Required Reading for the Stock Market Project!!!
1. What are stocks?
Stocks represent ownership in a corporation. Companies can issue two types of stock:
common stock and preferred stock. Each type of stock has its own characteristics and trades independently of the others in the marketplace.
2. How do common stocks differ from preferred stocks?
Common stockholders have certain rights. For example, they can vote on issues presented at the stockholder's annual meeting, receive dividends from earnings, and purchase shares of new issues of stock. Preferred stockholders have privileges and receive preferential treatment over common stockholders. For example, they receive dividends before common stockholders, and when companies dissolve businesses, preferred stockholders receive assets before common stockholders. An array of other privileges can be outlined on the stock contract.
Common stock is purchased mainly to reach growth objectives, while preferred stock is purchased primarily for income purposes. Corporations issue more common stock than preferred stock.
For this project, you are to invest only in common stock. Common stock has the potential to increase in price at a faster pace than preferred stock and therefore will help to make the project more fun, given the short time frame of the project.
3. Where are stocks traded?
The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), both located in New York City, are the principal stock exchanges in the United States for buying individual stocks. Individual stocks are also traded on an electronic marketplace called Over-the-Counter Market (NASDAQ). The companies listed on the NASDAQ market are generally smaller, younger companies providing high technology and financial services.
For this project, you will select at least two companies listed on the NYSE and two on NASDAQ. The remainder of your choices (remember, the number of stocks in your portfolio equals the number of people in your team) can be NYSE, AMEX, or NASDAQ stocks.
4. Why do you need a stockbroker?
Individuals cannot trade with the stock market exchanges. Only a stockbroker can execute an order to buy or sell stocks for you. For that service, they charge a fee called a commission.
5. How much does it cost to use a stockbroker?
The cost will be determined by the price per share of stock, the number of shares traded, the type of financial services used, and the commission rate. Commissions are negotiable, but often only investors who trade frequently or in large blocks of stock are accorded commission discounts. Discount brokers act only as agents. They only buy and sell stocks and do not provide investment advice.
For this project, you will "use” the services of a discount broker who will change you a flat fee of $20 to purchase each stock, and a flat fee of $20 to sell each stock.
6. How are stocks quoted?
Stocks are quoted in points. Points represent the money (cost) value of the stocks. Whole points are the same as whole dollars, and fractions of points (expressed in sixteenths, eighths, quarters, or a half) are a portion of a dollar.
Provided below are some examples of how fractions of points are converted to dollar amounts, and how stock quotes (as it is listed in the WSJ for example) would be converted to dollar amounts:
Fraction Point Conversions Stock Quote Conversions
1/16 point =$ .0625
1/8 point = $ .125 16 5/16 points =$16.3125
3/16 point =$ .1875
1/4 point = $ .25 25 1/8 points = $25.125
5/16 point =$ .3125
3/8 point = $ .375 46 1/4 points = $46.25
7/16 point =$ .4375
1/2 point = $ .50 37 7/8 points = $37.875
9/16 point =$ .5625
5/8 point = $ .625 64 3/16 points = $64.1875
11/16 point = $ .6875
3/4 point = $ .75 72 1/2 points = $72.50
13/16 point = $ .8125
7/8 point = $ .875 85 3/4 points = $85.75
15/16 point = $ .9375
1 point = $1.00 18 points = $18.00
7. How are stocks traded on the exchange?
Stocks are often traded in lot units consisting of round numbers of shares. For example, one (1) round lot is equal to 100 shares of stock, five (5) round lots are equal to 500 shares of stock, and ten (10) round lots are equal to 1,000 shares of stock. However, the small investor often has a set amount of money to invest and that amount of money may not be enough to buy a round lot or multiples of round lots. In this case, a portion of a lot, called an odd lot, would be bought.
For this project, you may be buying only odd numbers of shares, or you may be able to buy both round lots and an odd number of shares. The number of shares that you can buy will be determined by the cost of the stock.
8. How do you read a stock quotation?
A stock quotation gives information about a stock's performance. For example, it will tell you how low and how high the stock has traded in the past 52 weeks, how low and how high the stock traded on a particular day, the price of the last transaction for the day, how many shares traded on that day, and the difference in the price of the stock from the previous day's trading price. The quotation also shows the ratio of the price of the stock to its earnings, the amount of dividends, and the yield percentage from the dividends. Often other interesting bits of information can be noted and reviewed in the Explanatory Notes section of the Wall Street Journal.
The stock quotation below was taken from the Wall Street Journal. An explanation for each column is given below the table.
1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 1052 wks
High Low / Stock: Symbol / Div. / Yield
% / P-E
Ratio / Sales
Vol.
(100s) / High / Low / Close
Price / Net
Chg.
56 ½ 42
½ ** / Boeing BA * / 1.00 / 1.9 / 21 / 10191 / 54 ½ / 53 ½ / 53 ¾ / +1/4
Column 1 - Highest and lowest prices of the stock for the last 52 weeks. Stocks reaching a new high or low for the year are marked with an arrow in the margin. These figures show you the volatility of a stock --- an indicator of both profit potential and risk. (Over the past 52 weeks the prices per share of stock for the company listed in this stock quotation fluctuated from a low of $42.50 to a high of $56.50.)
Column 2 - Company names are abbreviated, listed alphabetically, and followed by the ticker symbol. (The name of the company in the stock quotation is Boeing Aircraft and is listed on the ticker tape as BA. The ticker tape lists the latest price and the size of each stock transaction.)
Column 3 - Cash dividend per share is given in dollars and cents. A dividend is a payment to shareholders for part of a company's profit. This figure is an estimate of the anticipated yearly dividend per share. Sometimes the dividend column for a company is blank, indicating that the company does not pay cash dividends. (Boeing estimates that it will pay a dividend of $1.00 per share for this year.)
Column 4 - Percent yield is a way of expressing the stock's current value: it tells you how much dividend you receive for what you pay. In the table the yield has already been calculated for you; you could do it yourself by dividing the dividend by the closing price (next to the last column). (Boeing's yield is 1.9 percent.)
Column 5 - P-E Ratio, short for price-earnings ratio, refers to the relationship between the price of one share of stock and the annual earnings of the company. The higher the P-E ratio, the greater the cost of the stock is in relationship to the annual earnings of the company. To determine a benchmark P-E Ratio for your company, review what has occurred over time within the company and compare the P-E Ratio to the P-E Ratios in other companies in the industry. The P-E Ratio for Boeing is 21. Since annual earnings are not given here, you cannot calculate this figure yourself.
Column 6 - Sales in hundreds refers to the volume of shares traded on the previous day. Just multiply the figure in this column by 100. (In our example, 1,019,100 shares of Boeing stock traded on that particular day.)
Column 7- Highest price the stock traded for on the previous day. (The highest price the Boeing stock traded for on that day was $54.50.)
Column 8 - Lowest price the stock traded for on the previous day. (The lowest price the Boeing stock traded for on that day was $53.50.)
Column 9 - Close price is the last transaction price for the previous day. (In this quotation, Boeing's last transaction for that day traded at $53.75 per share.)
Column 10 - Net change compares the closing price given here with the closing price of the day before (given in the previous day's paper). (On this day Boeing's stock closed at 25 cents per share higher than on the previous day's close price.)
9. What Do the Symbols and Abbreviations Mean?
A pf or pr where you see * in the second column of this illustration, "stock," refers to preferred stock rather than common stock. A wt in that location refers to warrants, or the right to buy stock during a certain period of time for a certain price.
An s where you see ** in column one of the table above ("52 weeks high low”) refers to a recent stock split, and an n indicates a new stock issued within the last 52 weeks.
Refer to the "Explanatory Notes” section in the Wall Street Journal for other symbols or abbreviations that might appear in the stock quotation.
10. How Do You Choose a Stock When You’re Investing “For Real”?
The stocks that you select should fit your financial plan and help move you closer to accomplishing your personal financial goals. Common and preferred stocks can be grouped into several classifications based on their past performance and the present financial condition of the corporation. For example:
Income Stocks pay high dividends and often have moderate or even low growth rates.
Blue Chip Stocks are stocks of large, well-established companies that consistently pay dividends and show an increase in value.
Growth Stocks are from companies that experience growth in both operations and earnings, and generally pay little or no dividends. The benefit of these stocks is the growth in price of the stock itself.
Speculative Stocks are issued by companies with unstable and uncertain earnings, subject to tremendous price fluctuations, pay little or no dividends, and are very risky stocks with potential for great profits or losses (usually new, innovative companies).
11. What is the Dow Jones Industrial Average and the NASDAQ average?
The Dow Jones Industrial Average (DJIA) is an index composed of 30 industrial companies (listed on the New York Stock Exchange) chosen from sectors of the economy most representative of our country's lifeblood. The Dow Jones Industrial Average is the oldest stock indicator in use today, established in 1897, and is the most commonly quoted indicator of market health. Examples of other indicators include: The Standard & Poor's 500 (S&P 500), The AMEX Market Value Index, and NASDAQ Composite.
For this project, each team must record the Dow Jones Industrial Average and the NASDAQ Composite on the day you buy your stocks, at every Monday closing, and again on the day you sell your investments. During the project, you should compare changes in the averages to the changes in your prices. At the end of this project, you will graph the performance of the DJIA and the NASDAQ Composite and determine how effective the averages were as predictors of your portfolio’s performance.