FAMILY ECONOMICS & FINANCIAL EDUCATION
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 1Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
The Language of the Stock Market
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Why Learn About Stocks
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
The stock market is the core of America’s economic system Stock is a share of ownership in the assets and
earnings of a company Stock market is a general term used to describe all
transactions involving the buying and selling of stocks by a company
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Why Companies Issue Stock
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
When a company would like to grow, it issues stocks to raise funds and pay for ongoing
business activitiesIt is popular because:
The company does not have to repay the money Paying dividends (profit) is optional
Dividends are distributions of earnings paid to stockholders
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Risk vs. Return
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
On average, stocks have a high rate of return The increase or decrease in the original purchase
price of an investment
Higher rate of return = greater risk Uncertainty about the outcome of an investment
Stocks provide portfolio diversification Money invested in a variety of investment tools
COMMON STOCKVS.
PREFERRED STOCK
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2 Basic Types of Stock
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Common Stock
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Common stock – shares or units of ownership in a public corporation Most basic form of ownership One vote per share owned to determine
company’s board of directorsWays the stock value can change
The dollar value increases or decreases A merger of two companies Dividends are paid
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Preferred Stock
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Preferred stock – shares which pay fixed dividends and have priority over common stock Less risk than common stock No voting rights Dividends are stated as a percentage known as the
par value Fixed value stated on the stock certificate
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Stock Classifications
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Stock Classifications
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Seven basic classifications Growth, Income, Value, Cyclical, Countercyclical,
Speculative, Blue Chip
Some stocks can be classified into more than one category
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Researching A Stock
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Book Value
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Book value is the net worth of a companyAssets-Liabilities = Book value
Information can be found in the company’s annual report
Indicates what would happen if a company’s assets were sold, debts paid, and proceeds distributed to stockholders
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Earnings per Share
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
How much income a company has available to pay in dividends and reinvest as retained earnings on a per share basis
After tax annual earnings= Earnings per share
Total number of shares of common stock
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Price/Earnings Ratio
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Price/earnings ratio is the relationship between the price of one share of stock and the annual earnings of the company (P/E ratio)
Price per share = P/E ratio
Earnings per share of stock
Most widely used critical measure of a stock’s price
Represents how much an investor is willing to pay for each dollar of a company’s earnings
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P/E Ratio Continued
© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market – Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Most companies have between a 5-25 P/E ratio 7-10 P/E ratios are financially successful companies 15-25 P/E ratios are rapidly growing companies 40-50 P/E ratios are speculative companies
Lower P/E stocks pay higher dividends and have less risk, lower prices, and slow growth
High P/E ratios indicate the firm is expected to have a lot of growth in the future