find someone in BEFORE you run off, find someone in class and explain to them the most class and explain to them the most interesting thing you have learned interesting thing you have learned thus far.thus far.

Benefits, Rights, and Risks of Benefits, Rights, and Risks of OwnershipOwnership

PROPRO

- Capital Appreciation- Capital Appreciation

- Votes- Votes- DividendsDividends- Something to talk Something to talk

aboutabout

CONCON- VolatilityVolatility- Market crashes Market crashes

(corrections)(corrections)- Idiosyncratic (firm Idiosyncratic (firm

specific) riskspecific) risk- Taxes (Capital Taxes (Capital

Gains Tax)Gains Tax)

Stock ExchangesStock Exchanges

There are different types of There are different types of exchanges. exchanges.

VirtualVirtual PhysicalPhysical NYSE – Physical location with human NYSE – Physical location with human

traderstraders TSE – Virtual Exchange all computer TSE – Virtual Exchange all computer

based. based.

ExchangesExchanges

Stock Exchanges are simply a medium for Stock Exchanges are simply a medium for exchange of the possession of ownership exchange of the possession of ownership of companies.of companies.

They also help to enforce the rules and They also help to enforce the rules and regulations imposed on public companies. regulations imposed on public companies. i.e. listing requirements, financial i.e. listing requirements, financial reporting etc.reporting etc.

Exchanges in England Germany Asia Many Exchanges in England Germany Asia Many in the USA, Toronto (Vancouver). in the USA, Toronto (Vancouver).

Mutual FundsMutual Funds

What is a Mutual Fund???What is a Mutual Fund???

Mutual FundsMutual Funds

Pooling of assets of many to create Pooling of assets of many to create large buying power.large buying power.

Imagine what it would cost to Imagine what it would cost to purchase 30 different stocks?purchase 30 different stocks?

Pool Assets.Pool Assets. Professionally managed.Professionally managed. Diversified.Diversified.

Mutual FundsMutual Funds

Many different kindsMany different kinds

Michelle Quigg segment on ethical Michelle Quigg segment on ethical investing.investing.

There are funds who only invest in There are funds who only invest in “ethical” companies for example no “ethical” companies for example no tobacco producing companies or tobacco producing companies or animal testing pharmaceutical animal testing pharmaceutical companies. companies.

Mutual FundsMutual Funds

Many different kinds of mutuals.Many different kinds of mutuals. Sector Funds (Metals, Energy, Tech)Sector Funds (Metals, Energy, Tech) Ethical FundsEthical Funds Aggressive FundsAggressive Funds Balanced FundsBalanced Funds Conservative FundsConservative Funds

Mutual Fund ProsMutual Fund Pros

Professionally managedProfessionally managed Diversification for cheap.Diversification for cheap. RRSP, RRIF eligible in most casesRRSP, RRIF eligible in most cases Flexible (Can concentrate or not)Flexible (Can concentrate or not)

Mutual Fund ConsMutual Fund Cons

Uncertainty – You never know which Uncertainty – You never know which fund will perform bestfund will perform best

Fees – Management Expense Rato of Fees – Management Expense Rato of MER on an actively managed fund MER on an actively managed fund hovers around 2.5% that cuts into hovers around 2.5% that cuts into gains. Difficult to beat benchmark.gains. Difficult to beat benchmark.

Participate in Downside risk. (Cant Participate in Downside risk. (Cant hedge or short sell)hedge or short sell)

Stock CompetitionStock Competition

Pick a 5 stock portfolio TODAY. Pick a 5 stock portfolio TODAY. Portfolios will be recorded next day.Portfolios will be recorded next day. Follow them for the duration of the Follow them for the duration of the

course.course. Read the news periodically follow Read the news periodically follow

what is going on with them.what is going on with them. Person with the highest (4wk) return Person with the highest (4wk) return

who can explain the news over the who can explain the news over the duration of the game wins. duration of the game wins.

Questions?Questions?

ExtraExtra

Bell Curve.Bell Curve. Volatility of returns.Volatility of returns. Balance SheetBalance Sheet Cashflow statementCashflow statement Income StatementIncome Statement Prospectus.Prospectus. Business models (sole, partner etc)Business models (sole, partner etc)