Stock Markets For Beginners

A Free Course By Max Maher

Intro and Definitions
What is a Stock?

A stock, also known as a share, represents a small piece of

ownership in a corporation. Your total ownership is also
referred to as equity in the company.
You Are an Owner

Buying a share/stock in a company means you actually own

that slice. Buying one share of Coca-Cola stock means you
actually are an owner of Coca-Cola, just a very small owner.
What it Means to Own a Share

Owning a share/stock in a company entitles you to a portion of that company’s

assets and profits.

Assets = A resource with economic value (it’s worth money) that the company
owns either because it is valuable (cash) and/or helps produce value (a piece
of machinery).

Profits = The financial benefit a company gets to keep after deducting

expenses from revenue/sales (revenue - expenses = profit)
Not all Shares are Created Equal

Share price means nothing. Repeat after me. Share👏 price👏

means👏 nothing👏 (without additional context)

If Company A’s shares cost $10 and Company B’s cost $100
that does NOT necessarily mean company A is cheaper.
Market Cap

Market Cap = The total value of a company

Market Cap Calculation = Total Number of Shares * Share Price

Ex:

Coca-Cola: 4.3B shares * $54 per share = $232B market cap

Gamestop: 70.77M shares * $217 per share = $15.3B market cap

Note: a stock split increases total shares. A reverse stock split decreases shares.
But NEITHER changes the total market cap.

**It’s all about the shares * price bay-beeee!

Why Do Companies Have Stocks?

To finance growth and expansion in their company by giving

up some ownership and profits (if there are profits)
What if you wanted to sell shares on the open market?

This is when a company IPOs (initial public offering)

Where a private company goes through the regulatory and
underwriting process that allows them to sell shares on a
public market.

Nice Buns & Co 🍑 probably wouldn’t be able to go public

Most companies are not eligible to go public as there are
high expenses and steep requirements in order to do so.
Different Types of Stocks
Common Stock - The most, well, common type of stock. Typically if someone is talking about stocks they are referring to common
stocks.

-A common stock gets one vote per share and it’s portion of assets, profits, & ownership

Preferred Stock - Still represents ownership in a company but has some differences:

-Usually doesn’t have the same voting rights

-Usually include a guaranteed, fixed dividend

-In the event of liquidation (asset sale upon bankruptcy) preferred holders are paid before common stockholders

-The company has the option to purchase back these shares at any time (usually for higher than market value)

*preferred stock is like a common stock and a bond combined*

Classes of Stock -

-Companies can customize stocks any way they want with varying levels of ownership, voting rights, price, and dividends

-Common Example is Berkshire Hathaway BRK-A has voting rights and a much higher share price

BRK-B has no voting rights and is 1/1500 the share price of BRK-A
What is the Stock Market

A collection of markets and exchanges where you can buy,

sell, or issue shares of a public company.

Stock Exchanges are the “markets” within the stock market

What is a Stock Brokerage

The middleman that connects buyers and sellers of a stock

Different Kinds of Stock Brokerages

Full Service Brokerage - A professional financial adviser who

manages all of your investment decisions and provides continuous
support (Ex: Charles Schwab, Raymond James, & Fidelity)
Discount Brokerages - Platform that allows DIY investors to make
their own stock trades for lower fees. Most discount brokerages
offer $0 trades. (Ex: Charles Schwab, Webull, Robinhood, M1
finance, & many more)
Robo Advisors - Platform that offers investment management
services carried out by algorithms and AI. A lower cost version
of full service. (Sofi, Vanguard, Betterment, & many more)
Stock Market Sectors

Industrials🛫 - Businesses that generally use heavy equipment. Railroads, airlines,

trucking/logistics. (Southwest Airlines, Union Pacific, etc.)

Energy ⛽ - Oil, gas industries, and businesses that provide equipment and services to oil and gas
industries. (ExxonMobil, Chevron, BP, etc.)

Materials 🦺 - Provide goods for manufacturing and building (Nucor, Cemex, & DuPont)

Utilities 💡- Any type of basic utility including electricity, natural gas, and more (Consolidated Edison,
American Water Works, etc.)

Financials 💰- Money Handlers. Banking, insurance, brokerages. (Wells Fargo, Aflac, etc.)
Stock Market Sectors (Cont.)

Consumer Discretionary 🍟- Non-essential goods and services. Typically demand fluctuates with consumer
income. Can be low cost items or luxury. (McDonalds, Disney, Ford, etc..)

Consumer Staples 🍱 - Essential goods and services. Demand does not fluctuate with income. Food, Hygiene
Products, Household products. (Coca-Cola, Walmart, Procter & gamble, etc.)

Information Technology 💻 - Involved in technical innovation (Apple, Dell, etc.)

Communication Services ☎ - Telecommunications & Media/Entertainment (AT&T, Viacom CBS, etc.)

Real Estate 🏠- REITs and real estate development (Simon Property Group, Crown Castle, etc.)

Healthcare 🩺 - Pharmaceuticals and biotech (Pfizer, Teledoc, etc.)

How You Make Money With
Stocks

Dividends & Appreciation

What is a Dividend?
Dividend = A portion of a company’s profits paid out to
shareholders, typically on a quarterly basis. (typical
dividends are 1-7% of the stock price paid out annually.

$100 share with a 5% dividend = $5 paid out per share per

year (or $1.25 paid out per quarter)

Note: you do not have to sell a

share to collect a dividend payment.
What is Appreciation?📈

Appreciation happens when the market value of the shares you purchased
increase.
Example:
-You purchased 1 share of Nice Buns & Co. (Ticker Symbol BUNZ) for $100
-3 months later the market price of your share is $130
-Your 1 share of BUNZ has appreciated by 30%
Note: You only realize (get to keep) appreciation gains once you sell
your share. Until you sell this is called a paper gain 📄
Note Note: Selling creates a taxable event 👎
Types of Stocks as a Type of Investment

Income Stocks: The “safest” type of stock due to low

volatility and steady dividend payments.

Volatility = A stocks tendency to change in price rapidly

and unpredictably. High volatility = less reliable

Blue Chip Stock = A stock that has a long reputation of

positive profits and steady dividends
Types of Stocks as a Type of Investment (Cont.)

Penny Stocks - Shares that trade at no more than $5. These

are typically small, high risk companies

Speculative Stocks - Stocks of exploratory companies

attempting to break into new technologies or markets or
stocks where investors are betting on a large turnaround.
Meme stocks fall into this category.
Types of Stocks as a Type of Investment (Cont. Cont.)

Growth Stocks - Stocks of companies who are trying to grow

as quickly as possible. Typically growth stocks offer no
dividends as these companies reinvest all earnings back into
growth.
Cyclical Stocks - Stocks that are dramatically impacted by
the state of the economy (airlines, new vehicles, luxury
goods, etc.)[consumer discretionary]
Defensive Stocks - Stocks that typically remain unaffected
during downturns in the economy (groceries, healthcare,
utilities, etc.) [consumer staples]
Types of Stocks as a Type of Investment (Cont. Cont. Cont.)

Value Stocks - Stocks in which investors believe the market has undervalued (they are worth more
than the stock price).

Broken into 2 styles -

Benjamin Graham style:

I’ll buy anything as long as it’s cheap. He would buy any company as long as it was cheap enough.
Sometimes called Cigar Butt Investing

Warren Buffett style:

I want great companies at a fair price. Warren Buffett would rather buy a great company for an
okay deal than a bad company at a spanking deal. He aims to hold the stocks he buys forever
Mr. Market

Benjamin Graham in his 1949 book The Intelligent Investor describes how the
market price for a stock is not always perfect in the short run by using the
Allegory of “Mr. Market”

Imagine you are one of two owners of a business and your business partner is
Mr. Market. Your partner every day either offers to buy your share or sell you
their share every day. Your partner is either wildly optimistic about the
company or wildly pessimistic depending on the day.

Your partner is irrational, blows small events out of proportion, and is moody
in the short run. This is the stock market according to Graham.
“In the Short Run the Stock Market is a Voting Machine, in the
Long Run a Weighing Machine” - Benjamin Graham

In the short run a stock

price is determined by things
like small news events,
analyst projections, drama,
rumors, and hype.

But! In the long run the

stock market is determined by
the value it creates.
What is an ETF? (Exchange Traded Fund)

A security (a tradable financial instrument) that allows you

to purchase a small portion of a diverse bundle of multiple
securities. ETFs can track an index, sector, commodity, or
other asset.

The most popular ETF if the SPDR S&P 500 ETF (SPY). Buying a
share of SPY gives you a small portion of the 500 largest
companies in the U.S.
What is an Index Fund?

A type of ETF built to match or track a financial market

index.
Market Index = a bundle of securities that represent a
category of the financial market.
Examples = large company stocks, growth stocks, value
stocks, consumer defensive stocks, tech stocks, etc...
2 popular index funds are the Dow Jones Industrial Average
Index and the Nasdaq Composite Index
What is a Mutual Fund?

A professionally managed financial instrument that pools

money from investors and aims to beat market returns by
purchasing a variety of stocks, bonds, and other assets.

Mutual funds are similar to an ETF in that money is

diversified however performance is based more on the funds
success than a specific asset or index performing well
What Are REITs? Real Estate Investment Trusts

A company that owns, finances, or operates income producing

real estate.

-Think of it as a combination of a dividend stock, a

mutual fund, and a real estate investment at the same time.

-REITs allow investors to earn income off of real estate

without actually having to buy or manage it yourself.
 What is Risk in the Stock Market?

-All investments come with risk. In

stocks it largely come down to three
types:

1. Market risk/systematic risk = entire

markets can drop due to unforeseen
events. This can’t typically be
diversified away within an asset class

2. Specific Risk = The risk associated

with an individual company (it’s debt,
profitability, management issues,
fraud, etc.)

3. Interest Rate Risk = Stocks tend to

go up when interest rates decrease
 What is your Risk Tolerance?

-AKA how much are you willing to lose without losing your mind and
panic selling?
Ask Yourself:
1. Are you concerned about losing money?
2. How much are you willing to lose?
3. How worried do you think you will be when the market declines?
4. How old are you? How much time do you have?
5. How much money do you have?
6. How diversified do you want your portfolio to be?
7. What level of returns are you looking for?
8. Do you need the money for something else?
Can You Time the Market?
What Does Timing the Market Mean?

Buying or selling stocks based on expected price changes.

-In theory timing the market makes sense

-But it is much harder in practice

-A perfect example of attempting to time the

Market is mutual fund managers
-average return mutual funds 2019: 26.14%
-S&P 500 index return 2019: 31.49%

-This isn’t to say it’s impossible

-Just not possible consistently
-Remember the markets can overreact
What is Dollar Cost Averaging?

A strategy where an investor divides

Up the total amount they plan to

Invest into regular set purchases

over time.

-Reduces volatility

-Reduces emotions
How to Analyze a Stock?
Fundamental Stock Analysis

The process of understanding

the past, present, and
potential future prospects of
a company by taking into
account their sales, rate of
growth, profitability,
health, industry, management,
and much more.
Three Financial Statements

Income Statement

Balance Sheet

Cash Flow Statement

Income Statement AKA the P&L
-The first place you’ll typically
look at when analyzing a company

-Shows the overall performance for

a company during a time period
(usually quarterly or annually)

-Starts with sales revenue,

deducts cost of goods sold to
reach gross profit. Gross profit
is then decreased by operating
expenses to equal the net income.
Statement of Cash Flows

-Takes in net income and

adjusts it by factoring in
non-cash expenses
-Displays the change in cash
over a specified period
-Displays the beginning and
ending balance of cash in a
time frame (usually quarterly
or annually)
Balance Sheet

-The balance sheet displays a

company’s assets, liabilities,
and shareholders’ equity at a
specific date (usually the end of
a quarter or year)
-Begins with cash and cash
equivalents, then shows changes
in accounts, and should end with
a balance of accounts
-Shows the financial position of
a company
Financial Ratios
P/E Ratio Price to Earnings

How much an investor needs to invest

in a company in order to receive $1 in
earnings.
-If the P/E is 15 you need to spend
$15 to earn $1 in earnings in 1 year
-A high P/E indicates the market
expects the company to grow in the
future
-A low P/E indicates the market may be
undervaluing the company
Current Ratio

A company’s ability to pay short-term

obligations (debts due within 1
year). How well can current assets
satisfy current debts?
Current Ratio = Current Assets /
Current Liabilities
*Ratios can vary by industry
*A current ratio of less than one is
generally bad
P/B Ratio Price to Book

Tells us how the market values a company

compared to the value of its assets on the
balance sheet.
P/B = Stock Price / Book Value Per Share
Book Value Per Share = (Stockholders’ Equity
- Preferred Stock) / Shares Outstanding
- A P/B under 1 is generally considered a
bargain
D/E Ratio Debt to Equity

Tells us the level at which a

company is taking on debt relative
to its net assets. A high D/E
means the company is aggressively
financing growth with debt.
D/E = Total Liabilities / Total
Shareholders’ Equity
- A D/E of around 1 is generally
considered good however this
can vary by industry. Over 2 is
generally considered risky.
ROE Return on Equity

Tells us how good the

management is at returning a
profit on the equity available
to them.

ROE = Net Income / Average

Shareholders’ Equity

-You want to be in line or

higher than competitors
ROA Return on Assets

Tells us how well a company can generate profits on its

assets.

ROA = Net Income / Total Assets

-Over 5% is generally considered good but you will want to

compare this to competitors

-Some industries naturally make more money with fewer assets

and are worth more because of it
Narrowing Down Your Choices
Other Things to Look For When Analyzing a Stock

-Who is the management?

-Competitors

-Industry analysis

-News catalysts

-Earnings calls
Technical Analysis

A technical analyst attempts to

evaluate what will happen next in
a stock’s price by studying its
past
-A technical analyst believes
that past price action can be
very telling as to what may
happen in the future
Technical Analysis Cont.

Common items taken into consideration:

-Price trends
-Chart patterns
-Moving averages
-Support and resistance levels
-Volume of shares traded
Buying a Stock
Order Types

Market Order - The most common order type. This is an order

to buy or sell immediately at the current price.
*The last posted price is not necessarily the price you will
pay

Limit Order - A buy or sell order that will execute if the

price reaches a specific number.
*A limit order is not guaranteed to be executed
Stock Market Taxes
Capital Gains Taxes - When You Sell

Short-Term Capital Gains = Tax on the profit from the sale

of an asset held less than 1 year
-If you held less than 1 year you pay taxes at your
normal income tax rate.
Long-term Capital Gains = Tax on the profit from the sale of
an asset held longer than 1 year
Short-Term Capital Gains (under a year)
Long-Term Capital Gains (1 year plus)
Dividend Taxes
Qualified Dividends (taxes paid at your long-term cap gain rate)

Dividends paid by:

-A U.S. company.

-A company in U.S. possession.

-A foreign company residing in a country that is eligible for benefits

under a U.S. tax treaty.

-A foreign company’s stock that can be easily traded on a major U.S.

stock market.

Non-Qualified Dividends (taxes paid at your short-term cap gain rate)

Dividends paid by examples:

-A REIT

-A MLP (master limited partnership)

-Dividends on employee stock options

Retirement Accounts: 2 Most Popular Types
401(k)
An employer sponsored retirement plan that allows
you to invest a portion of your income pre-tax.

-Your investment options can vary wildly depending

on your provider (many times are limited to mutual
funds and ETFs)

Contribution Limits = $19,500 if you’re under age

50. Up to $26,000 as a catch-up contribution of an
extra $6,500 if you’re 50 years old or older

-Your employer may match a percentage of your wages

as a contribution

-You will pay taxes after you retire and begin

making withdrawals from the plan. The gains are
taxed at your retirement tax rate. Deductions can
begin after age 59.5.
ROTH IRA
A retirement plan set up directly between you and a
brokerage.

-More Freedom. You can invest in any securities you

choose

Contribution Limits =

$6,000 if you’re under age 50

$7,000 if you’re age 50 or older

-Income Limits = full contribution under $125,000.

Phase out between $125,000 and $140,000 single.
$198,000 to $208,000 married

-You pay taxes on income before adding funds to your

ROTH IRA but withdrawals after age 59.5 are tax free
ROTH IRA Vs. 401(k)
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