Economics Ch. 11, The Stock Market

shares

portions of stock

bull market

a steady rise in the stock market over a period of time. We are currently in a bull market.

equities

another name for stocks; claims of ownership in a corporation

options

contracts that give investors the choice to buy or sell stock and other financial assets

futures

contracts to buy or sell commodities at a specific date in the future at a price specified today. Many of the markets in which futures are bought and sold are associated with grain and livestock exchanges (e.g., New York Mercantile Exchange; Chicago Board of Trade).

The Great Crash

the collapse of the stock market in 1929

"Black Monday"

Stocks crashed again on Monday, October 18, 1987. The market rebounded after two days and the impact on the economy was less severe.

What is EPS?

(earning-per-share) = company net earnings - dividends divided by # of shares outstanding Shares outstanding refers to all shares currently owned by stockholders, company officials, and investors in the public domain, but does not include shares repurchased by a company EPS is a measure of a company's profit. Company ABC has 1000 shares in the market. Last quarter, it earned a profit of $25,000. Each share is worth $25 of profit. As the company earns more $, the value of the stock increases, so will the price of the stock. When the price of the stock increases, you will have a capital gain.

What is the difference between defensive stock and cyclical stock?

A defensive stock is a stock whose profit growth and price are not as affected by economic activity. No matter how the economy is doing, the revenues, the earnings and the cash flows of the company remain relatively stable and so does the share price. Health care, household and personal care (HPC) stocks are known as defensive. A cyclical stock is a stock affected by economic activity. When the economy is in a recession, the profits of a cyclical company tend to drop and so does its share price. On the other hand, when the economy is in good shape (expansion), the share price tends to go up along with the profit growth. High-priced consumer goods like cars, appliances, and new houses and raw materials like aluminum, steel, and cement are examples of cyclical stock.

stockbroker

A person who links buyers and sellers of stock; stockbrokers usually work with individual investors, advising them to buy or sell particular stocks.

How does the discount rate affect GDP growth?

A relatively high discount rate can cause slow GDP, while a low discount rate may encourage economic growth the following year.

Why do lower interest rates encourage people to invest in new businesses?

Because the cost of borrowing money is lower.

Peter Lynch

Go with what you know(after some research) "During a lifetime of buying cars or cameras, you develop a sense of what's good, what's bad, what sells, what doesn't...and... you know it before Wall Street knows it."

GDP

Gross Domestic Product; the total value of all final goods and services produced in a particular economy; the dollar value of all final goods and services produced within a country's borders in a given year.

How many stock exchange markets are there?

Over 100 markets worldwide. Stocks are registered with a particular exchange.

The Dow

The Dow Jones Industrial Average has shown how certain stocks have traded daily since 1896.

What is one of the key factors that determines how expensive it is to borrow money to start a business or invest in capital?

The discount lending rate; the higher the discount rate, the more expensive it is to borrow money.

How does the stock market work?

Traders buy and sell stock. They make money by buying the stock before the price goes up and selling it before the price goes down.

bear market

a steady drop in the stock market over a period of time

brokerage firms

businesses that specialize in trading stocks. Stockbrokers work for brokerage firms.

How do corporations raise funds?

by issuing stock, which represents ownership in the corporation.

daytrading

making dozens of trades a day based on computer programs that tell the trader when to buy and sell. Daytrading is a risky business in which traders can lose a great deal of money

stock exchanges

markets for buying and selling stock. They act as secondary markets for stocks and bonds.

yield

the dividend rate of return

blue chip companies

the largest and best-known companies listed on the NYSE. These companies are often in high demand because investors expect them to be profitable for a long time.

call option

the option to BUY shares of stock at a specified time in the future

put option

the option to SELL shares of stock at a specified time in the future

What is index?

the value of a specific group of stocks; it provides a basic signal of how specific markets perform during the day.

What is P/E ratio?

(price-to-earning ratio) = current price divided by earning per share You must compare P/E ratios of companies in the same industry (similar production costs, consumer base and risk). The P/E tells us how much an investor is willing to pay for $1 of a company's earnings. For example, if the P/E is 15, then investors are willing to pay $15 for every dollar of earnings. A lower P/E ratio means that you will pay less for the same amount of earnings. The P/E ration is a sign of whether a company is overvalued or undervalued. Companies that are losing money do not have a P/E ratio.

What were some of the signs of trouble that led to the Great Crash?

1. A relatively small number of companies and families held much of the nation's wealth. 2. Many ordinary people went into debt buying consumer goods. 3. Farmers and workers were suffering financially. 4. Industries were producing more goods than consumers could buy (e.g. the automobile industry). 5. There was widespread speculation (the practice of making high-risk investments with borrowed money in the hopes of getting a big return). 6. Stockbrokers encouraged buying on margin, which allowed investors to purchase a stock for only a fraction of the price and borrow the rest from the brokerage firm.

What are 2 major United States stock exchanges?

1. New York Stock Exchange (NYSE). It is the country's largest and most powerful exchange. It began in 1792. It handles stock and bond transactions for only the largest and most established companies in the country. 2. Nasdaq: the National Association of Securities Dealers Automated Quotations. The Nasdaq is the American market for over-the-counter securities. It was created in 1971 to help solve the problem of fragmentation in the OTC market by using automation.

What are the 6 largest stick exchanges?

1. New York Stock Exchange NYSE (hours: 9:30-4 EST) 6:30-1 PST 2. NASDAQ (National Association of Securities Dealers Automated Quotations) (hours: 9:30-4 EST) 3. Tokyo Stock Exchange 4. London Stock Exchange 5. Shanghai Stock Exchange 6. Hong Kong Stock Exchange

What are two ways for stockholders to make a profit?

1. dividends: portions of corporate profits paid out to stockholders; usually paid 4 times a year (quarterly) 2. capital gains: the difference between higher selling prices and lower purchase prices

What are 4 types of stocks?

1. income stock: stock that pays dividends at regular times during the year. The dividend amount column shows the current cash amount that will be paid over one year to the owner of one share of stock. 2. growth stock: stock that pays few or no dividends. The issuing company reinvests its earnings in its business. The business and its stock increase in value over time. 3. common stock: stocks bought by investors who are voting owners of the company 4. preferred stock: stock bought by investors who are nonvoting owners of the company. Owners of preferred stock receive dividends before the owners of common stock.

Why is purchasing stock risky?

Because the firm selling the stock may earn lower profits than expected, or it may lose money.

Why does the Federal Reserve Bank raise the discount rate if there is a lot of new investment in the economy?

Because too much borrowing can lead to inflation.

What is the difference between income stock and growth stock?

Income stock pays dividends at regular times during the year. The dividend amount column shows the current cash amount that will be paid over one year to the owner of one share of stock. Growth stock pays few or no dividends. The issuing company reinvests its earnings in its business. The business and its stock increase in value over time.

What is the trailing annual dividend Yield and how do you figure it out?

It looks at a stock's dividends over the past year. If a $120 stock pays $1.20 in two quarters and $.60 in two quarters, the year's total dividend is $3.60. Divide the per-share price into the dividend and you get the yield, which in this case is 3 percent. Measuring trailing yields for different stocks lets you compare dividend performance regardless of the price per share.

What does it mean to own stock?

It means becoming a fractional owner of a company. If the company thrives, the price of the stock will rise, and if you sell the stock, your profit is the difference between what you paid for the stock and the price you sold it at.

Why do stock prices go up and down?

Stock prices are driven by supply and demand. If a company is doing well or its shares are selling at a fair price, many investors may buy its stock, creating demand, which drives up the price. But when demand decreases, so does the price. Stock prices reflect what investors think a company will be worth. That demand depends on the company's past performance, current profits, the industry, upcoming products, the health of the economy, and current events.

S & P 500

The Standard & Poor's 500 gives a broader picture of stock performance. It tracks the price changes of 500 different stocks as a measure of overall stock market performance.

What is a capital loss?

The difference between a lower selling price and a higher purchase price, resulting in a financial loss for the seller.

Why do corporations sell shares of stock?

To start, run, and expand their businesses.

stock split

each single share of stock splits into more than one share. A company may split a stock when the price of stock becomes so high that it discourages potential investors from buying it.

OTC market

the over-the-counter marketplace; an electronic marketplace for stock that is not listed or traded on an organized exchange.