The Stock Market& Introduction to the LHA Stock Market Game Mr. Servello

Markets

A market is any one of a variety of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange (Wikipedia)

Stock Markets Bond Markets

Futures Markets

Commodities Markets

Currency Markets

Money Markets

Stocks and Bonds

Companies that need $$$ can borrow, but they can also issue Bonds

A bond is a document that formally promises to pay back a loan under specified terms and a given period of time.

Bonds

Key Features of Bonds Face value: Price of the bond. The amount that

the buyer will pay/lend the issuer

Bonds

Key Features of Bonds Maturity date: The date when the Bond expires. The

borrower pays back the lender. Bonds can also be sold prior to maturity.

Bonds

Key Features of Bonds A fixed payment: also known as a coupon; which is

calculated at a set interest rate at the time of issue• Amount is known in advance and does not change once

the bond is issued. (This is a VERY IMPORTANT feature)

Bonds

Key Features of Bonds• Coupons stay the same

• Interest rates change

• The result is that bonds can rise or fall in value

Why Bonds?

15-yr. Bond

Face Value: $10,000Coupon rate: 10%

Yearly payment of $1,000

Bank Account

requires only: $5,000

with interest rate of 20%

To obtain same yearly payment of $1,000

Who issues Bonds?

Corporate

Government (Federal or Provincial)

Municipal

Financial Institutions –Mortgage Backed

Benchmarks

Benchmarks serve the purpose of comparison. We compare a certain bond to a benchmark to see if it performs better or worse than the usual.

Click here to see a recent table of Canadian Benchmarks

http://www.tmxmoney.com/HttpController?GetPage=BondsAndRates&Language=en

Bid/Ask Spread?

If you are buying a bond, you will pay the Ask Price (always higher)

If you are selling a bond, you will received the Bid Price (always lower)

The spread or (difference) is kept by the broker as profit. This is not the same as commission which you will have to pay as well.

Yield to Maturity

Today – Buy Bond 900$

Year 3 – Bond Matures 1000$

Receive Coupon payment of 100$ each anniversary

100$

100$

100$

3 Coupon Payments = 300$Gain from Bond Price = 100$

YTM = Gains/Price PaidYTM = 400/900YTM = 44% over 3 years

Yield to Maturity

Today – Buy Bond 980$

Year 3 – Bond Matures 1000$

Receive Coupon payment of 100$ each anniversary

130$

130$

130$

3 Coupon Payments = Gain from Bond Price =

YTM = Gains/Price PaidYTM = / YTM = % over 3 years

Do You Recognize Any Companies?

Stocks

A stock is a certificate that certifies ownership of a certain portion of a firm.

When a company issues stocks It does not borrow funds/add to debt Instead it increase the number of owners

Stocks

Unlike bonds or direct borrowing, stocks do not promise a fixed annual payment. (Like the coupon)

Returns depend on company performance. If profits are high, the firm may pay dividends.

Stocks

A capital gain is an increase in the value of an asset. If you buy a share at 10$ and it increases to

15$, your capital gain is 5$

A realized capital gain occurs only when the owner sells the stock for a profit

The Common Stock Market

Common Stock Ownership Distribution of earnings (variable) Share of assets Right to vote

Preferred Stock Similar to Common stock with 2 main differences

+ fixed distribution of earnings -- no voting right

Types of Markets - Exchanges

Physical Location

Trading by members

Stocks traded are ‘listed’ companies

There are a number of exchanges around the world; you may have heard of the NYSE or the TSX

http://en.wikipedia.org/wiki/List_of_stock_exchanges

Rank Economy Stock Exchange Cap

B$ Value B$

1  United States Europe NYSE Euronext 15,970 19,813

2  United States Europe NASDAQ OMX 4,931 13,439

3  Japan Tokyo Stock Exchange

3,827 3,787

4  United Kingdom London Stock Exchange

3,613 2,741

5  China Shanghai Stock Exchange

2,717 4,496

6  Hong Kong Hong Kong Stock Exchange

2,711 1,496

7  Canada Toronto Stock Exchange

2,170 1,368

8  India Bombay Stock Exchange

1,631 258

9  India National Stock Exchange of India

1,596 801

10  Brazil BM&F Bovespa 1,545 868

11  Australia Australian Securities Exchange

1,454 1,062

12  Germany Deutsche Börse 1,429 1,628

13  China Shenzhen Stock Exchange

1,311 3,572

14  Switzerland SIX Swiss Exchange 1,229 788

15  Spain BME Spanish Exchanges

1,171 1,360

16  South Korea Korea Exchange 1,091 1,607

17  Russia MICEX 949 408

18  South Africa JSE Limited 925 340

Bear and Bull

Describes upward and downward market trends.

Can be used to describe a security (company), sector or market as a whole

Types of Orders of Stock

Market Order Buy/Sell at market price

Limit Order Buy/Sell at specific price

Stop Loss Order Protect against big losses

Trailing Stop Order Protect a profit

Types of Orders of Stock

Good till Cancelled Active until you cancel

the order

Day Order Must be re entered each

day if not filled

All or None The entire order must be

filled

Common Stock

Owners are also referred to as shareholders or equity owners.

A brokerage account is where the customer's securities and assets are held in the name of the brokerage firm, rather than you holding the stock certificate yourself.

Board of Directors: A group of individuals that are elected.  Representatives of the stockholders. The roles include such issues as the hiring/firing of executives, dividend policies, options policies and executive compensation. 

Every public company must have a Board of Directors.

Dividends

Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS.

Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

 

Common Stock

Capital Gain: Profit that results when the price of a security rises above its purchase price and the security is sold (realized gain). A capital loss would occur when the opposite takes place.

Growth Stock: A stock that experiences a continued period of growth exceeding that of the economy. Generally, the duration is over a year in length.

Income Stock: A stock that has a high, consistent, dividend paid annually.

Speculative Stock: Stocks that offer the potential for substantial price increase, usually because of some special situation such as new management or the introduction of a promising new product.

Types of Stock

Cyclical Stocks: these are stocks whose earnings and overall market performance are closely linked to the general state of the economy.

Defensive Stocks: these stocks tend to hold their own, and even do well, when the economy starts to drop

Mid-cap stocks: are medium-sized companies, generally with market values of less than $4-$5 billion but more than $1 billion.

Small-cap stocks: are stocks that generally have market values of less than $1 billion but can offer above-average returns.

Types of Stock

Reading Stock Quotes

Reading Stock Quotes

Columns 1 & 252-Week High and Low – The highest and lowest prices the stock traded over the previous 52 weeks (one year) and typically does not include the previous day’s trading.

Reading Stock Quotes

Column 3Company Name & Type of Stock – The name of the company. If no special symbol or letter follows the name, it is common stock. Different symbols indicate different classes of shares (i.e., “pf” means preferred stock).

Reading Stock Quotes

Column 4Ticker Symbol – The unique alphabetic name which identifies the stock. When looking for stock quotes online, you search for a company by the ticker symbol.

Reading Stock Quotes

Column 5Dividend Per Share – The estimate of the anticipated yearly dividend per share in dollars and cents. If this space is blank, the company does not currently pay out dividends.

Reading Stock Quotes

Column 6Price/Earnings Ratio – Shows the relationship between a stock’s price and the company’s earnings for the last four quarters. Calculated by dividing the current price per share by the earnings per share. (higher is better)

Reading Stock Quotes

Column 7Year-to-Date Percentage Change – Reports gain or loss in each stock’s price as a percentage of its price on January 1.

Reading Stock Quotes

Column 8Trading Volume – The total number of shares traded for the day (in hundreds). Add two zeros to the end of the number listed to get the actual number traded.

Reading Stock Quotes

Columns 9 & 10Day High and Low – The price range at which the stock has traded throughout the day. These are the maximum and the minimum prices that people have paid for the stock.

Reading Stock Quotes

Column 11Close – The last trading price recorded when the market closed on the day..

Reading Stock Quotes

Column 12Net Change – The change in the stock price from the previous day’s closing price in dollars. When the net change is positive, it is recorded as being “up for the day.”

Stock Market Indicators Measures the average performance of a group of stocks on a

market.

Gives an overall performance of the market. Canada – S&P/TSX US – NASDAQ Compsite, Dow Jones Industrial Average etc….

List of Indexes

http://en.wikipedia.org/wiki/List_of_stock_market_indices

DJIA

Price Weighted More expensive stocks makes up bigger portion

30 large blue chip companies cross section of industries Leaders

NASDAQ Composite Index: Based on the stock prices of over 5,000

companies traded on the NASDAQ stock market.

National Association of Securities Dealers Automated Quotation System.

S&P 500 (Standard and Poor)

Value Weighted Perceived value of company

500 large blue chip companies

Most popular benchmark for index funds What Mutual Funds compare themselves

against

Determining the Price of Stock

Coca Cola vs Chunky Cola

What factors would you be considering when trying to decide between buying these two companies?

Determining the Price of a Stock

Price affected by: How much $$$ are you excepted to receive

(dividends)

When are the dividends expected (Payouts, when companies make Profit, they pay dividends to their investors. The more Shares you have the more Dividends you get)

How much risk is involved in the company

Determining the Price of a Stock

A stock will be worth less if we are unsure about dividends

A stock will be worth more if we are confident about dividends

Determining the Price of a Stock

Price of a Stock should be the Present Value of the amounts we are expecting to receive in Dividends

Announcements of higher expected future dividends or perceived lower risk should increase the firm’s stock price.

Determining the Price of a Stock

Another factor that can affect price is Peoples views of a company

One might call this a bubble because the stock price depends on what people expect that other people expect, etc.

Market Efficiency

If information is truly public, market prices should reflect that and stock prices are efficient.

You are technically not able to ‘beat’ the market

Past Performance NEVER predicts the Future!!!

General Market Strategies

Active

• Use of technical analysis to pick stocks

• Trading on this info increases• trading costs• tax consequences

• Odds of working are low

Passive

• Believe in market efficiency, Long-term investments

• Diversified portfolio• index funds

• Lower expenses, defer taxes

Market Crashes

The Great Wall Street Crash of 1929 Aka Black Tuesday

The Crash of 1987 Aka Black Monday

The Crash of 2008 (Oct 1 – Oct 10) Black Week Oct 6-Oct 10

LHA Stock Market Game

You will make an Account on www.marketwatch.com

Search for and add yourself to the following game with the password below.

Term 1 Game : you will compete against your classmates, each of you has 100 000$ to invest!

Game:_______________________

Password:___________________