GoVenture Experiencing the Stock Market

Transcription

Experiencing
the
Stock Market
An Illustrated Introduction
to the Stock Market
Mathew Georghiou
Margaret Williams
Experiencing the Stock Market
GoVenture Experiencing the Stock Market
This resource is designed to be a stand-alone learning tool, as well as a supplement for
use with GoVenture software simulations.
Author: Mathew Georghiou, Margaret Williams
Cover Design: Wendy McElmon
ISBN 1-894353-06-4
Copyright ©2001, First Edition
by MediaSpark Information Technology Solutions Incorporated (MediaSpark)
All rights reserved. No part of this publication may be reproduced or transmitted in English or in
other languages in any form or by any means, electronic or mechanical, including photocopy,
recording, or any information storage and retrieval system, without permission in writing from the
publisher.
GoVenture and MediaSpark are registered trademarks or trademarks of MediaSpark in Canada, the
United States, and other countries.
Disclaimer
GoVenture is a learning simulation. As such, it should not be used to make real-life business
decisions. Similarly, all GoVenture information resources have been designed for learning
purposes only and should not be used to make business, legal, financial, or other decisions.
Consult appropriate professional advisors prior to undertaking any venture.
MediaSpark will not be liable, in any event, for any damages whatsoever (including, without
limitation, damages for loss of business profits, loss of business information, interruption, or
other pecuniary loss) arising out of use or inability to use the materials, even if MediaSpark has
been specifically advised of the possibility of such damages. In no event will MediaSpark’s
liability for any damages ever exceed the cost of the license fees (as outlined by MediaSpark)
paid by you for your right to use this material. MediaSpark makes no representation that this
material is free of defects.
MediaSpark Inc., Publisher
PO Box 975
Sydney, Nova Scotia
Canada
B1P 6J4
www.mediaspark.com
www.goventure.net
USA and Canada Version – First Printing, 2001
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Table of Contents
Contents
1.
Welcome................................................................................. 5
2.
GoVenture Stock Market ........................................................... 6
What is the GoVenture Stock Market Simulation........................................ 6
What Makes GoVenture Stock Market Unique............................................ 6
How GoVenture Differs from Other Stock Simulations ................................ 7
What You Need to Play GoVenture Stock Market........................................ 8
More Information.................................................................................. 8
3.
Purpose of Stock Markets .......................................................... 9
Stock Markets ...................................................................................... 9
Who Invests in Stock ............................................................................ 9
Liquidity .............................................................................................. 9
4.
Why Companies Sell Stock ...................................................... 10
Raising Money.................................................................................... 10
Debt Financing vs Equity Financing ....................................................... 10
5.
Why People Buy Stock ............................................................ 11
Financial Gain .................................................................................... 11
Personal and Emotional Reasons ........................................................... 12
Risk and Return.................................................................................. 13
6.
Stock — Types and Issues ....................................................... 14
Not All Companies Sell Stock ................................................................ 14
Types of Corporations ......................................................................... 14
Stock (Shares) ................................................................................... 15
Stock Options and Warrants ................................................................. 18
Stock Portfolio.................................................................................... 20
Company Value .................................................................................. 20
Changes to the Value of Your Stock....................................................... 21
7.
How Stock Markets Work ........................................................ 23
Listed and Over-the-Counter Markets .................................................... 23
Bear Markets and Bull Markets ............................................................. 25
Trades: Bid, Ask, Spread, Market, and Volume....................................... 25
Stock Prices ....................................................................................... 26
Stock Performance.............................................................................. 26
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Table of Contents
Stock Ticker....................................................................................... 26
How Corporations Become Traded on a Stock Market ............................... 27
8.
Buying and Selling in the Stock Market ..................................... 29
Stockbrokers and Brokerage Houses...................................................... 29
Buy and Sell Orders ............................................................................ 29
Being Long or Short in a Stock ............................................................. 31
The Dollars and Cents of Buying and Selling Stock................................... 31
9.
Reporting, Regulations, and Research ....................................... 33
Stock Market Index............................................................................. 33
Government and Securities Regulations ................................................. 33
Insider Trading................................................................................... 34
Stock Research .................................................................................. 34
10. Next Steps ............................................................................ 35
11. Glossary ............................................................................... 36
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1. Welcome
GoVenture®
An Illustrated Introduction to the Stock Market
1. Welcome
This document is an illustrated introduction to the basics of the Stock Market. It is a
companion piece to MediaSpark’s GoVenture Stock Market simulation.
The purpose of this document is to provide a complete overview to the key elements
and terminology of stock markets, as well as to explain the basic underlying structures
of how these markets work — all in a condensed, easy-to-read format.
The GoVenture Advisor
The GoVenture Advisor — the animated “GO” character — will alert you to features in
the GoVenture software simulation, examples of concepts, and where you will find more
information on a topic in the second section of this book.
GO to the GoVenture simulation software to apply these techniques.
GO here to see an example of a concept discussed in the text.
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2.
2. GoVenture Stock Market
GoVenture Stock Market
What is the GoVenture Stock Market Simulation
GoVenture Stock Market is a software program delivered via CD-ROM and/or the
Internet. The GoVenture Stock Market simulation is designed primarily as a learning
tool, but it is also intended to provide an entertaining experience. The objective of
GoVenture Stock Market is to help you learn about the Stock Market in a fun and
educational manner.
GoVenture Stock Market allows you to invest in industry-representative companies,
research the companies and the economy, track stock performance, open a trading
account, buy and sell, track your stock portfolio’s performance, and compete with other
investors. News and rumors also impact the market, so just like real stock markets, you
have to keep track of what is happening and evaluate how it could impact your
investments.
GoVenture Stock Market utilizes MediaSpark’s innovative software simulation
techniques, enabling you to “learn-while-doing.” Unlike any book, course, or seminar,
MediaSpark simulations enable you to gain years of business experience in minutes!
What Makes GoVenture Stock Market Unique
GoVenture simulations enable “learning-by-doing”, an approach that cognitive scientists
have identified as the fastest and most effective way for human beings to learn.
GoVenture simulations immerse the learner in a highly visual and interactive
environment in such rewarding ways that learners feel intellectually and emotionally
engaged in the experience — as if they were personally living it.
GoVenture Stock Market offers several key advantages:
1. A complete experience, providing all the challenges of trading in the stock
market, virtually.
2. An educational tool designed to deliver the entertainment value of a game.
3. Helpful paper-based resources that complement and support the learning
experience.
GoVenture Stock Market is designed as a tool for youth and adults, to be used as a
learning program on its own, or to complement other learning materials, courses,
programs, and curricula. It can provide a valuable learning opportunity for an individual
or an entire class, within a single hour of use – or over an extended period of time.
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How GoVenture Differs from Other Stock Simulations
There are other stock market games and simulations available, particularly via the
Internet, and many online simulations are tied to real stock market activity. However,
many learners and instructors can be reluctant to use these systems because of one or
more of the issues detailed below. GoVenture Stock Market solves these challenges,
and provides the foundation needed to encourage learners and instructors to participate
in real stock market activities or simulations:
Flexible Scheduling
Online simulations often have fixed deadlines, startup dates, and schedules of
participation. They often require many weeks or months of participation to
complete one simulation exercise.
GoVenture Stock Market condenses time into ‘virtual’ weeks, simulating
years of economic and market activities in a condensed timeframe. You can
start a new simulation at any time, pause it, save it, and return to it later.
Designed to Educate, Not Overwhelm
Many simulations are linked to real stock markets, posing a highly complex
challenge which can overwhelm learners and instructors alike.
GoVenture Stock Market provides an educational challenge in a simulated
environment: a limited number of companies; time condensed and
matched to the learner’s pace; and company profiles, news, and economic
effects in manageable quantities.
Experience Economic Cycles
Simulations tied to real market activity, in real time, are limited to a narrow
window of fluctuations and do not reflect the full potential of economic swings
over a long period of time.
GoVenture Stock Market condenses virtual time and economic cycles to
provide the realistic effect of markets in different conditions. In a few hours
of play, you can experience years of economic variation. Start a new
simulation, and you can have totally different conditions challenging you.
Flexible Learning Styles
Simulations linked to real stock markets often do not meet different learning
style needs. Others are designed as games, and lack structured educational
pedagogy. Some learners give up if they don’t have early success, while others
do better without direct competition. And some stock market simulations are
over by the time learners understand the concepts.
GoVenture Stock Market is designed as an educational tool to meet a wide
range of learning styles. It is designed to be used as a learning program on
its own, or to complement other learning materials, courses, programs, and
curricula. It can provide a valuable learning opportunity for an individual or
an entire class, within a single hour of use – or over an extended period.
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Differing Technology Resources
Some classrooms and students may not have computers or reliable Internet
access required for online simulations.
GoVenture Stock Market can be run on a stand-alone computer, or
over a network without any Internet access.
GoVenture Stock Market is designed to be used as a learning program on its own, or to
complement other learning materials, courses, programs, and curricula. It can provide
a valuable learning opportunity for an individual or an entire class, within a single hour
of use – or over an extended period of time. The educational foundation and ease of
integration in the classroom and curriculum make GoVenture Stock Market the first
choice among learners, educators, and business trainers who are in the early stages of
learning about or who are providing basic training for the stock market.
What You Need to Play GoVenture Stock Market
GoVenture Stock Market is designed using proven technologies that will operate on
Windows and Macintosh computers, either stand-alone or over the Internet. For specific
system requirements, please refer to the software documentation.
More Information
For more information on GoVenture Stock Market and other simulations, visit the
GoVenture.NETwork Internet portal or contact MediaSpark at:
Sales:
1-800-331-2282 USA/Canada
Telephone:
902-562-0042
Fax:
902-562-1252
Internet:
www.goventure.net
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3. Purpose of Stock Markets
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3. Purpose of Stock Markets
Stock Markets
A company raises funds on a Stock Market by
selling Stock, a percentage of ownership in the
company, to Investors, people and companies
that purchase partial ownership in a company. In
return for this Stock, the Investors provide the
company with cash.
A Stock Market is an entity that brings together
companies which wish to raise money with people
who have money to invest. This is similar to any
other market (like grocery markets, antique
markets, and even flea markets). But instead of
commodities, the Stock Market sells Stock,
enabling people to buy and sell ownership in
companies easily and quickly.
Stock Markets are privately owned and run
organizations. Some are non-profit and others are
operated for-profit. All are regulated by the
government in order to maintain the integrity of
the process and to protect the public. Stock
Markets are important to the economy because
they provide people with investment opportunities,
and they provide companies with the money they
need. This in turn creates positive economic
activity, such as jobs, innovation and profits.
Who Invests in Stock
Millions of people and companies buy Stock. Some do so directly
through individual Stock purchases, while others indirectly invest in
Stock via mutual funds, pension plans, and other investment
vehicles. The vast majority of all these purchases are conducted in
Stock Markets.
Liquidity
One of the key roles of a Stock Market is liquidity. Liquidity
refers to the Investors’ ability to sell their Stock in a company,
quickly converting their Stock to money. A Liquid Market is
important because it assures Investors that if they wish to sell
Stock of a company, there will be someone quickly available to
buy that Stock at some time in the future. (The opposite of a
liquid market is a Thin Market.)
All Stocks in GoVenture
Stock Market have full
liquidity – buy and sell orders
are immediately filled.
4. Why Companies Sell Stock
4. Why Companies Sell Stock
Raising Money
Companies sell Stock (ownership) of the company in order to
raise money. These funds can be used to finance operations,
expansion, sales, marketing, research and development, new
acquisitions, and so on.
Selling Stock is a very common way for companies to raise
money because it does not have to be paid back like loans, and this makes it a less
expensive method to raise money. But, because owning Stock is owning a portion of
that company, whoever owns the majority of voting Shares of a company has
Controlling Interest in that company. Sometimes company founders are reluctant to
sell ownership in their company, because they do not want to lose control of the
company.
Debt Financing vs Equity Financing
The only ways for a company to get cash are through sales of products or through
financing. Financing is categorized as either Debt or Equity.
Debt Financing is money that the company borrows for a limited
period of time, and must pay back at some time in the future –
usually with some type of interest added. Debt is usually shown as a
Liability on a company’s Balance Sheet, in order to show that this
money must be paid back sometime in the future.
Equity Financing is money that is given to a company in exchange
for a Share of the ownership, and usually does not have to be paid
back directly. So when an Investor gives a company money in
exchange for Shares (another name for Stock, i.e., ownership in the
company), this is called Equity Financing. Equity Financing shows as
Shareholders Equity on a Balance Sheet. With Equity Financing,
Investors can get their money back in a variety of ways, including
Dividends, future sale of the company itself, future sale of Shares on
the Stock market, and so on.
There are also various types of quasi-debt and quasi-equity financing approaches that
are used.
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5. Why People Buy Stock
People buy Stock for a number of reasons – usually with the anticipation of financial
gain, but sometimes for personal or emotional reasons. Financial institutions, insurance
companies, and fund managers (pension plans, mutual funds, etc.) also purchase Stock
for financial gain. Companies invest in other companies by acquiring Stock in a
company to gain ownership in that company, generally to expand the overall reach of
their operations and increase revenues and overall value.
Financial Gain
Most people buy Stock as an investment that they hope will
increase in value sometime in the future. When that
happens, they may choose to sell the Stock, getting back
more money than they put in. Similar to interest at a bank
– you put your money in a savings account, and if you let it
sit in the account, it accrues interest, making you more
money. The difference with the Stock Market, however, is
that there are no guarantees that your investment will
increase in value. In fact, many times people lose money
on the Stock Market, when the value of their Stock
diminishes.
The good news, however, is that many people have made money on the Stock Market
(some have even become millionaires), because the Stock market offers the potential
for very high returns that are difficult to achieve with other investments. Over the long
term, the leading Stock Markets are known to have provided returns in the range of
10% each year on average, but individual short-term returns could range from total loss
to gains of 25-50% or more. The challenge, however, is choosing which Stock in which
to invest and the best time to buy and sell.
There are two primary types of financial benefits that may be realized by investing in
Stock: generating cash through Dividends, and growth in the value of the company
resulting in Capital Gains upon the sale of the Stock.
Income Generation ― Dividends
A Dividend is a distribution of part of a company’s profits which is paid by the
company to its Shareholders (another name for Investors, because they hold
Shares in the company). Dividends are authorized by the Board of Directors,
and are generally paid quarterly, semi-annually, or annually. Most often,
Dividends are paid yearly. Not all companies pay Dividends – in fact, most
companies do not. Most do not because they wish to reinvest profits back into
the company in order to grow the company.
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EXAMPLE
Company-A
Issues dividends of $0.50 per Share
You own 100 Shares.
You will receive $50 (100 Shares x $0.50 per
Share) in dividends as your Share of the profits
Growth ― Capital Gains
With Capital Gains, an Investor expects to make money through an increase in
overall value of the company. This increase is called Capital Gains because
Investors gain capital, i.e., get more money back when they sell their Stock.
Capital Gains offer the potential for very high rates of return on investments –
much more than dividends may provide.
Capital Gains are what have made some people overnight millionaires.
EXAMPLE
TODAY
Company-A
Share Price is $1
You buy 100 Shares
for $100 (100 x $1)
SOMETIME IN THE FUTURE
Company-A
Share Price is $3
You sell 100 Shares
for $300 (100 x $3)
Your Capital Gain =
$200 ($300 - $100)
Personal and Emotional Reasons
While making money is the key driving force behind the Stock Market, some people
choose to invest in companies for reasons that are not necessarily financial. For
example, you may know a friend or family member who has a key role in a company,
and in order to show your support, you choose to invest in the company. Or you may
have an interest in what a company is doing, and so by being a Shareholder of the
company, you are entitled to certain rights that may provide you with better access to
the key decision makers within the company.
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As a Shareholder, you also get to vote on important issues, such as electing the Board
of Directors, who oversee the company (assuming you own a class of Shares that
include voting rights – some Share classes do not). It is important to note, however,
that your power as a Shareholder is limited by the percentage of ownership that you
own in the company. For example, if you own more than 50% of the voting shares of a
company, then you are said to own Controlling Interest in that company, since you
can outvote anyone on important issues. But this also depends on the voting structure
of that company, because some votes require approvals by more than 50%.
Risk and Return
Stock investments offer the opportunity to make more
money than you start with, but they also carry the risk of
losing money. The Stock Market is considered a higher
risk investment vehicle because there are no guarantees.
This is unlike a savings account at a bank, which pays you
a stated rate of interest and where deposits are usually
guaranteed by the government if the bank goes bankrupt.
The general rule of thumb is that the higher the potential return, the higher the risk that
you could lose your entire investment. And conversely, the safer an investment is, the
lower its rate of return. Since investments that offer the greatest potential for a high
rate of return also bear the most risk, if you cannot afford to lose your money you
should always invest most of your savings in lower risk investments.
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6.
6. Stock — Types and Issues
Stock — Types and Issues
Not All Companies Sell Stock
Not all businesses have Stock, and even those that do sometimes do not make it
available to the public for investment. Each business is established as a specific legal
entity. The most common types are Corporations, Partnerships, Co-operatives, and
Sole Proprietorships. Governments also sometimes operate similar to businesses, but
there is no Stock sold in governments – after all, in a democratic society you are already
a part owner of the government to begin with.
A Sole Proprietorship is owned by one person, so there is no Stock to sell. Partnerships
and Co-Operatives do sell partial ownership, but not with Stock and there are limits as
to who can become a part owner. Only Corporations have Stock which may be sold.
Types of Corporations
Now that we have narrowed the field down to Corporations, it is important to
understand that not all Corporations sell Stock. And those that do, do not necessarily
make it available to the general public.
Non-Profit and Not-for-Profit Corporations
Many businesses and organizations are incorporated, but because they are not
run to generate profits, they do not sell Stock. These would include schools,
hospitals, churches, and charities.
Private Corporations
Private Corporations are owned by one or a few individuals. They do not make
their financial information available to the public. They do not sell Stock publicly
on the Stock Market, but can sell stock privately (within stringent government
regulations). They are also called Privately Held or Privately Traded
Corporations because the ownership is not available to the general public.
Governments regulate how Private Corporations may approach potential outside
Investors, and these companies are generally limited to finding investment from
friends, family, close business associates, and sophisticated investors. Often,
private companies are small or newly formed, because most large companies
require more cash to grow and expand than a few people can afford.
Public Corporations
Even though there are many different types of companies, the vast majority of
investment activity is with for-profit Public Companies, also called Publicly
Held or Publicly Traded Corporations. These companies register with a Stock
Market and sell their Shares to the general public. Public Companies are required
to make their financial information available to the public, and may be owned by
anyone who can afford to buy their Stock. The usual reason to buy their Stock is
for financial gain, either through Dividends or from Capital Gains.
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Stock (Shares)
Stock is a term used to refer to ownership in a
company. A for-profit corporation is an entity
unto itself, and therefore must be owned by
someone (a person or group of people), or
something (such as another company).
Ownership of a company is accomplished by
issuing Shares of the company. The terms
Stock and Shares are often used
interchangeably.
GoVenture Stock Market simulates a real
Stock market, enabling you to buy and sell
Stock of virtual companies. You can
measure your portfolio performance
against your own objectives, or compete
with traders over a network or the Internet.
Authorized vs Issued Shares
When a corporation is set up, the maximum number of Shares which can be sold
is established. This number can be changed later but will involve Dilution or a
Stock Split (see below). These are the Authorized Shares.
The term “issued and outstanding” is used to refer to Shares that have been
issued to the public and are still valid (i.e., not expired or cancelled). Once a
Share is sold, a certificate is issued to the owner. These Shares are now Issued
and Outstanding, or just Issued Shares. The Board of Directors decides when
new Shares will be issued, but once the Shares are issued, the owners can resell
them in the Stock Market at will.
EXAMPLE
Company-A has 1,000 Shares Authorized,
but only 100 Shares Issued and Outstanding.
If you own 10 Shares of Company-A, then
you own 10/100 or 10% of the company.
If you purchase another 10 Shares, for a
total of 20, then you own 20/100 or 20%
of the company.
Some Private Companies are entirely (100%) owned by a single person.
However, this is not the case with Public Companies that sell their Shares on a
Stock Market, because rules outline that a Public Company must have a certain
percentage of its ownership available to the general public to purchase.
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Share Certificates
Once you purchase Shares of a company, you are considered a
Shareholder of that company. Proof of ownership of a company is
represented by issuance of Share (or Stock) Certificates. A
Share Certificate is like the deed to a house – but instead of proving
your ownership of a house, a Share Certificate proves that you own
a given number of Shares of a certain company.
When you purchase Shares in a company, the company or its agent will
send you a Share Certificate. One Share Certificate is issued for the total
number of Share you purchase at one time. The number of Shares you own is
printed on the certificate, along with your name.
Number of Shares per Company
The total number of Shares you own in a company tells you the total value of
your investment based upon the current market price times the number of
Shares you own.
EXAMPLE
Company-A
100 Shares issued
and outstanding
Company-B
1,000,000 Shares
Issued and Outstanding
This does not mean that Company-B is more valuable than Company-A, or
vice versa. It simply means that the ownership of Company-B has been
divided 1,000,000 times, whereas Company-A has only been divided 100
times. It is possible for a company to have as few as one Share and as many
as billions of Shares. (Public companies trading on a Stock Market usually
have quite a few Shares).
There are several reasons why a company may choose to have only a few, or to
have many, Shares. One common reason is so that the Share price remains
within an attractive and affordable price range.
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EXAMPLE
Company-A
100 Shares issued and outstanding
If Company-A had a value of $1-Million and only 100 Shares, then the Share
price would be $10,000 per Share ($1,000,000 ÷ 100). Since in most cases
you cannot buy part of Share, very few people could afford to buy even a
single Share of Company-A. This makes the Stock of Company-A less
attractive and affordable.
Another reason a company may want to keep its Share price low is because of
the perceived value of owning many Shares. For example, owning thousands or
millions of Shares in a company can sometimes feel more valuable than only
owning a few Shares of another company. But it is important to remember that
the number of Shares you own does not matter – it is the total value of those
Shares and your percentage ownership (control) that are of key importance.
Classes of Stock
Companies can divide their Stock into different classes of Shares. Some Shares
may include Voting rights on key company issues (such as choosing the Board of
Directors), while others are Non-Voting.
Some Share classes can also be made subordinate to
others. For example, if a company goes bankrupt,
Shareholders who own a higher class of Shares get paid
first when the company is liquidated. In some cases, this
may mean that there is little or no money left over for
Shareholders who own the lower class of Shares.
Common Stock is the most prevalent type of Stock
available.
The most common type is a “Class-A” full voting Share.
Common Stock is also often the most subordinate type of
Stock, i.e., it is the last to get paid in case of bankruptcy.
Another type of Share is called Preferred Stock because it may have additional
rights that other Shares do not, and because it has a preferred (i.e., higher)
priority in getting paid in case of bankruptcy.
A company may structure its Shares any way it likes, assuming the company
obtains Shareholder approval and is within legal guidelines.
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Stock Options and Warrants
Stock Options and Warrants are legal rights to purchase Stock at a future date and
price, under certain limitations. Often Stock Options are made available to employees of
the company, whereas Warrants are provided to outside Investors. Stock Options can
also be traded publicly in certain instances.
Stock Options
A Stock Option is a right to purchase Shares in a company at a set price during
a given time in the future. You cannot normally purchase those Shares
immediately, but have to wait a certain amount of time until your options “vest”
or “mature.”
EXAMPLE
TODAY
Company-A
Share Price is $1
You are assigned 200
Options at a Strike
Price of $1, valid for 4
years, with a Vesting
Period of 2 years.
YEAR 3
Company-A
Share Price is $3
You Exercise 100 Options
for $100 (100 x $1). Your
benefit is $200 ($300 $100).
• You are assigned (or purchase) 200 Stock Options whereby you can purchase up
to that many Shares of the company at a Strike Price of $1 per Share, up to 4
years from now. The Vesting Period is 2 years, which means you cannot
Exercise your Options (convert Options to Shares by purchasing the Shares) for
at least 2 years. (But often, Stock Options include the benefit of vesting
immediately upon a company being sold).
• Three years from now, you decide to Exercise some of your Options and
purchase 100 Shares. Since your Strike Price was $1, you only have to pay $100
($1 x 100), even though the market value of the Shares is $300 ($3 x 100). You
have therefore received a benefit of $200 ($300 - $100).
• At the end of the 4-year time period, your remaining Stock Options will expire.
At that time you may choose to exercise the remaining Options, or let them expire.
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It is important to note that if the Share price goes below your Strike Price, you
normally would not Exercise your Options because you would lose money by
Exercising your options at that time. In these cases you can usually purchase
Shares directly at the current market price instead of exercising Options, if you
wish to buy more Shares.
Stock Options are a risk-free benefit often given to employees and directors of a
company, in order to provide a feeling of ownership and as an added benefit for
their work. The better the company does, presumably the higher the Stock price
will go, and as a result the value of the Stock Options will increase when they are
Exercised. Some employees have become very wealthy through Stock Options –
but many more have not.
A company normally sets aside a Reserve of a given number of Authorized
Shares for Stock Options that it can issue to key people. Public companies have
limits as to how great a percentage of Shares can be reserved for Employee
Stock Options (normally up to 10 – 15% of all issued and outstanding Shares).
There are also restrictions on who is eligible to receive Stock Options from a
company. In many jurisdictions, Stock Options receive favorable tax treatment.
Company Stock Options are often traded on the Stock market, but are generally
considered high-risk investments because they have an expiration date
associated with them.
Warrants
A Warrant is a certificate giving the bearer the right to purchase Shares in a
company at a set price, up to a given time in the future. It is similar to a Stock
Option but without a vesting period, because Warrants essentially vest
immediately upon issuance. Warrants may also have different restrictions as to
whom they can be assigned. Warrants are often assigned to Investors, as an
added incentive for them to invest in a company.
Similar to Stock Options, Warrants also include a Strike Price and Expiration
Period.
Futures
Note that Futures are not associated with selling Stock. Futures are similar to
Warrants, except instead of purchasing the right to buy Shares in the future, you
are acquiring the right to purchase a commodity (such as precious metals,
minerals, food, grain, etc). An important consideration with Futures, however, is
that in many cases the purchaser is obligated to buy or sell the commodity at the
designated time. In such instances, this is unlike a Warrant or Option contract
because the Futures transaction must take place, regardless of market
conditions.
19
Stock Portfolio
The term Stock Portfolio describes a collection of
investments. The value of the Portfolio may vary over time,
as each individual investment increases and/or decreases in
value, and as you move funds from one investment to
another (such as buying and selling Stock).
Company Value
enables you to track the
value of your portfolio in
detail. You can also
compare your portfolio
performance with that of
other Investors.
The value of the company can be a subjective issue (see
Stock Performance), but the one measurement that can be the most important is the
Market Capitalization (Market Cap), which is determined by the company’s current
Share price multiplied by the total number of Shares issued and outstanding.
EXAMPLE
Company-A
Share price is $2
1,000,000 Shares Issued
and Outstanding
Market Cap = $2,000,000
($2 x 1,000,000)
Company-B
Share price is $200
1,000 Shares Issued
and Outstanding
Market Cap = $200,000
($200 x 1,000)
You own 10,000 Shares of Company-A
and 1,000 Shares of Company-B.
•
•
You own 10% (10,000 ÷ 100,000) of Company-A and your
Shares have a value of $200,000 ($2 x 10,000).
You own 100% (1,000 ÷ 1,000) of Company-B and your
Shares also have a value of $200,000 ($200 x 1,000)
It is important to note that the Market Capitalization formula only refers to the value of
the company based upon its current Share price (which is determined by market
demand). It does not take into account how much potential a company may have, or
how much money it may have in the bank, or who its customers are, or what business
the company is in, etc.
Some market analysts might say that the market price does reflect the future potential
and other intangible factors as perceived by the Investors. Since all of these factors will
in some way affect the perceived value of the company, this impacts the market
demand for that company’s Stock, and thus the price.
20
Changes to the Value of Your Stock
The value of your Shares will change as the market price of the Stock moves with
market demand. In addition, your stock value can change if the company Issues more
Shares from the Authorized number of Shares (Dilution), or if the company divides or
recalls Shares (Stock Split, Reverse Split).
Market Price and Demand
The primary reason the value of your Stock will change is because of changes in
the market price. In general, if people want a company’s Stock, they will offer
more for it. And if they don’t want it as much, the price will go down. Wanting
the Stock involves the Investor’s estimation or belief on what the true value and
potential value of the company is compared with the current Market
Capitalization (current price times total number of Outstanding Shares). Thus
the price of a Stock in high demand will only rise so high before it levels off – as
the Market Cap becomes equal to the Investment community’s perceived total
potential value of the company.
Dilution
Dilution occurs when your percentage of ownership in a company gets reduced
due to the issuance of new Shares.
EXAMPLE
TODAY
Company-A
1,000 Shares issued
and outstanding
You own 100 Shares.
10% ownership
(100 ÷ 1,000)
Company-A
500 new Shares issued to new Investor(s)
1,500 Shares issued and outstanding
You own 100 Shares.
Ownership diluted to 6.7%
(100 ÷ 1,500)
A company may issue new Shares in order to raise more funds, after its Initial
Public Offering. Dilution also occurs when Stock options, warrants, and
convertible securities are Exercised.
The trading of existing Shares on the Stock market does not cause Dilution, since
these Shares were already issued sometime in the past.
Dilution can be a sensitive issue for Shareholders. In theory, even though your
ownership may have been diluted through the issuance of new Shares, since the
company has brought in new funds in exchange for the new Shares, then the
overall value of the company has increased (because it now has more money), so
the overall value of your Shares remains the same.
21
This can be a very subjective issue, however, and in some cases Shareholders
may not want a company to issue new Shares if they feel it risks reducing the
value of their ownership.
Stock Split and Reverse Split
If a company wishes to reduce its Share price, it can undergo a Stock Split.
Companies undergo Stock Splits in order to make their Share structure and
Share price more favorable to Investors. A company may choose to split its
Shares as often as it likes, and by any multiple it chooses. Companies may also
undergo a “Reverse Split”, which reduces the total number of Shares,
consequently increasing the Stock price.
EXAMPLE
TODAY
Company-A
10,000 Shares Issued
and Outstanding
Share price is $100
You own 100 Shares.
Your Share value =
$10,000 ($100 x 100)
Company-A
Undergoes 2 for 1 Stock split.
20,000 Shares Issued and
Outstanding (2 x 10,000)
Share price is $50
You are issued 100 new
Shares for a total of 200
Shares now owned.
Your Share value =
$10,000 ($50 x 200)
22
7.
7. How Stock Markets Work
How Stock Markets Work
Listed and Over-the-Counter Markets
The organized trading of Stocks is done via Listed Exchanges or Over-the-Counter
Markets. Listed Exchanges are sometimes referred to as “auction markets,” since each
buy and sell order is auctioned for the best price (according to supply and demand)
using an open bidding process. This is unlike an Over-the-Counter market, where the
price may be set by the Market Maker(s) according to supply and demand.
Listed Exchange
A Listed Exchange is a Stock Market that utilizes Stock Specialists to manage
trading activity. Designated brokerage firms assign an experienced individual to
act as Specialist for a given Stock. The Specialist is responsible for all activities
related to the buying and selling of the Stock which they represent. Buyers and
Sellers approach Specialists on a Trading Floor (at the Stock’s designated
“trading post” in the “Pit”) and the Specialist acts as a middleman (or
“auctioneer”) connecting buyers with sellers, and vice-versa. Specialists execute
a trade when the highest bid meets the lowest offer. If there are more buy
orders than there are sell orders (or vice-versa), then the Specialists are
obligated to provide Liquidity by using their firm’s capital to buy or sell shares as
necessary, until such point as the supply and demand are once again in balance.
At the end of the day, the Specialists report the details of all trades that they
have transacted to the exchange.
The New York Stock Exchange (NYSE), the American Stock Exchange (AMEX),
and the Toronto Stock Exchange (TSE) are examples of Listed exchanges.
Exchanges such as the TSE are now completely automated and do not have a
trading floor – all trades are done via computer.
SPECIALIST
ORDER
INVESTOR
ORDER
STOCKBROKER
In an Auction Market,
buyers and sellers converge
on the Specialist, who
connects buyers with sellers.
23
Over-the-Counter (OTC) Market
In an Over-the-Counter Market, Brokerages act as Market Makers for various
Stocks. The Brokerages interact over a centralized computer system.
With an OTC Market, the Market Maker maintains a firm bid and ask price for a
designated Stock, and maintains a minimum inventory of Shares in the Stock for
which they “make a market.” This is in contrast to a Listed Exchange, where
Stock is auctioned and does not necessarily have a firm price (i.e., the price said
to be the price of the most recent trade). Similar to Specialists in a Listed
Exchange, Market Makers match buyers with sellers. But, in most instances,
Market Makers use their own inventory of Shares to fill buy and sell orders
immediately. In addition, a specific Stock can have several Market Makers, all of
which may compete to buy and sell Stock to Investors.
With Over-the-Counter Markets, the volume of Shares traded is not an accurate
representation of trading activity, because true trading activity requires matching
one buyer and one seller (one trade), whereas when Market Makers step in and
use their inventory, two trades are made – one with the Seller and Market Maker,
and the other with Market Maker and the Buyer.
The Nasdaq Stock Market, the Nasdaq SmallCap, and the OTC Bulletin Board are
the three main Over-the-Counter Markets in North America.
ORDER
INVESTOR
ORDER
ORDERS
STOCKBROKER
In an OTC market, Market
Makers compete to fill buy
and sell orders of the Stock
which they represent.
Trades are executed at the
highest bid and lowest ask
prices put forward by the
Market Makers.
MARKET MAKER
24
Bear Markets and Bull Markets
A Bear Market is used to describe a market that is
declining in value, while a Bull Market describes a
market that is increasing in value.
Trades: Bid, Ask, Spread,
Market, and Volume
When a trade is initiated, the terms Bid, Ask, Spread, Market, and Volume are used
to describe the type of trade that is made.
Bid is the highest price a buyer, Specialist, or Market Maker is willing to pay for (bid on)
a Stock. Ask is the lowest price a seller, Specialist, or Market Maker is willing to sell a
Stock for (the “asking” price). The Spread is the difference between the two prices,
and Volume is the number of Shares being traded. Market is the current market price
for the Shares.
EXAMPLE
Company-A
Share price is $5.00
You own 100 Shares.
1. You instruct your broker to “sell 100 Shares of Company-A at Market.”
2. Your broker forwards the “Market” order onto the Stock Market.
3. If this Stock is in demand, the buyers, Specialists, or Market Makers might bid $5.10
per Share in order to acquire your Shares because they are confident that they can
then sell those same Shares at an ask price of $5.20 (this $0.10 per Share difference
is called the Spread and is the profit made by the Specialists and Market Makers).
If, however, the Stock you want to sell is not in demand, the buyers, Specialists, or
Market Maker might only bid $4.90. Since you have designated your trade at
“Market,” your broker will sell your Shares at the best price that is offered at that time
(since that is considered the current market price).
You, as the Investor, also have the ability to instruct your Broker to buy or sell only at
a specific price. The benefit of this is that you have control over the price, but the risk
is that no one may want to buy your Shares at that price.
25
26
Stock Prices
Stock prices are set according to market demand for that
Stock. If many people want to buy Shares of a company and
are willing to bid higher prices to purchase those Shares, then
the price of the Shares will increase. If many people want to
sell Shares of a company and are willing to accept a lower
price, then the price of the Shares will decrease.
Consequently, Share prices fluctuate from day to day,
sometimes minute-by-minute – and in fact, trade by trade.
includes a Stock Performance
area where you can review
the historical performance of
a Stock, including news and
events that may affect the
future of the company behind
the Stock.
Stock Performance
The performance of a Stock refers to the value of a Stock – whether it is increasing or
decreasing over time. Stock value is strictly based on market demand for that Stock
and nothing else. But, of course, there are many factors that affect the value of a
Stock, including:
•
•
•
•
•
•
•
•
The total value of a company’s tangible assets (its Book Value).
The perceived value of a company’s intangible and intellectual assets.
The success or failure of the company.
The perceived potential of the company to be
successful in the future.
The state of the Economy and Industry Sector.
The mindset of the investment community.
Media and analyst attention that a Stock/company
receives.
And various other factors.
All together, the above factors create a demand for a company’s Stock. This demand
then drives the price of the Stock up or down – the greater the demand, the higher the
price, and vice-versa. And while many people may argue and debate the “true value” of
a company, the current Stock price is the one single, important measure.
Stock Ticker
A Stock Ticker is a display that scrolls the most recent Stock prices (and sometimes
volume of Shares traded). Data is presented differently on each ticker, but usually
includes the Stock Symbol, followed by the current market price, and an indication of
the amount the price has gone up or down when compared to the previous day’s closing
price.
XYZ 5.23 +0.25
Stock XYZ current Share price is $5.23
which is $0.25 higher than it was the
previous trading day.
includes a Stock Ticker that
displays the current price of
each Stock.
How Corporations Become Traded on a Stock Market
Initial Public Offering (IPO)
An Initial Public Offering (IPO) refers to the first occasion in which a company
makes its Stock available for sale to the public. This is done via an
Underwriter, which is a financial services organization that acts as a
middleman, purchasing a bulk of Shares from the company and then selling
those Shares to the public. The Underwriter works with the company to promote
the Stock in order to increase market demand, and consequently increase the
sale price of the Shares.
UNDERWRITER
STOCK
MARKET
COMPANY
PUBLIC / INVESTORS
Public Companies cannot be created overnight. Instead, a company is first
founded as a Private Company. Private Companies are restricted by securities
law as to whom they can sell their Shares. If the Private Company meets
appropriate securities regulations, it can apply to become a Public Company. If
the application is successful, the company moves towards an IPO. IPOs generally
can take many months and cost hundreds of thousands of dollars, and
sometimes millions of dollars, to undertake.
Sale of Shares through an IPO is designated as the Primary Market, whereas
trading of Shares previously issued is referred to as the Secondary Market or
Aftermarket.
Reverse Take-Over (RTO)
When a company buys/acquires a larger company, the companies are said to
have undergone a Reverse Take-Over (RTO).
Private Companies that wish to become Public Companies without going through
the time and expense of an IPO sometimes choose to perform an RTO. With an
RTO, a Private Company finds a company that is already trading publicly and
arranges to acquire ownership control of that company. Once ownership is
acquired, the Private Company merges its operations with the Public Company
(sometimes eliminating the Public Company’s operations completely), and
subsequently becomes the Public Company.
27
Shell
The term Shell, or Shell Company, is used to describe a company that does not
have any assets or viable operation. From a Stock Market perspective, Shell
Companies sometimes arise when a company is no longer fully operational, but is
also not completely bankrupt to where it is automatically disqualified from the
Stock Market. Some Stock Markets even enable the creation of Shell Companies,
specifically as an investment vehicle. Shell Companies are ideal candidates for a
Reverse Take Over (RTO).
One important consideration about the trading of shares is that once a company has
sold shares to the public, it no longer receives direct financial benefit from the continued
trading of those shares by the public. For example, if a company issues 1 Million shares
and generates $1 Million through an IPO, the continued trading of those 1 Million shares
from one investor to another does not generate any new money for the company.
28
8.
8. Buying and Selling in the Stock Market
Buying and Selling in the Stock Market
Stockbrokers and Brokerage Houses
Trading — buying and selling — Stock is done through a Stockbroker (Broker). You
place your Order — your buy or sell request — with your Stockbroker and the
Stockbroker completes the transaction on the Stock Market. There are many rules and
regulations involved with having direct access to the Stock Market, and Stockbrokers are
trained and registered to participate in the process.
INVESTOR
STOCKBROKER
STOCK MARKET
Stockbrokers are usually employed at a firm which specializes in Trading, called a
Brokerage House. Recently, many electronic Brokerage Houses have been set up so
that as an Investor you can make trades almost directly. However, even though you
may not deal directly with a Stockbroker, you still have to go through the system of the
Brokerage House, which actually completes the transaction.
Buy and Sell Orders
An Order is a request from a client to a Stockbroker to buy or sell Stock. A Buy Order
is given to buy stock, while a Sell Order is given to sell stock. Orders can be executed
either at the market price or at a specific price given by the client/investor.
ORDER
ORDER
There are various types of orders:
Market Order
A Buy or Sell Order where the Stockbroker is instructed to execute the trade
immediately at the best available price.
29
Limit Order
A Buy or Sell Order where the Stockbroker is instructed to make the trade at a
specified price (the Limit Price), or better. While Limit Orders enable Investors
to buy and sell at a set price, these orders are not always filled, because the
market may feel that the Limit Price is too high (in the case of a sell order) or too
low (in the case of a buy order).
Stop Order
A Market Order to buy or sell a Stock if it reaches or passes a specified price, the
Stop Price. Unlike a Limit Order, which is immediately put on the market and, if
filled, will set the market price of the Stock at the time of the transaction, a Stop
Order is not put on the market until the market price has reached the Stop Price.
A Stop Order is more of a “sit and wait” approach.
Day Order
A Buy or Sell Order which automatically expires it if has not been filled by the
end of the Trading day.
Fill-or-Kill Order
A Buy or Sell Order where the Stockbroker is instructed to make the trade
immediately, but if the order cannot be filled immediately, it is automatically
cancelled.
All-or-None Order
A Buy or Sell Order where the Stockbroker is instructed to fill all of the order, or
none of it. Unlike a Fill-or-Kill order, an All-or-None order does not automatically
expire if it cannot be filled immediately.
After-Hours Trading
Trading of Stock while the Stock Markets are closed. Many Brokerage firms offer
this service.
30
Being Long or Short in a Stock
When Investors buy a Stock with the expectation that it will increase in value sometime
in the future, they are said to be Long in the Stock. Generally when the Stock does
increase in value, the Investors sell for the Capital Gains.
There are other types of Investors who buy and
sell Stock because they feel the Stock will
actually decrease in value. This is called being
Short in a Stock, or Shorting a Stock. These
Investors attempt to make money by selling
Stocks that they actually do not yet own, but
then buying the stock after the price drops, and
subsequently delivering the Shares to the original
buyer.
SHORT
LONG
The Dollars and Cents of Buying and Selling Stock
Opening a Trading Account
To open your own trading account, you must first select the Brokerage Firm
which you want to handle your trades. There are many Brokerage Firms, with
different fees and requirements. Once you select a Brokerage Firm and sign up,
you can begin trading Stocks.
Cash and Margin Accounts
A Cash Account is an account that contains money. When you
buy a Stock, the money needed to pay for the purchase by your
Stockbroker is taken from your Cash Account. When you sell a
Stock, the money from the sale is deposited into the same cash
account. With a Cash Account, whenever you wish to buy Stock
you must be sure to have sufficient funds in your account (either
immediately or within a few days).
A Margin Account is similar to a loan or credit card. If you have
good credit, your Stockbroker may loan you money to buy Stock.
When you buy a Stock “on margin,” you do not need to have
cash available, as your Stockbroker will buy the Stock for you
and you are then expected to repay your Stockbroker sometime
in the future (usually with interest).
Brokerage Fees
There are various types of fees associated with trading Stock, and these fees
vary according to your Stockbroker. Fees are the compensation provided by
Investors to the financial community for services provided.
31
Specialists and Market Makers earn fees for trading a
Stock. Their fee is based upon the Spread between
the bid price and the ask price of a Stock. (See
Trades: Bid, Ask, Spread, Market, and Volume for
more information.)
Trades made on
are charged a fee based
upon a percentage of the
total value of the trade.
32
9.
9. Reporting, Regulations, and Research
Reporting, Regulations, and Research
Stock Market Index
A Stock Market Index is a collection of Stocks whose combined performance is used
as a standard to measure the performance of other Stocks or investments.
Popular Indexes
•
•
•
include:
Dow Jones Industrial Average (Dow)
Nasdaq Composite Index
Standard and Poor’s 500 (S&P 500)
includes a Stock Market
Index that is comprised of
the average price (weighted
by volume) of all Stocks on
the market.
There are many Indexes available for reference, and
each index uses different Stocks and different formulas
to determine its value. For example, the Nasdaq
Composite Index averages the market value of all Stocks
trading on the Nasdaq. The Dow, on the other hand, averages the current Share price
of only 30 of the largest companies in the US. Each Index provides a different standard
by which to measure performance of various Stocks and the Stock Market in general.
You can create your own Index using any Stocks and any formula you wish, and use it
to track the performance of the market and/or your investments.
Government and Securities Regulations
The government regulates activity on the Stock Market in order to assure the honesty
and integrity of the process. If regulations were not set up and followed closely, the
opportunity would exist for dishonest people to take advantage of the public by
providing misleading information about Stocks.
In the US, the federal government regulates Stock Market activity via an entity called
the Securities and Exchange Commission (SEC). The primary mission of the SEC is
to “protect Investors and maintain the integrity of the securities markets.” Each state in
the US also has its own Securities Laws and Regulations, which may or may not be
different from federal laws. Companies must comply with both federal and state laws.
In Canada, securities regulation falls within the jurisdiction of the provinces or
territories, rather than the federal government. Each province or territory has its own
securities regulator, and all are members of the Canadian Securities Administrators
(CSA), a national umbrella organization.
Each year, securities regulators bring thousands of civil actions against individuals and
companies that violate securities laws. The most common types of violations include
insider trading, accounting fraud, and providing false or misleading information about
Stocks and the companies behind them.
According to the US Federal SEC: “The laws and rules that govern the securities
industry in the United States derive from a simple and straightforward concept: all
Investors, whether large institutions or private individuals, should have access to certain
basic facts about an investment prior to buying it. To achieve this, the SEC requires
public companies to disclose meaningful financial and other information to the public,
33
9. Reporting, Regulations, and Research
which provides a common pool of knowledge for all Investors to use to judge for
themselves if a company's securities are a good investment. Only through the steady
flow of timely, comprehensive and accurate information can people make sound
investment decisions.” [The Investor's Advocate: “How the SEC Protects Investors and
Maintains Market Integrity.” Dec 1999]
Insider Trading
Insider Trading occurs when someone trades Stock based upon information not made
available to the general public. Insider Trading violates securities regulations because it
puts an Investor at an advantage when trading on the Stock Market. Persons convicted
of Insider Trading may face penalties, including fines and jail time.
For example, if a person finds out that a company is about to make a good news
announcement that will likely increase its Stock price, that person could purchase that
Stock before the price increases, making a quick profit. Similarly, if a person had heard
that a company was about to announce bad news, that person could sell the company’s
Stock before the price drops. Having such information and acting upon it before the
general public is aware of the same information may mean that person has violated
Insider Trading rules.
Usually, the average Investor who is not closely connected to a company will not be
privy to information that would be considered a violation of Insider Trading regulations.
However, there are many people who may have access to such information, including
company executives, managers, accountants, lawyers, and others. In order to provide
additional security in such matters, people who are very close to a company are
generally required to provide additional public disclosure when making trades of that
company’s Stock.
Stock Research
Researching a Stock and the company behind the Stock is an important element in
making smart trades and reducing your risk. There are many elements that you can
review as part of your research, including:
•
•
•
•
•
•
•
Past Stock Performance
Company Website
Company Prospectus
Company Financial Statements
Company News Releases
News Articles about the Company
Analyst Reports
The more time and effort you put into your research, the better position you will be in to
make good decisions.
34
10. Next Steps
10. Next Steps
Now that you have reviewed the key elements and
terminology of stock markets, as well as the basic
underlying structures of how these markets work,
you can put your knowledge to practice! And a
fast, fun, and risk-free way to learn-by-doing is to
try the GoVenture Stock Market simulation. Good
luck, and GoVenture!
www.goventure.net
35
11. Glossary
11. Glossary
Afterhours Trading, a service offered by many Brokerages to allow Trading of Stock
while the Stock Markets are closed.
Aftermarket, trading of Shares previously issued. Also called a Secondary Market.
All-or-None Order, A Buy or Sell Order where the Stockbroker is instructed to fill all of
the order, or none of it. Unlike a Fill-or-Kill order, an All-or-None order
does not automatically expire if it cannot be filled immediately.
Ask, the lowest price a stock owner is willing to sell Stock for (the “asking” price).
Authorized Shares, the maximum number of Shares in a Public Company which could
be offered for sale.
Balance Sheet, financial statement which reports the company’s assets, liabilities
(debts) and investments (equity).
Bear Market, a Stock Market that is declining in value.
Bid, the highest price a stock purchaser is willing to pay for (bid on) a Stock.
Board of Directors, the supervisory body of a corporation, elected by the Shareholders
to set policy and provide guidance to senior management.
Book Value, the total value of a company’s assets, as reported in the Balance Sheet.
Brokerage, Brokerage House, a company which specializes in Trading on the Stock
Market. Recently, many electronic Brokerage Houses have been set up so
that as an Investor you can make trades almost directly. However, even
though you may not deal directly with a Stockbroker, you still have to go
through the system of the Brokerage House, which actually completes the
transaction.
Bull Market, a Stock Market that is increasing in value.
Buy Order, order to buy Stock under certain conditions.
Canadian Securities Administrators (CSA), the Canadian national umbrella
organization for Provincial securities regulating agencies.
Capital Gains, the increase in value in an asset, like Stock.
Cash Account, a Trading Account that contains money. When you buy a Stock, the
money needed to pay for the purchase by your Stockbroker is taken from
your Cash Account. When you sell a Stock, the money from the sale is
deposited into the same cash account. With a Cash Account, whenever
you wish to buy Stock you must be sure to have sufficient funds in your
account (either immediately or within a few days).
36
11. Glossary
Common Stock, the most common type of Stock available. The most common type is
a “Class-A” full voting Share. Common Stock is generally the most
subordinate type of Stock, i.e., the last to get paid in case of bankruptcy.
Co-operative, a legal type of business which is owned by its members. Members are
usually employees or customers. There is no stock sold, and members
are normally regional.
Controlling Interest, because owning Stock is owning a portion of a company,
whoever owns the majority of voting Shares of the company has
Controlling Interest in that company.
Corporation, a legal type of business which issues Stocks. However, only Public
Companies can sell Stock on the Stock Market.
Day Order, a Buy or Sell Order which automatically expires it if has not been filled by
the end of the Trading day.
Debt Financing, money that the company borrows for a limited period of time, and
must pay back at some time in the future – usually with some type of
interest added.
Dilution, occurs when your percentage of ownership in a company gets reduced due to
the issuance of new Shares. Dilution also occurs when Stock options,
warrants, and convertible securities are exercised.
Dividend, a periodic distribution of part of the profits which is paid by a company to its
Shareholders.
Equity Financing, money that is given in exchange for a Share of the ownership, and
usually does not have to be paid back directly.
Exercise, to buy Stock under a Stock Option or Warrant.
Exercise Price, the price at which you can purchase Stock under a Stock Option or
Warrant. Another name for Strike Price.
Fill-or-Kill Order, a Buy or Sell Order where the Stockbroker is instructed to
immediately make the trade, but if the order cannot be filled immediately,
it is automatically cancelled.
Futures, similar to Warrants, except instead of purchasing the right to buy Shares in
the future, you are acquiring the right to purchase a commodity (such as
precious metals, minerals, food, grain, etc). An important consideration
with Futures, however, is that in many cases the purchaser is obligated to
buy or sell the commodity at the designated time. In such instances, this
is unlike a Warrant or Option contract because the Futures transaction
must take place, regardless of market conditions.
Initial Public Offering (IPO), the first occasion in which a company makes its Stock
available for sale to the public. This is done via an Underwriter, which is a
financial services organization that acts as a middleman, purchasing a
bulk of Shares from the company and then selling those Shares to the
public. The Underwriter works with the company to promote the Stock in
37
11. Glossary
order to increase market demand, and thus increase the sale price of the
Shares.
Investors, people and companies which purchase partial ownership in a company (or
put funds into some other type of security) with the expectation that they
will achieve a return on investment.
Issued Shares, the number of Shares which have been sold and issued to Investors,
employees, and other related parties.
Issued and Outstanding Shares, the number of Shares which have been sold and
issued to Investors, employees and other related parties, and which are
still active (i.e., not expired).
Liability, a debt or money owning.
Limit Order, a Buy or Sell Order where the Stockbroker is instructed to make the trade
at a specified price, or better. While Limit Orders enable Investors to buy
and sell at a set price, these orders are not always filled, because the
market may feel that the Limit Price is too high (in the case of a sell
order) or too low (in the case of a buy order).
Limit Price, the price in a Limit Order at which the Stockbroker is authorized to buy or
sell your Stock.
Liquidity, the ability of an Investor to find a buyer to whom to sell their Stock in a
company, quickly converting Shares to money – and at a reasonable
price.
Liquid Market, a market where Investors who wish to sell Stock in a company will be
able to do so quickly by easily finding buyers willing to provide a
reasonable price.
Listed Exchange, a Stock Market that utilizes Stock Specialists to manage trading
activity. (See How Stock Markets Work: Listed Exchanges and Over-theCounter Markets for more information.)
Long, when Investors buy a Stock with the expectation that it will increase in value
sometime in the future, they are said to be Long in the Stock.
Margin Account, similar to a loan or credit card. If you have good credit, your
Stockbroker may loan you money to buy Stock. When you buy a Stock
“on margin,” you do not need to have cash available, as your Stockbroker
will buy the Stock for you and you are then expected to repay your
Stockbroker sometime in the future (usually with interest).
Market Capitalization (Market Cap), a company’s current Share price multiplied by
the total number of Shares issued and outstanding.
Market Index, same as Stock Market Index, a collection of Stocks whose combined
performance is used as a standard to measure the performance of other
Stocks, or investments.
Market, Market Price, the current trading price for Stock of a company.
38
11. Glossary
Market Order, a Buy or Sell Order where the Stockbroker is instructed to make the
trade at the best available price.
Non-Profit, Not-for-Profit Corporation, a corporation established for reasons other
than generating profits. Non-profit corporations do not sell Stock. These
would include schools, hospitals, churches, and charities.
Non-Voting Stock, a class of Stock which does not give the owner any rights to vote
on key company issues.
Order, your buy or sell request to your Stockbroker
Over-the-Counter Market, a Stock Market where Brokerages act as Market Makers for
various Stocks. (See How Stock Markets Work: Listed Exchanges and
Over-the-Counter Markets for more information.)
Partnership, a legal type of business which is owned and operated by a limited number
of individuals. There is no stock sold for Partnerships. Owners (Partners)
are often employees.
Penny Stock, generally a high risk stock trading at less than $1 per share. Sometimes
this term is applied to stocks trading at up to $5.
Preferred Stock, a class of Stock which may have additional rights that other Shares
do not, and which has a preferred (i.e., higher) priority in getting paid in
case of bankruptcy.
Primary Market, sale of Shares through an Initial Public Offering.
Private Corporations, corporations which are owned by one or a few individuals. They
do not make their financial information available to the public. They do
not sell Stock in the Stock Market. They are also called Privately Held
or Privately Traded Corporations because the ownership is not
available to the general public.
Privately Held Corporation, another name for a Private Corporation.
Privately Traded Corporation, another name for a Private Corporation.
Public Company, another name for a Public Corporation.
Public Corporation, a corporation which is authorized to sell its Stock to the public.
Publicly Held Corporation, another name for a Public Corporation.
Publicly Traded Corporation, another name for a Public Corporation.
Reverse Stock Split, the opposite of a Stock Split – reduces the total number of
Shares issued and outstanding, consequently increasing the Stock price.
Reverse Take-Over (RTO), when a company buys/acquires a larger company.
Secondary Market, trading of Shares previously issued. Also called an Aftermarket.
39
11. Glossary
Securities and Exchange Commission (SEC), the US federal government agency
which regulates Stock Market activity in the United States.
Sell Order, order to sell Stock under certain conditions.
Share (or Stock) Certificate, a legal certificate, like the deed to a house – but
instead of proving your ownership of a house, a Share Certificate proves
that you own a given number of Shares of a certain company.
Shareholders, another name for Investors or Stockholders, because they hold Shares
in the company.
Shareholders Equity, the section on a company’s Balance Sheet which reports the
cumulative amount of equity investments and earnings of the company.
Shares, a percentage of ownership in a company. Also called Stock.
Security, an investment instrument issued by a corporation, government, or other
organization which offers evidence of debt or equity – excluding insurance
policies or fixed annuities.
Shell, Shell Company, a company that does not have any assets or viable operation.
From a Stock Market perspective, a Shell Company sometimes arises
when a company is no longer fully operational, but is also not completely
bankrupt to where it is automatically disqualified from the Stock Market.
Some Stock Markets even enable the creation of Shell Companies,
specifically as an investment vehicle. Shell Companies are ideal
candidates for a Reverse Take Over (RTO).
Short, Shorting, when Investors buy and sell Stock because they feel the Stock will
actually decrease in value. This is called being Short in a Stock, or
Shorting a Stock. These Investors attempt to make money by selling
Stocks that they actually do not yet own, but then buying the stock after
the price drops, and subsequently delivering the Shares to the original
buyer.
Sole Proprietorship, a legal type of business which not incorporated and which is
owned by one person and does not sell stock. Partnerships and CoOperatives do sell partial ownership, but not with Stock and there are
limits as to who can become a part owner. Only Corporations have Stock
which may be sold.
Spread, the difference between the Bid and Ask prices.
Stock(s), a percentage of ownership in a company. A Stock Certificate is issued to the
Investor to document the sale. Also called Shares.
Stock Certificate, same as a Share Certificate.
Stock Exchange, another name for the Stock Market – sometimes referring to a Listed
Exchange.
Stock Market, an entity that brings together companies that wish to raise money with
people who have money to invest.
40
11. Glossary
Stock Market Index, a collection of Stocks whose combined performance is used as a
standard to measure the performance of other Stocks, or investments.
Stock Option, a right to purchase Shares in a company at a set price during a given
time in the future. You cannot normally purchase those Shares
immediately, but have to wait a certain amount of time until your options
“vest” or “mature.”
Stock Performance, the value of a Stock – whether it is increasing or decreasing over
time. Stock value is strictly based on market demand for that Stock, and
nothing else. But, of course, there are many factors that affect the value
of a Stock.
Stock Portfolio, a collection of investments. The value of the Portfolio may vary over
time, as each individual investment increases and/or decreases in value,
and as you move funds from one investment to another (such as buying
and selling Stock).
Stock Split, when a company wishes to reduce its Share price, it increases the number
of shares by issuing one or more additional Shares for every existing
Share. Companies undergo Stock Splits in order to make their Share
structure and Share price more favorable to Investors.
Stock Ticker, a display that scrolls the most recent Stock prices and/or volume of
Shares traded. Data is presented differently on each ticker, but usually
includes the Stock Symbol, followed by the market price, and an
indication of the amount the price has gone up or down when compared to
the previous day’s closing price.
Stop Order, a Market Order to buy or sell a Stock if it reaches or passes a specified
price, the Stop Price. Unlike a Limit Order, which is immediately put on
the market and if/when filled will set the market price of the Stock at the
time of the transaction, a Stop Order is not put on market until the
market price has reached the Stop Price. A Stop Order is more of a “sit
and wait” approach.
Stop Price, the price in a Stop Order at which the Stockbroker is authorized to buy or
sell your Stock.
Strike Price, the price at which you can exercise a Stock Option or Warrant and
purchase Shares.
Thin Market, the opposite of a Liquid Market, when it is difficult to sell Stock at a
reasonable price.
Trading, buying and selling Stock.
Trading Account, an account with a Brokerage Firm used to pay for purchases and
receive proceeds from sales of Stock. This may be a Cash Account or a
Margin Account.
Underwriter, a financial services organization that acts as a middleman, purchasing a
bulk of Shares from a company and then selling those Shares to the public
41
11. Glossary
in an Initial Public Offering. The Underwriter works with the company to
promote the Stock in order to increase market demand, and thus increase
the price of the Shares.
Volume, the number of Shares being traded.
Voting Stock, a class of Stock which gives the owner voting rights on key company
issues.
Warrant, a certificate entitling the bearer the right to purchase Shares in a company at
a set price, up to a given time in the future. It is similar to a Stock Option but without a
vesting period, because Warrants essentially vest immediately upon issuance. Warrants
may also have different restrictions as to whom they can be assigned. Warrants are
often assigned to Investors, as an added incentive for them to invest in a company.
Similar to Stock Options, Warrants also include a Strike Price and Expiration Period.
42

GoVenture Experiencing the Stock Market

Transcription

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