So What is a Stock Market?So What is a Stock Market?

The DOW demystified

Remember: A stock market is Remember: A stock market is a “store” that sells business.a “store” that sells business.

You can buy ownership of businesses when you buy SHARES of stock.– Companies decide on

how many pieces (shares) of the company they want to sell.

There are THREE ways stock There are THREE ways stock have VALUEhave VALUE

Create DEMAND for the stock.– What happens to price

when demand goes up?

The THREE Ways stock have The THREE Ways stock have value value

Keep the SUPPLY of stock low.– What happens when

there is more demand than supply?

BERKSHIRE HATHWAY

The Third Way that Stocks The Third Way that Stocks have valuehave value

The FUNDAMENTALS.

The Major Markets in the USThe Major Markets in the US

NYSE

The Major Markets in the USThe Major Markets in the US

NASDAQ

(kinda) stock market(kinda) stock market

American Stock Exchange AMEX

Chicago Commodities MarketChicago Commodities Market

Commodities: The raw materials of the earth being traded.– Cocoa – not Hershey’s

What is the DOW?What is the DOW?

Dow Jones finished up 35 points to close at 10,000.

But what does that mean???

The DOWThe DOW

The Dow Jones Industrial Average (DJI), commonly just referred to as "The Dow", is an average of the price of 30 stocks. – The stocks represent

30 of the largest and most widely traded stocks in the United States.

What stocks are on the DOW?What stocks are on the DOW?

3M, Alcoa, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper

AND …AND …

J.P. Morgan Chase, Johnson & Johnson, McDonald's, Merck & Co., Microsoft, Philip Morris, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, and Walt Disney.

The DOWThe DOW

The Dow Jones Industrial Average is computed by taking the average price of the 30 stocks and dividing that figure by a number called the divisor.

The DOW DivisorThe DOW Divisor

If the price of International Paper increases by two points, the DJI would increase by 13.7 points assuming none of the other stock values changed (13.7 = 2 / 0.14585278).

– Because of the formula used by the Dow a one point increase or decrease by any stock will have the same affect, which is not the case for all indices.

The DOWThe DOW

So the Dow Jones number you hear in the news each night is simply this weighted average of stock prices. Because of this, the Dow Jones Industrial Average should just be considered a price in itself.

The DOWThe DOW

So when you hear that the Dow Jones went up 35 points, it just means that to buy these stocks (taking into account the divisor) at 4:00pm today (the closing time of the market) it would have cost 35 more dollars than it would have cost to buy the stocks the day before at the same time.

The History of the DOW The History of the DOW JONESJONES

It was created in 1896 by Mr. Dow and Mr. Jones using 16 common stocks.

The First Dow Jones The First Dow Jones CompaniesCompanies

American Cotton Oil Company, a predecessor of Bestfoods, now part of Unilever

American Sugar Company, now Amstar Holdings American Tobacco Company, broken up in 1911 Chicago Gas Company, bought by Peoples Gas

Light & Coke Co. in 1897 (now Peoples Energy Corporation)

Distilling & Cattle Feeding Company, now Millennium Chemicals, a division of Lyondell Chemical Company

The First DOW JONESThe First DOW JONES

Laclede Gas Light Company, still in operation as The Laclede Group

National Lead Company, now NL Industries North American Company, (Edison) electric

company broken up in the 1950s Tennessee Coal, Iron and Railroad Company,

bought by U.S. Steel in 1907 U.S. Leather Company, dissolved 1952 United States Rubber Company, changed its name

to Uniroyal in 1967, bought by Michelin in 1990

QUICK QUIZ!QUICK QUIZ!

The Dow Jones measures the performance of which stock market?– NYSE

Historic LOWS of the DOWHistoric LOWS of the DOW

A CRASH is a sudden dramatic decline of stock prices across a cross-section of the market.– Often panic-driven– Speculative stock

market bubble?

Historic Lows of the DOWHistoric Lows of the DOW

Crash of 1929– Followed by the crash

of 1930– Followed by the crash

of 1931– Followed by the crash

of 1932

Historic Lows of the Stock Historic Lows of the Stock MarketMarket

1987 ( Black Monday)

Dot.com crash 2000-01Dot.com crash 2000-01

People were – Speculating instead of

investing– Borrowing money to

invest in the stock market

– 9/11 happened too– PANIC!!!!

Think of the historic crashes Think of the historic crashes as percentage losses of valueas percentage losses of value

1929 – – Average investment

lost 63.9% value

1987 – – 22.3% loss in value of

investments

Since July 2008Since July 2008

Average portfolio (list of stocks) lost 40%

So …..So …..

What’s going to happen?– Is it a good time to

invest in the market?

Terms to KNOW: Terms to KNOW:

BULL MARKET– Prolonged period

where the price of stock is rising

BEAR MARKET– Investment prices are

falling and there is general pessimism.

BubblesBubbles

Wave of public enthusiasm causes an exaggerated bull market.– Stock prices rise

dramatically– TEND to be

OVERVALUED!

BubblesBubbles

At some point – – REALITY HITS– BUBBLE BURSTS– CRASH HAPPENS

NOTE: Some other IndexesNOTE: Some other Indexes

NYSE Composite Made of 1750

common stocks listed on the exchange.

NASDAQ CompositeNASDAQ Composite Comprised of common

stocks organized as industry, bank, insurance, financial institutions, transportation and utilities.

Standard and Poor’s OTCStandard and Poor’s OTC 250 companies

averaged. Price weighted and minute by minute.OTC= Over the

CounterSmall

companies

The S & P 500The S & P 500 Includes 400

industrials, 20 transportation and 40 public utilities.

The Wilshire 5000 IndexThe Wilshire 5000 Index Broadest index

available. All stocks for which daily quotations are available.

What do indexes do?What do indexes do?

Market indicators?Can tell the future trends?

Strategies for the game:Strategies for the game: Warren Buffett’s

advice: “Buy what you know.”

Look at the business websites, magazines.

Monkey Method

Points to REMEMBER!Points to REMEMBER! The stock market is driven by supply

and demand. The number of shares of stock dictates

the supply The number of shares that investors

want to buy dictates the demand.  It's important to understand that for

every share that is purchased, there is someone on the other end selling that share (or vice versa). 

With Supply and Demand and the MarketMMore demand than supply – the market indexes go UP.MMore supply than demand – the market index goes DOWN.

Stocks have two types of valuationsOOne is a value created using some type of cash flow, sales or fundamental earnings analysis.

The Fundamental Way to InvestTThis is the valuation that people use to justify stock prices.  TThe most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. 

This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes.  This form of valuation is typically what drives long-term stock prices.