Stocks

Unlocking Ownership: Demystifying Stocks

Welcome to the exciting world of stocks! In this lesson, we'll embark on a journey to understand these powerful investment vehicles. Get ready to uncover the meaning of stock ownership and explore the potential they hold.

Get ready to:

• Illustrate the concept of stocks, grasping how they represent ownership in a company.

• Define key terms related to stocks, such as "dividend," "stock market," "market value," "stock yield ratio," and "par value," building a strong financial vocabulary.

• Solve real-life examples related to stocks, applying your knowledge to practical scenarios and making informed investment decisions.

By the end of this lesson, you'll have a solid understanding of stocks, empowering you to navigate the stock market with confidence. Let's dive in!

Activity: The Company You Own

Imagine you have ₱10,000 to invest. Think about a company whose products or services you use regularly. If you could buy a small piece of that company, what would it be and why? What benefits would you expect to receive as a part-owner?

This lesson delves into the world of stocks, exploring their fundamental concepts, key terms, and practical applications.

Abstraction: What Does it Mean to Own Stock?

Imagine owning a piece of your favorite company – that's what owning stock is all about. When you buy stock, you're buying a small ownership stake in that company. This ownership comes with potential benefits, like receiving dividends (a share of the company's profits) and benefiting from an increase in the stock's value.

Two Flavors of Stock: Common vs. Preferred

• Common Stock: The most common type of stock. Common stockholders have voting rights in company decisions and may receive dividends, but their claims on assets and earnings are subordinate to preferred stockholders and debtholders.

• Preferred Stock: Offers priority over common stock in terms of receiving dividends and claims on assets in case of liquidation. However, preferred stockholders usually don't have voting rights. Think of it as a slightly more stable, but potentially less rewarding, option compared to common stock.

Navigating the Stock Market Lingo

• Dividend per Share: This is the amount of dividend each share of stock receives. It's calculated by dividing the total dividend payout by the total number of outstanding shares.

• Stock Market: This is where the buying and selling of stocks happen. Think of it as a giant auction house for company ownership! In the Philippines, the Philippine Stock Exchange governs this marketplace.

• Market Value: This is the current price at which a stock is trading in the market. It's influenced by supply and demand, company performance, and overall market sentiment.

• Stock Yield Ratio: This ratio tells you how much dividend income you can expect to receive relative to the stock's current market price. It's calculated by dividing the annual dividend per share by the market value per share.

• Par Value: This is the face value of a share of stock, determined by the company when it initially issues the stock. It's often a nominal amount and doesn't necessarily reflect the market value of the stock. 

Calculating Dividend per Share

Problem: A financial institution announces a P30,000,000 dividend for its common stockholders. If there are 700,000 outstanding common shares, what is the dividend per share?

Solution:

• Total Dividend = P30,000,000

• Total Shares = 700,000

Dividend per Share = Total Dividend / Total Shares = P30,000,000 / 700,000 = P42.86

Therefore, each common share receives a dividend of P42.86.

Calculating Total Dividend Received

Problem: A corporation declares a 3% dividend on its stock with a par value of P500. Mrs. Lingan owns 200 shares. What is her total dividend?

Solution:

• Dividend Percentage = 3% = 0.03

• Par Value = P500

• Number of Shares = 200

Dividend per Share = Par Value * Dividend Percentage = P500 * 0.03 = P15

Total Dividend = Dividend per Share * Number of Shares = P15 * 200 = P3,000

Therefore, Mrs. Lingan receives a total dividend of P3,000.

Comparing Stock Yield Ratios

Problem: Corporation A, with a market value of P52, pays a P8 dividend per share. Company B, with a market value of P95, pays a P12 dividend. Which stock offers a higher yield?

Solution:

• Corporation A:

  • Stock Yield Ratio = P8 / P52 ≈ 0.154 or 15.4%

• Corporation B:

  • Stock Yield Ratio = P12 / P95 ≈ 0.126 or 12.6%

Corporation A has a higher stock yield ratio (15.4% vs. 12.6%), indicating that investors receive a higher dividend return relative to their investment in Corporation A.

Ready to test your knowledge of stocks? This assessment will evaluate your understanding of key stock concepts, including dividends, market value, and stock yield ratio. You'll also apply your knowledge to real-life examples and solve problems related to stock ownership.

Uncovered the power of stocks? Let's explore the world of bonds in Lesson 2!