UNDERSTANDING STOCKS

Welcome to the Stock Market(see pages 3-4 for examples)

The stock market is like a flea market where people buy & sell pieces of paper called stock.

There are owners of the corporations who want to raise money to hire more employees, build factories or offices.

They raise money by issuing shares of stock in their corporation.

On the other side, there are people like us who buy shares of stock in the corporation.

The place both sides meet is the stock market.

Types of Investments (see

pages 20-23 for examples)

Mutual funds: An investment company pools investors’ money & uses it to invest in an assortment of stocks, bonds or cash.

Investment: the action or process of investing money for profit or material result.Stock: represents ownership or shares in a

corporation.

BondAn IOUYou are lending money to a corporation and are

promised that you will be paid back in full with interest.

Bills: Have the shortest maturity dates. 1-12 months.Notes: 1-10 yearsBonds: 10+ years

(see pages 4-5 for examples)

Investor/shareholder: When you own a share of stock. The more shares you own, the more control you have in the company.

Stock certificate: Written proof that you have invested in a companyYou will have to request a copy of the

stock certificate from your broker. Capital gains: The profits you make

from a stock

Types of Investors (See pages 8-

10 for examples)

Retail Investors: Individual investors who buy and sell securities for their personal account, and not for another company or organization.

Professional Investor: A category of investor under the financial services regulations, and one who would be transacting similar types of investment to the adviser.

Short term trader: Goal is to take advantage of the short term movements in a stock or the market.

Professional trader: use other people’s money to make investments or trades on behalf of clients.

Measuring how much you make: (See pages 13-14 for examples)

Wall street uses a system of points that represent dollars.

Ex: If your stock went up from $5/share to $10/share , your stock went up 5 points.

Ex: If you own 100 shares of a stock and it goes up 1 point, you made $100. If it went up 5 points, you made $500.

How to Classify Stocks (see pages 29-35 for examples)

Stock sector: group of companies that belong to the same industry and provide the same product or serviceEx: Airlines, retail. automobiles,

etc. Income stocks: Include shares of

corporations that give money back to shareholders in the form of dividends.

Value stocks: Stocks of profitable companies that are selling at a reasonable price compared with their value.

(See pages 31-35 for examples)

Growth stocks: Stocks of companies that consistently earn lot of money and are expected to grow faster than the competition.

Penny Stocks: Stocks that usually sell for less than a dollar.Small-cap: Market Cap of 2.5 billion or

less. Normally trades are under $10.Microcap: Markets of 500 million or less.

Normally trades are under $1.

Fun things you can do (with stocks) (see pages 37-39 for examples)

Diversification: Important not to bet your entire portfolio on one or two stocks.

Once you have diversified, you have to decide what percentage of your money you want to allocate to each investment.

Compounding: Reinvesting any money you make on your savings or investments. The longer you do this, the more money you will make.

Understanding Stock Prices (see pages 49-53 for examples)

Stock quote: current price of the stock. Bid price: The price you will receive if you

own the stock and want to sell it. Ask price: The price you pay if you place a

market order. The spread: The difference between the

big and ask price. Outstanding shares: The total number

of shares a company has issued. Float: Shares that are owned by outside

investors

Investment Strategies (see pages 69-76 for examples) Buy and hold strategy(averaging

down): If you buy a stock in a fundamentally sound company and hold it for a long term you will profit.

Buy on the dip strategy: When a stock you like goes down in price, and you think the decline is temporary, you buy more shares.

Bottom Fishing Strategy: You look for stocks that are so low they have seemed to hit bottom.

Dollar-cost averaging: You buy stocks regularly and systematically. You invest a set amount of money each set period of time.

Value investing: Use fundamental analysis to pick good-quality stocks that are a bargain compared with their actual worth. (looking for stocks on sale)

Growth Investing: Use fundamental analysis to find stocks that are growing faster than the economy or earning more than other stocks in the same industry.

Momentum Investing: Growth investors who look for stocks that are ready to make explosive moves upward.

Contrarian Investing: Use fundamental analysis to find high-quality companies with low P/Es that other investors abandoned.

Trading Strategies (see pages 77-80 for examples)

Day Trading: Extreme trading strategy that involves constantly moving into and out of stocks.

Market timing: You predict in advance where a stock or the market is headed and make your move before the market does.

Short the rallies: When the market of your stock goes up a lot, you sell the stock at a lower price.

Exchange traded funds: An investment product that is similar to a mutual fund, but trades like a stock.

Fundamental Analysis (see pages 89-95 for examples)

Fundamental analysis: The study of the underlying data that affect a corporation.

Balance sheet: report of the financial condition of a business.

Key things to remember:Learn everything you can about the industryIdentity the leading company (choose a

company that is stronger & more profitable than their competition)

Talk to managers Watch company insiders closely

Fundamental Analysis: Tools & Tactics (see pages 97-99 for examples)

Income statement: Can be used to see how much money a company is making. Contains a lot of information such as the companies sales, operating expenses and earnings.

Stock analysts: people that are paid to independently research corporations and make buy or sell recommendations on their stocks. They make estimates on companies future earnings.

Introduction to Technical Analysis. (see pages 107-109 for examples)

Technical analysis: Technical analysis of stocks and trends has been used by serious traders for decades. Although it does not guarantee success and is not 100% accurate, it is still one of the two key methods of analyzing stock prices, along with fundamental analysis

Stock chart: provide important clues as to when people are buying or selling.

Line chart: plots the closing prices of a stock over a specific period.

Technical Analysis: Tools & Tactics (see pages 131-136 for examples)

Volume: how many shares changed hands during a given period. Fuel that drives stock prices higher or lower.

Moving average: Average price of the stock for a specified period (hours, days, weeks etc.)

On-balance volume: measures how much money is flowing into or out of security.

Relative Strength Indicator(RSI): measures the weakness of a stock when its compared to itself over a specified period.

Sentiment Analysis (see pages 141-146 for examples)

Studying psychological clues to help you determine where the market is headed.

The Chicago Board Options Exchange Volatility Index (VIX): an index that measures the volatility of the US stock market by tracking S&P 100 option contracts.

Media: People use the media when trading. By the time something is reported on TV, you should do the opposite.

Mutual Fund Redemptions: Individual investors are selling their mutual funds.

Capitulation: What happens when everyone in the market panics and immediately sells all of their stock, which causes the market to crash.

Pump and Dump: When a company is paid, with money or shares, to promote a stock. It is legal as long as they disclose it in their fine print.

Insider trading: Legal: Done by company employees.Illegal: When company employees buy and

sell stocks based on information that is not public knowledge.

What makes stocks go up & down (see pages 149-155 for examples)

Federal Reserve System: When the Fed lowers interest rates, it means that it will be cheaper for people to borrow money. This often makes the stock market go up.

Inflation: Refers to how much the prices of goods and service that you buy go up each year.

Deflation: An economic condition in which the supply of money and credit is reduced.

Politics: Actions of the president and Congress affect the stock market (Speeches, higher taxes, new laws)

Where to buy stocks (see pages 55-60 for examples)

Full service brokerage firms: Provide a huge variety of financial and

investment products.Offer investment advice, research,

banking services and the ability to buy and sell stocks, bond, mutual funds, and fixed income products.

Stockbrokers: Paid to advise you what stocks to buy or sell & personally fill the order.

Online investing/trading: You buy and sell online from your own computer.

Types of orders you can place with a brokerage firm: Market order: The fastest and easiest type

of order. The people selling it to you know that it is the best price for them.

Limit order: More complicated but allows you to negotiate the price. You decide yourself the price which you want to buy or sell the stock.

Stop-loss order: Instructs your broker to sell the stock at a price you specify.

Trailing stop order: top order that moves along with a favorable movement in a security.