Stocks and The Stock Market

1
Stocks and The Stock Market

• What is a stock?
• Why do they matter?
• Why is this relevant to the roaring 20s

2
Homework

• Watch the business news on CNN or BBC and write a
  short paragraph (1/2 pg) on what the story was
  saying and how it relates to today's topics on
  money, stock market and banks.
• Or
• Download and print a current article on money,
  banks or the stock market and write an
  explanation/summary of what the article is about
  and what it is trying to say.

3
The Roaring 20s

• The 1920s were a time of peace and great
  prosperity. After World War I, the Roaring
  Twenties was fueled by increased
  industrialization and new technologies, such as
  the radio and the automobile. Air flight was also
  becoming widespread, as well. The economy
  benefited greatly from the new life changing
  technologies.

4
Skyscrapers and Cars
5
The Stock Market

• The stock market appears in the news every day.
  You hear about it any time it reaches a new high
  or a new low, and you also hear about it daily in
  statements like "The Dow Jones Industrial Average
  rose 2 percent today, with advances leading
  declines by a margin of..." Obviously, stocks and
  the stock market are important, but you may find
  that you know very little about them. What is a
  stock? What is a stock market? Why do we need a
  stock market? Where does the stock come from to
  begin with, and why do people want to buy and
  sell it?

6
What are Shares?

• You have a restaurant which will probably make at
  least 75,000 this year
• you know that from your history with the
  business. Therefore, you can think of
• the restaurant as an investment that will pay out
  something like 75,000 in
• interest every year. Looking at it that way,
  someone might be willing to pay
• 750,000 for the restaurant, as a 75,000 return
  per year on a 750,000
• investment represents a 10-percent rate of
  return. Someone might even be
• willing to pay 1,500,000, which represents a
  5-percent rate of return, or
• more if he or she thought that the restaurant's
  income would grow and
• increase earnings over time at a rate faster than
  the rate of inflation. The
• restaurant's owner, therefore, will set the price
  accordingly. You might price
• the restaurant at 1,500,000. What if 10 people
  come to you and say, "Wow, I
• would like to buy your restaurant but I don't
  have 1,500,000." You might
• want to somehow divide your restaurant into 10
  equal pieces and sell each
• piece for 150,000. In other words, you might
  sell shares in the restaurant.
• Then, each person who bought a share would
  receive one-tenth of the profits
• at the end of the year, and each person would
  have one out of 10 votes in
• any business decisions.

7
A Stock Exchange

• If I am a private citizen who owns a restaurant,
  and I am selling my restaurant stock to other
  private citizens in the community, I might do the
  whole transaction by word-of-mouth, or by placing
  an ad in the newspaper. This makes selling the
  stock easy for me. However, it creates a problem
  down the line for investors who want to sell
  their stock in the restaurant. The seller has to
  go out and find a buyer, which can be hard. A
  "stock market" solves this problem. Stocks in
  publicly traded companies are bought and sold at
  a stock market (also known as a stock exchange).
  The New York Stock Exchange (NYSE) is an example
  of such a market. In your neighborhood, you have
  a "supermarket" that sells food. The reason you
  go the supermarket is because you can go to one
  place and buy all of the different types of food
  that you need in one stop -- it's a lot more
  convenient than driving around to the butcher,
  the dairy farmer, the baker, etc. The NYSE is a
  supermarket for stocks. The NYSE can be thought
  of as a big room where everyone who wants to buy
  and sell shares of stocks can go to do their
  buying and selling.

8
Stock Exchange
9
Lets Visit A Stock Exchange

• Australian Securities Exchange http//www.asx.com/
  
• Others
• www.nyse.com
• www.nasdaq.com
• www.jsx.co.id

10
Stock Prices

• Let's say that a new corporation is created and
  in its IPO it raises 20 million by selling one
  million shares for 20 a share. The corporation
  buys its equipment and hires its employees with
  that money. In the first year, when all the
  income and expenses are added up, the company
  makes a profit of 1 million. The board of
  directors of the company can decide to do a
  number of things with that 1 million
• It could put it in the bank and save it for a
  rainy day.
• It could decide to give all of the profits to its
  shareholders, so it would declare a dividend of
  1 per share.
• It could use the money to buy more equipment and
  hire more employees to expand the company.
• It could pick some combination of these three
  options.

11
Money Questions Discussion

• What is money
• Definition
• Why is it worth what it is?
• What was the system before money?
• What are some modern systems that are making
  money obsolete?

12
What is a Bank?

• According to Britannica.com, a bank is
• an institution that deals in money and its
  substitutes and provides other financial
  services. Banks accept deposits and make loans
  and derive a profit from the difference in the
  interest rates paid and charged, respectively.
• Banks are critical to our economy. The primary
  function of banks is to put their account
  holders' money to use by lending it out to others
  who can then use it to buy homes, businesses,
  send kids to college...
• When you deposit your money in the bank, your
  money goes into a big pool of money along with
  everyone else's, and your account is credited
  with the amount of your deposit. When you write
  checks or make withdrawals, that amount is
  deducted from your account balance. Interest you
  earn on your balance is also added to your
  account.

13
How Loans Work
Banks create money in the economy by making
loans. The amount of money that banks can lend is
directly affected by the reserve requirement set
by the Federal Reserve.
14
Why does banking work?

• Banking is all about trust. We trust that the
  bank will have our money for us when we go to get
  it. We trust that it will honor the checks we
  write to pay our bills. The thing that's hard to
  grasp is the fact that while people are putting
  money into the bank every day, the bank is
  lending that same money and more to other people
  every day. Banks consistently extend more credit
  than they have cash. That's a little scary but
  if you go to the bank and demand your money,
  you'll get it. However, if everyone goes to the
  bank at the same time and demands their money (a
  run on the bank), there might be problem.

15
(No Transcript)
16
So What Happened in 1929?

• The 1929 stock market crash is conventionally
  said to have occurred on Thursday the 24th and
  Tuesday the 29th of October. These two dates have
  been dubbed "Black Thursday" and "Black Tuesday,"
  respectively. On September 3, 1929, the Dow Jones
  Industrial Average reached a record high of
  381.2. At the end of the market day on Thursday,
  October 24, the market was at 299.5 a 21
  percent decline from the high. On this day the
  market fell 33 points a drop of 9 percent on
  trading that was approximately three times the
  normal daily volume for the first nine months of
  the year. By all accounts, there was a selling
  panic. By November 13, 1929, the market had
  fallen to 199. By the time the crash was
  completed in 1932, following an unprecedented
  large economic depression, stocks had lost nearly
  90 percent of their value.

17
So What?

• As the Dow Jones Industrial Average soared, many
  investors quickly snapped up shares. Stocks were
  seen as extremely safe by most economists, due to
  the powerful economic boom. Investors soon
  purchased stock on margin. Margin is the
  borrowing of stock for the purpose of getting
  more leverage. For every dollar invested, a
  margin user would borrow 9 dollars worth of
  stock. Because of this leverage, if a stock went
  up 1, the investor would make 10! This also
  works the other way around, exaggerating even
  minor losses. If a stock drops too much, a margin
  holder could lose all of their money AND owe
  their broker money as well.

18
Gamblers Always Lose

• From 1921 to 1929, the Dow Jones rocketed from 60
  to 400! Millionaires were created instantly. Soon
  stock market trading became Americas favorite
  pastime as investors jockeyed to make a quick
  killing. Investors mortgaged their homes, and
  foolishly invested their life savings in hot
  stocks, such as Ford and RCA. To the average
  investor, stocks were a sure thing. Few people
  actually studied the fundamentals of the
  companies they invested in. Thousands of
  fraudulent companies were formed to hoodwink
  unsavvy investors. Most investors never even
  thought a crash was possible. To them, the stock
  market always went up.

19
Oops!

• By 1929, the Fed raised interest rates several
  times to cool the overheated stock market. By
  October, the bear market had commenced. On
  Thursday, October 24 1929, panic selling occurred
  as investors realized the stock boom had been an
  over inflated bubble. Margin investors were being
  decimated as every stock holder tried to
  liquidate, to no avail. Millionaire margin
  investors became bankrupt instantly, as the stock
  market crashed on October 28 th and 29 th. By
  November of 1929, the Dow sank from 400 to 145.
  In three days, the New York Stock Exchange erased
  over 5 billion dollars worth of share values! By
  the end of the 1929 stock market crash, 16
  billion dollars had been shaved off stock
  capitalization.

20
Wheres My Money!!!

• To make matters worse, banks had invested their
  deposits in the stock market. Now that stocks
  were obliterated, the banks had lost their
  depositors money! Bank runs started, where bank
  patrons tried to withdraw their savings all at
  once. Major banks and brokerage houses became
  insolvent, adding more fuel to the bear market.
  The financial system was in shambles. Many
  bankrupt speculators, who were once aristocracy,
  commit suicide by jumping out of buildings. Even
  bank patrons who had not invested in shares
  became broke as 140 billion of depositor money
  disappeared and 10,000 banks failed.

21
The Great Depression

• The stock market crash of 1929 launched the Great
  Depression. The Depression was the time from
  October 1929 to the mid 1930s. Mass poverty
  occurred then, as many workers lost their jobs
  and were forced to live in shanty towns. Former
  millionaire businessmen were reduced to selling
  apples and pencils on street corners. One third
  of Americans were below the poverty line in the
  Great Depression. The Dow Jones finally surpassed
  its 1929 high, a full 26 years later in 1955.

22
Bank Runs
People panic and run to the bank to take out
their money making the demand for money higher
and the situation even worse.
23
Krismon!

• The rapid fall in the rupiah, beginning in
  July-August 1997, soon revealed the underlying
  weakness of the Indonesian financial sector.
  Panic selling of rupiah for dollars by Indonesian
  companies with dollar-denominated debt showed
  that private foreign debt was far higher than
  previously thought. Worse still, the fact that
  Bank Indonesia was unaware of the extent of the
  debt showed its poor capacity to oversee and
  regulate Indonesia's financial markets. As in
  Thailand, much of the foreign debt was short-term
  and due for repayment within twelve months and,
  with the continuing fall in the rupiah, was
  increasingly difficult to service.

24
Indonesia

• High levels of economic growth from 19871997
  masked a number of structural weaknesses in
  Indonesia's economy. The legal system was very
  weak, and there was and is no effective way to
  enforce contracts, collect debts, or sue for
  bankruptcy. Banking practices were very
  unsophisticated, with collateral-based lending
  the norm and widespread violation of prudential
  regulations, including limits on connected
  lending. Non-tariff barriers, rent-seeking by
  state-owned enterprises, domestic subsidies,
  barriers to domestic trade, and export
  restrictions all created economic distortions.

25
Democracy at Last
26
Your Money

• Based on what you have read about banks, money
  and stock markets
• What would you do if you had 100,000 dollars to
  spend?
• What are some other options besides these three
  for storing money?
• What do you think ended the Great Depression?

27
HW Essay

• The stock market in the 20s was a time of great
  wealth and great disaster.
• Explain how the consumer culture of the 20s led
  to the overuse of the stock market and how this
  inevitably led to the Great Depression.