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Study the introduction to this section above.
Explain what you expect to learn from this section.
Study the vocabulary words and look for them as you do the readings in this section. You will be tested on these words.
The New York Stock Exchange is a
tangle of telephones, video monitors,
computer screens, and frantic activity. The
wrong decision may mean the difference
between gaining or losing thousands of
dollars. This is one of the places where
stock is bought and sold?-and fortunes are
made and lost. Just what is stock, exactly
how is it traded, and when is it a good

Buying Stock
Besides bonds, corporations can raise funds
by issuing stock, which represents ownership
in the corporation. Stock is issued in
portions known as shares. By selling shares
of stock, corporations raise money to start,
run, and expand their businesses. Stocks
are also called equities, or claims of ownership in the corporation.
Benefits of Buying Stock
There are two ways for stockholders to
make a profit:

• Dividends As you read in Chapter 8,
many corporations pay out part of their
profits as dividends to their stockholders.
Dividends are usually paid four times a
year (quarterly). The size of the dividend
depends on the corporation’s profit. The
higher the profit, the larger the dividend
per share of stock.

• Capital gains A second way an investor can earn a profit is to sell the stock for more than he or she paid for it. The difference between the higher selling price and the lower purchase price is called a capital gain. An investor who sells a stock at a price lower than the purchase price, however, suffers a capital loss.


Why would a company want to issue (sell) shares in its company?
because the government forced to to sell
to limit liability in case of law suits
to raise money
to be more democratic


Mr. Lopez purchased equities in the Apple corporation as part of his retirement portfolio. What does that mean?
Mr. Lopez is guaranteed to make a profit by purchasing equities
Mr. Lopez does not have to pay taxes on the dividends he receives from Apple.
Mr. Lopez owns part of the Apple corporation
All investors have an equal ownership in the company


Mr. Lopez is likely to recieve a dividend check from Apple four times a year. Which statement below is true about the dividend?
Apple does not have to pay Mr. Lopez dividends because only owns equities and not shares
The more profits Apple makes the greater the dividend
The less profit Apple makes the greater the dividend it will have to pay
The more profit Apple makes the less it will have to pay in dividends.


Mr. Lopez purchased Apple for $109.01 per share. The price of apple shares is now 105.1 Mr Lopez made 
a capital gain
a $4.00 dividend
a capital loss
a $4.01 dividend
Types of Stock
Stock may be classified in several ways, such as whether or not it pays dividends.

• Income stock
This stock pays dividends
at regular times during the year.

• Growth stock
This stock pays few or no dividends. Instead, the issuing company reinvests its earnings in its business. The business (and its stock) thus increases in value over time. Stock may also be classified as to whether stockholders have a vote in company policy.

• Common stock
Investors who buy
common stock are voting owners of the
company. They usually receive one vote
for each share of stock owned. They may
use this vote, for example, to elect the
company’s board of directors. In some
cases, a relatively small group of people
may own enough shares to give them
control over the company.

• Preferred stock
Investors who buy
preferred stock are nonvoting owners of
the company. Owners of preferred stock,
however, receive dividends before the
owners of common stock. If the company
goes out of business, preferred stockholders
get their investments back before
common stockholders.


Mrs. Murphy wants to invest some money in the stock market and get regular payments from the company that she can use to live on. What type of stock should she buy??
income stock
growth stock
common stock
preferred stock


Mr. Magna wants to purchase stock in Qualcomm and is interested in voting on the people who will run the company. Which type of stock should Mr. Magna purchase that will give one vote for each share he owns?
income stock
common stock
growth stock
preferred stock


You want to start saving for your retirement and have enough money to live on. What type of stock should you purchase that will grow in value over time thus increasing the value of your portfolio?
income stock
growth stock
preferred stock
common stock
Stock Splits
Owners of common stock may sometimes
vote on whether to initiate a stock split. A
stock split means that each single share of
stock splits into more than one share. A
company may seek to split a stock when
the price of stock becomes so high that it
discourages potential investors from
buying it.

For example, suppose you own 200
shares in a sporting goods company called
Ultimate Sports. Each share is worth $100.
After the split, you own two shares of
Ultimate Sports stock for every single share
you owned, so that you now own 400
shares. Because the price is divided along
with the stock, however, each share is now
worth only $50. Although the split has not
immediately resulted in any financial gain,
shareholders like stock splits because prices
tend to rise afterward.

Risks of Buying Stock
Purchasing stock is risky because the firm
selling the stock may earn lower profits
than expected, or it may lose money. If so,
the dividends will be smaller than expected
or nothing at all, and the market price of
the stock will probably decrease. If the
price of the stock decreases, investors who
choose to sell their stock will get less than
they paid for it, experiencing a capital loss.

How do the risk and rate of return on
stocks compare to the risk and rate of
return on bonds? As you have read,
investors expect higher rates of return
when they take on greater risk. Because of
the laws governing bankruptcy, stocks
are more risky than bonds. When a firm
goes bankrupt, it sells its assets (such as
land and equipment) and then pays its
creditors, including bondholders, first.
Stockholders receive dividends only if
there is money left over after bondholders
are paid. As you might expect, because
stocks are riskier than bonds, the returns
on stocks are generally higher.


You are the owner of a popular restaurant chain listed on the NY Stock Exchange. Your business is doing really well. The value and price or your stock has increases dramatically. In fact, the price of you stock is so high people are not buying as much as they did in the past. What is one solution you could take to encourage buyers to purchase your stock.
Sell lots of your stock so people would think your stock is not as valuable as it was in the past.
Sell half of the company so people would be buying half a share when they bought.
Split the stock, thereby lowering the price.
Take your company private by removing it from the Stock Exchange


In the example above you have 200 shares of Ultimate Sports in your stock portfolio at $100 a share. What happens to the value of your portfolio if the stock splits?
The value of your portfolio decreases
The value of your portfolio increases
The value of your portfolio stays the same
Your portfolio is worth half as much as it did before the split


Marisa wants to invest part of her money for retirement. She is a frugal saver and does not like to take risks with her cash. Which investment below would be best for her?


Sean is a risk taker. He also wants to save for his retirement but wants a higher return on his investments and doesn’t mind a little risk. What investment would be best for Sean?


Which two statements below are true? (pick 2)
The greater the risk the lower the return
The lower the risk the lower the return
The greater the risk the higher the return
The lower the risk the greater the return
How Stocks Are Traded
Suppose you decide that you want to buy
stock. Do you call up the company and
place an order? Probably not, because very
few companies sell stock directly. Instead,
you would contact a stockbroker, a person
who links buyers and sellers of stock.

Stockbrokers usually work with individual
investors, advising them to buy or sell
particular stocks.

Stockbrokers work for brokerage firms,
or businesses that specialize in trading
stocks. Stockbrokers and brokerage firms
cover their costs and earn a profit by
charging a commission, or fee, on each
stock transaction. Sometimes they also act
as dealers of stock, meaning that they buy
shares at a lower price and sell them to
investors at a slightly higher price, profiting
from the difference, or “spread.”

Stock Exchanges
Stock is bought and sold on stock
or markets for buying and
selling stock. These markets act as
secondary markets for stocks and bonds.
Most newspapers publish data on transactions
in major stock exchanges. (See Figure
11.7 to learn how to read a newspaper
stock market report.)

Major United States stock exchanges
include the New York Stock Exchange
(NYSE) and Nasdaq. In addition, a large
number of people trade stocks on the
Internet. (See Skills for Life on page 284 to
learn more about reading a stock market
report on the Internet.)

The New York Stock Exchange
The New York Stock Exchange (NYSE) is
the country’s largest and most powerful
exchange. The NYSE began in 1792 as an
informal, outdoor exchange under a now famous buttonwood tree in New York’s
financial district. Over time, as the financial
market developed and the demand to buy
and sell financial assets grew, the exchange
moved indoors and became restricted to a
limited number of members, who buy
“seats” allowing them to trade on the
exchange. Today, new technologies make
trading so fast that a transaction takes only
an instant.

The NYSE handles stock and bond
transactions for only the largest and most
established companies in the country. The
largest and best-known companies listed on the NYSE are referred to as blue chip
companies. Blue chip stocks are often in
high demand because investors expect the
companies to continue to do business profitably for a long time.  



If you wanted to invest in the stock market, who would you call?
stock broker
government stock service
finance company
New York Stock Exchange


What do brokerage firms do?
They employ stock brokers who help you to invest in the stock market and charge you a fee for their service
They make sure investors do not go “broke,” thus the name brokerage firm.
They are employed by the government to make sure your investments in the stock market are safe.
They provide insurance much like the FDIC to protect investros from loosing their money


What is the New York Stock Exchange?
A bank that consumers can use to get credit cards, such as Visa and American Express
A New York State agency that allows people to exchange cash for goods and services
It is the main ATM outlet in New York
A place where brokers can go to buy and sell stocks
The OTC Market
Despite the importance of organized stock
exchanges like the New York Stock
Exchange, many stocks, as well as bonds,
are not traded on the floor of stock
exchanges. Instead, they are traded on the
OTC market, that is, over-the-counter, or
electronically. Investors may buy directly
from a dealer or from a broker who will
search the market for the best price.

Nasdaq (the National Association of
Securities Dealers Automated Quotations)
is the American market for over-the-counter
securities. Nasdaq was created in 1971 to
help solve the problem of fragmentation in
the OTC market by using automation. By
the 1990s, it had grown into the second
largest securities market in the United States
and the third largest in the world, linking
markets in the United States, Asia, and
Europe. Because it does not have a trading
floor, Nasdaq’s trading information is
simultaneously broadcast to some
360,000 computer terminals
throughout the world.


If Mario wanted to use his computer to buy and sell stock directly, which service would he use?
America Online
His local ISP
An OTC firm


Because millions of people use their computers to trade stocks and bonds electronically, there has to be a way to show what the current price of stocks and bonds are. As people trade online during the day the prices are constantly changing. What company performs this service?
Standard and Poors
Futures and Options
Futures are contracts to buy or sell
commodities at a specific date in the future at a price specified today. For example, a buyer and seller might agree today on a price of $4.50 for a bushel of soybeans six or nine months in the future. The buyer would pay some portion of the money today, and the seller would deliver the goods in the future. Many of the markets in which futures are
bought and sold are associated with grain and livestock exchanges. These markets include
the New York Mercantile Exchange and the Chicago Board of Trade.

Similarly, options are contracts that give
investors the choice to buy or sell stock and
other financial assets. Investors may buy or
sell a particular stock at a particular price
up until a certain time in the future—usually three to six months. The option to buy shares of stock at a specified time in the future is known as a call option.

For example, you may pay $10 per share today for a call option. The call option gives you the right, but not the obligation, to purchase a certain stock at a price of, say, $100 per share. If at the end of six months, the price has gone up to $115 per share, your option still allows you to purchase the stock for the agreedupon $100. You thus earn $5 per share ($15 minus the $10 you paid for the call option). If, on the other hand, the price has dropped to $80, you can throw away the option and buy the stock at the going rate.

The option to sell shares of stock at a specified time in the future is called a
Suppose that you, as the seller, pay
$5 for the right to sell a particular stock that you do not yet own at $50 per share. If the price per share falls to $40, you can buy the share at that price and require the contracted buyer to pay the agreed-upon $50. You would then make $5 on the sale ($10 minus the $5 you paid for the put option). If the price rises to $60, however, you can throw away the option and sell the stock for $60.

Most people who buy stock hold their
investment for a period of time—sometimes
many years—with the expectation that it will grow in value. Recently, however, a different type of stock trading, called daytrading, has become popular. Daytraders try to predict minute-byminute price changes based on computer programs that tell the trader when to buy and sell. These traders might make dozens of trades a day in hopes of making a
profit. Unfortunately, daytrading is a risky
business in which traders can lose a great
deal of money.  


The current price for a bushel of corn is $5.00 Daniel believes that six months from now the price will be $10.00 If Daniel can buy today at $5.00 and sell for $10.00 six months from now he will make a good profit. What is this transaction called?
Over The Counter Trading
Day Trading
Buying Futures
Dealing in Mutual Funds


The option to buy shares of stock at a specified time in the future is known as a/an
OTC option
call option
put option


The option to sell shares of stock at a specified time in the future is called a/an
OTC option


Computers allow people to see the minute by minute changes in stock prices over the internet. Michael Palomata likes to sit at his computer and buy and sell stocks on a minute by minute basis. Michael is engaging in
OTC trading
Futures Trading
Day Trading
Put Options
Measuring Stock Performance
You may have heard newscasters speak of a
“bull” or “bear” market or of the market
rising or falling. What do these terms mean
and how are increases and decreases in the
sale of stocks measured?

Bull and Bear Markets
When the stock market rises steadily over a
period of time, a bull market exists. On the
other hand, when the stock market falls for
a period of time, people call it a bear market.
In a bull market, investors expect an
increase in profits and thus buy stock.
During a bear market, investors sell stock
in expectation of lower profits. The 1980s
and 1990s brought the longest sustained
bull market in the nation? ’s history. A multiyear bear market began in 2000.

The Dow Jones Industrial Average
The Dow (The Dow Jones Industrial
Average) has shown how certain stocks
have traded daily since 1896. To make sure
that the stocks remain representative of the
stock market as a whole, over the years the
companies on the Dow have changed.
Today, the stocks on the Dow represent 30
large companies in various industries, such
as food, entertainment, and technology.

S & P 500
The S & P 500 (Standard & Poor’s 500) gives a broader picture of stock performance. It tracks the price changes of 500 different
stocks as a measure of overall stock market
performance. The S&P 500 reports mainly
on stocks listed on the NYSE, but some of
its stocks are traded on the Nasdaq and
OTC markets.


When times are good and stock prices are rising it is called a _____ market. When times are bad and stock prices are falling it is called a _____ market
bull - bear
steady - periodic
bear - bull
full - half


They cant take an average of all the companies in the stock market because there are too many. Therefore, they take the average of 30 large companies that represent the market as a whole and publish it in the newspapers each day. What is this average called?
Standard and Poors average
NYSE average
The Nasdaq


What is the difference between the DOW and the S&P 500?
The DOW only includes technology companies
The DOW is published daily while the S&P 500 is published monthly
The S&P 500 includes a broader range of financials in its average
There is no difference
The Great Crash of 1929
Like the 1980s and 1990s, the 1920s saw a
long-term bull market. Unfortunately, this
period ended in a horrifying collapse of the
stock market known as the Great Crash. The
causes of this collapse contain important
lessons for investors today.

Signs of Trouble
Despite widespread optimism about continuing prosperity, there were signs of trouble. A relatively small number of companies and families held much of the nation’s wealth. Many farmers and workers, on the other hand, were suffering financially. In addition, many ordinary people went into debt buying consumer goods such as refrigerators and radios—new and exciting inventions at the time—on credit. Finally, industries were
producing more goods than consumers could buy. As a result, some industries, including the important automobile industry, developed large surpluses of goods, and prices began to slump.

Another economic danger sign was the debt that investors were piling up by playing the stock market. The dizzying climb of stock prices encouraged widespread speculation, the practice of making high-risk investments with borrowed money in hopes of getting a big return. To make matters worse, before World War I, only the wealthy had bought and sold
shares in the stock market. Now, however, the press was reporting stories of ordinary people making fortunes in the stock market. Small investors thus began speculating in stocks, often with their life savings.

To attract less-wealthy investors, stockbrokers encouraged a practice called buying on margin. Buying on margin allowed investors to purchase a stock for only a fraction of its price and borrow the rest from the brokerage firm. Brokers’ loans to these investors went from about $5 million in mid-1928 to $850 million in September 1929. The Hoover administration did little to discourage such borrowing.
The Crash
By Monday, October 28, 1929, the value
of shares of stock were dropping to a fraction of what people had paid for them. Investors all over the country were therefore racing to get what was left of their money out of the stock market. On October 29, 1929, known as Black
Tuesday, a record 16.4 million shares were
sold, compared with the average 4 to 8 million shares per day earlier in the year. The Great Crash had begun.

The Aftermath of the Crash
During the bull market that led up to the Crash, about 4 million people had invested
in the stock market. Although they were
the first to feel the effects of the Crash, eventually the whole country was affected.
The Crash contributed to the Great Depression, in which millions of Americans
lost their jobs, homes, and farms.

Mistakes in monetary policy slowed the nation’s recovery. In 1929, the Fed had begun limiting the money supply in order to discourage excessive lending. With too little money in circulation, individuals and businesses could not spend enough to help
the economy improve.

After the Depression, many people saw stocks as risky investments to be avoided. In 1980, only about 2.5 percent of American households held stock. Gradually, however,
attitudes began to change. The development of mutual funds also made it easy to own a wide range of stocks. Americans became more comfortable with stock ownership.

After a period of very strong growth, stocks crashed again on “Black Monday,” October
18, 1987. The Dow Jones lost 22.6% of its value that day—nearly twice the one-day loss that began the Crash of 1929. This time the market rebounded on each of the next two days, and impact on the economy was much less severe. The Fed moved quickly to add
liquidity and reduce interest rates to stimulate
economic growth. Within two years, the Dow returned to pre-crash levels.


What is the main idea of the reading above?
There were many reasons for the Great Crash of 1929 but those reasons do not apply to today’s market
There were many reasons for the Great Crash of 1929 that contain lessons for investors today
The Crash of 1929 proved that Socialism is prefereable to Capitalism
People should not buy on credit, whether it be stocks or consumer goods


Which statement below is true?
Greedy speculation in the stock market caused the Great Depression
The stock market contributed to the Great Depression but was not the only factor
Rich people caused the Great Depression
If more people had bought stocks on margin the Great Depression might not have happened
The Market Today
During the second half of the 1990s, stock
prices rose dramatically. Many people
bought stock for the first time or invested
in new technology companies. At the end
of the 1990s, almost half of American
households owned mutual funds.

By 2000, however, investors had
become worried that most companies
could not make enough money to justify
their high stock prices. Stocks fell, and
many investors lost most or all of their
prior gains. The following year, an
economic recession and terrorist attacks
further battered the stock market.

In 2002, several large corporations,
including Enron and WorldCom, declared
bankruptcy and revealed that they had
issued false financial reports for several
years. Stock prices fell even more as
investors questioned how much they really
knew about the companies they had
invested in. The federal government introduced new rules for corporations to restore confidence in the market. The stock market
recovered, but it remained below the peak
values reached during the bull market of
the 1990s.

In 1990 the DOW was about 2,750, today it is around 17,000


What does the reading above suggest?
Over time the stock market is a good place to invest your money
The stock market has too many ups and downs to be safe
The stock market is a dangerous place to invest your retirement savings
Hitler was right, Socialism is better than Capitalism


Refer to the graphic above. Which company paid the highest dividend on this day?


Which stock performed worst during the day shown on the chart above?


Which company traded the most shares during the day?
Donnely A
capital gain
stock exchange
brokerage firm
capital loss
OTC market
stock split


an electronic marketplace for stocks and bonds


a person who links buyers and sellers of stock


portion of stock


a market for buying and selling stock


the difference between a lower selling price and a higher purchase price resulting in a financial
loss to the seller


claims of ownership in a corporation


American market for OTC securities


a business that specializes in trading stocks


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


the division of a single share of stock into more than one share
bear market
put option
S & P 500
Great Crash
The Dow
call option
bull market


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


index that shows the price changes of 500 different stocks


contracts to buy or sell at a specific date in the future at a price specified today


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


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


the practice of making high-risk investments with borrowed money in hopes of getting a big return


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


the collapse of the stock market in 1929


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


index that shows how certain stocks have traded

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