The Stock Market ECONOMICS-AUWERS Introduction Essential Questions: What is the Stock Market? How does it work? Why is it important to the United States economy? What is it? “The center of our Nation's economy does not rest at Fort Knox with its millions of dollars worth of gold, or even the Treasury that prints the money that you use. At the center of the United States economy is Wall Street. Almost every large company in the US and around the world is traded on a Stock Exchange; from McDonalds to Lockheed Martin… Even if you have no money in the stock market, or are in school, the stock market does affect you. It affects everything you do, from going to the mall, to buying that new outfit you have always wanted. After all, Calvin Klein has to get money to make those outfits!” http://library.thinkquest.org/3088/stockmarket/thebeginning.html How did it start? “ …it started out as dirt path in front of Trinity Church in East Manhattan 200 years ago. At that time, there was no paper money changing hands, or even the idea of stocks. Rather, they traded silver for papers saying they owned shares in cargo, that was coming in on ships every day. The trade flourished. During the American Revolution, the Colonial Government needed money to fund its wartime operations. One way they did this was by selling bonds. Along with bonds, the first of the nation's banks started to sell parts or shares of their own companies to people in order to raise money. In essence they sold off part of the company to whomever wanted to buy it, which is the essence of the modern day stock market.” http://library.thinkquest.org/3088/stockmarket/thebeginning.html How did it start? continued “Wall Street was becoming a major center of these transactions, and in 1792 twenty-four men signed an agreement that started the New York Stock Exchange (NYSE). They agreed to sell shares or parts of companies between themselves and charge people commissions, or fees, to buy and sell for them. They found a home at 40 Wall Street in New York City. As they grew they later moved into what is currently the New York Stock Exchange Building.” Industrial Revolution “The 1900s brought the Industrial Revolution, and along with it, a boom in Wall Street. Everybody wanted a piece of the action, and Wall Street grew. The New York Stock Exchange was not the only way to buy stocks at that time. Many stocks that were deemed not good enough for the NYSE, were traded outside on the curbs. This so called "curb trading," has now become the American Stock Exchange (AMEX). Today, the New York and the American Stock Exchanges, have been joined by the NASDAQ, and hundreds of local and international Stock Exchanges, that all play a part in the national and global economy. ” How it works… When you want a stock, you call a broker. The broker calls a person on the floor (usually an employee of the broker). This person runs to the space that is allotted to this stock. He then buys the amount of stock from the specialists, or companies, that are there to sell and buy on a regular basis. He then tells the firm he bought it, and then you have your stock. Alternatively, you do your own research and purchase stock “on-line” through your bank or one of the many online companies that purchase your stock for you at a much lower cost. The risk is YOU are not the expert. What Makes Us Tick you tube Honesty in the Market Place or why Martha Stewart went to jail “…to keep brokers honest, the government has put into place many commissions, and organizations. Of these organizations the major player is the Securities Exchange Commission (SEC). The SEC is a government agency whose purpose is to regulate the securities industry (the stock markets). It was created after the Great Depression when Congress passed the Securities Exchange Act of 1934. This agency decides what is legal, and prosecutes those who break the rules, along with setting many standards for brokers and investors alike. All companies traded on the many stock exchanges across America have to be registered with the SEC. Each must follow rules about what they can do with their stock, how they can advertise, and much more.” Stewart was convicted of selling almost 4,000 shares of ImClone Systems on Dec. 27, 2001, after being tipped that former ImClone CEO Sam Waksal was trying to dump his own shares in the company. Waksal is a friend of Stewart. Prosecutors said Stewart and her former stock broker, Peter Bacanovic, then tried to cover up the reason for the trade. Bacanovic also received a five-month prison sentence on Friday. http://library.thinkquest.org/3088/stockmarket/thebeginning.html How to diversify…Mutual Funds Open mutual funds let people put their money in them, just like a bank. When you put your money in a mutual fund, they take that money, along with that of millions of other people who are investing, and buy stocks and bonds with it. They then take out part of the profits for themselves, a commission, and give you your share. Closed end mutual funds, are similar to their open counterparts in that you turn over control of your money to professionals but, rather than putting money in them like a bank, you buy shares like a stock. This means that a closed end mutual fund acts just like any other stock on the Stock Exchange, they have Ticker Symbols, and are traded. The difference is that these mutual funds, instead of making burgers, or creating airplanes, take the money they have, invest it, and return the profits to the share holders” through diversification… In class you will create a mutual fund based on your teams recommendations…you will create a closed end Mutual Fund and compete against the other economic classes this semester to see which mutual fund was the most sucessful. What to watch for when choosing your stocks… “ A stock is only worth what someone will pay for it. Usually, if a company makes a lot of money, its value rises, because people are willing to pay more for a company's stock if the company is doing well. There are many other factors that affect the value of stocks. One example is interest rates, or the amount of money you have to pay a bank to loan money, or how much it has to pay you to keep your money in their bank. If interest rates are high, stock prices generally go down, because if people can make a decent amount of money, by keeping their money in banks, or buying bonds, they feel like they should not take the risk in the stock market.” What to watch for? Many other factors have an effect on the stock market- for example, the state of the economy. If there is more money floating around, there is more flowing into companies making their prices rise. Yet another factor is time of year, and publicity. Many stocks are seasonal, meaning they do well during certain parts of the year, and worse during others. An example is an ice company, the ones that package ice that you buy at the supermarket. During the summer, with picnics, and sweltering heat, their product sells well, and thus their stock price goes up; But during the winter, when people are not as interested in a picnic with 20 below temperatures, their price goes down. Publicity has an effect on stock prices. If an article comes out saying that company ABC, has just invented this new type of ice that will revolutionize the industry, odds are their price will increase. Conversely, if an article comes out saying that company ABC's president is a crook, and stole the pension funds, it is a good bet that the price will go down. Trends…What do you see? symbol 5 year chart… Glossary of terms 52 weeks high and low This field is a good indicator about a stocks volatility. Volatility is an indicator of the riskiness and potential for profit that the stock has. The greater the difference between the high and low, the riskier the stock is for loss and gain. If the difference between the high and low is small, then there is little potential for either loss or gain. Company name - This field is usually abbreviated in the listings, and listed alphabetically. Symbol - This field is a one to four character symbol used as a sort of nickname for the company. Dividend - This field is listed in dollar format, and it is the cash amount of money that the company will pay you each year for each stock. Percent yield - This field is calculated by dividing the dividend by the closing price. It just tells you how much of the price of the stock you will be paid in dividends each year. PE ratio - The price-earnings ratio calculates the relationship between the price of a company's stock, and the annual earnings of a company. It is calculated by dividing the closing price of the stock by the earnings per share of each stock. Glossary of terms Volume - The volume is the amount of stocks that were traded the day before. This number is given in hundreds, so to get the actual number of stocks traded, multiply the number in that field by one hundred. If a small z is before the number, then the volume is not given in hundreds, and is the actual number of stocks traded. High, low and close - These are the highest and lowest prices of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day. Net change - This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising. In addition to the stock listings, stock price charts can sometimes offer a better view of how the stock is doing. The price charts graphically organize the value of the stock over time. The charts can give you information on the company's historical performance, the stock's stability or volatility, the stock's current price relative to the past, and the stock's growth rate.