LESSON 1. What is stock investing?
What are stocks?
A stock or share represents ownership in a piece of a company.
The stock price of a company is the current market price of a single stock in that company.
Stocks are traded on a stock exchange, such as the NYSE or NASDAQ
Buyers put in a Bid price, sellers put in an ask price which they are willing to buy or sell for.
What are some of the key terms?
The number of stocks of a single company being traded over any period of time is known as its market
Market capitalization = current stock price x No. of outstanding shares
The market capitalization of a company is the total value, as determined by the stock market
Day range: lowest and highest price traded in a day
52wk range: the lowest and highest price traded in a year
Why do people invest in stocks?
Capital gain, earnings via dividend and interest.
Shareholders are compensated for their risk through a risk premium.
LESSON 2. STRATEGIES FOR STOCK INVESTING
What is an investing style?
Over 2000 companies on NYSE and over 3000 in Nasdaq.
- Your timeline
- Your personal risk tolerance
- Time that you want to spend managing the stock portfolio
a. How much should I invest?
- Never invest what you truly can’t afford to lose ( 1 or 2 months worth of living expenses in a nest
egg) - Find risk-reward balance : Under 40 years – 60-80% stocks, Close to 80years : consistent returns
should outpace inflation : 20-40% stock
- Do what feels right
b. What are large, medium and small caps?
- Under $1 billion: small caps : core products, specific markets, high growth potential , more risk
for bankruptcy, innovative products.
- $1 billion - $10 billion : mid caps
- More than $10 billion: large caps / blue caps
Young investors, longer investment timelines: more small and mid caps and less large caps
Older investors, shorter investment timelines: more large caps
c. What are value, growth and income stocks?
Value investing: look for stocks which are undervalued: company assets, current earnings, products and
competitive advantage. Low P/E
Growth investing: look for earnings momentum or future growth in profits and the products of a
company. Higher P/E. mostly small or mid caps
Income investing: companies with consistently high dividends distributed to shareholders. Large caps
Dividend payment = dividend declared x no. of shares you own.
LESSON 3. What makes a company valuable and what makes a stock a “buy”?
What makes a company valuable?
- Who buys the product? What could affect the purchase of that product?
- What makes the product profitable for the company
- Scalability is important
- Economies of scale : intel
- Branding: Nike
- Tangible assets
- Intangible assets : value investors look into assets - Company assets: (company assets – company liabilities) / no. of shares outstanding
Investors look at EPS : company earnings/ no. of outstanding shares
Issue of more stocks would lead to stock dilution and steadily rising EPS is the factor to be looked at.
PE ratio: current stock price/ EPS
The price paid for a company is just as important as the quality of the company
Rule of thumb:
- PE above 11 : expect positive growth
- PE at 11 : zero growth
- PE below 11: negative growth
Company debt or liabilities: Debt accrues interest and increases chance of bankruptcy