CCC- Wkbk 1 (1-55) 1/20/01 1:56 PM Page 3

1
Welcome to the Stock Market

Chapter Summary In this chapter, the reader is introduced to various types of investments—cash equivalents, mutual funds, futures and commodities, options, bonds, and, last but not least, stocks. It is important to note that stocks have provided the greatest return of any of the trading instruments, and I thoroughly endorse their use as an investment. But how you choose to invest in them is a personal decision based on your time availability, risk tolerance, and capital restraints. Trading and investing are the ultimate balancing act. No one can tell you the best way to trade, and I certainly will not try to. But I do hope to give you a strong foundation of knowledge, a clear picture of the choices at hand, and enough tools to help you get where you want to go. In this initial approach to the stock market, we’ve addressed what the stock market actually is and the keys to making money in the market. • The first key to winning as an investor is to develop a healthy respect for and clear understanding of risk. Know what the risks are beforehand, and become comfortable with them. Defining your risk tolerance is critical. • The second task is to develop a low-stress investment plan that will enable you to build your knowledge base systematically. The old adage “Look before you leap” applies nicely here. Know what you want to accomplish, then look for a way to achieve that goal. • Third, beginners need to start by specializing in one or two markets at a time. Focusing on one aspect is crucial. Don’t fall into the generalist trap, looking at everything. By becoming informed about a particular sector, you can then transfer the lessons learned there to another sector, and so on up the learning curve. 3

2. What is the difference between gambling and investing as a speculative process that encompasses the element of chance? _______________________________________________________________ _______________________________________________________________ 4. ___________________________________________________________ 2. What is the difference between investors and traders? _______________________________________________________________ _______________________________________________________________ 7. and. so the time to act is now. What can make an investment a gamble? _______________________________________________________________ 5. By doing this you’ll reduce your personal anxiety. It’s important to become better informed about the economy. Learn by observing and by reading. . What are the four key approaches to becoming a successful investor? 1. go slowly. True or False: Stocks are definitely the least lucrative and the least risk free of the three investment products. Look for information regarding market breadth as well as the sector you’re most interested in.2. 6.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 4 4 QUESTIONS AND EXERCISES • Fourth. and 1. further. these people are usually very patient and friendly. No step is too small to take. define your limits in terms of the amount of money you can afford to lose. you need to know where you are.1.CCC. but don’t try to be an expert. They won’t bite! Questions and Exercises 1. completely fill out the financial investment worksheets in Figures 1. Before you know where you’re going. Doing nothing is also a risk because of inflation. Keep these sheets handy and update them regularly as changes occur in your life. Watch the daily investing programs on CNBC and CNNfn. a brokerage account can be purchased with no money down. 1. and read the major financial newspapers. True or False: Like real estate. you’ll know how much you can afford to put at risk. Learn the procedures brokers and mutual fund representatives take. The aura of the market is scariest for those unfamiliar with it. When you are ready to place that first trade. ___________________________________________________________ 3. ___________________________________________________________ 4. To assess your financial condition.3. whether it’s for a mutual fund or a stock. or evening broadcasts. ___________________________________________________________ 3.

2 Monthly Income Statement .CCC.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 5 WELCOME TO THE STOCK MARKET PERSONAL BALANCE SHEET Amount Liabilities Short-Term Debts __________ • Credit card debt __________ • Medical/dental debt __________ • Vehicles debt __________ • Short-term loans __________ • Miscellaneous debt __________ __________ __________ Long-Term Debts __________ • Mortgage __________ • Tuition loans __________ • Long-term loans __________ __________ __________ __________ __________ 5 Assets Finances • Cash • Checking account • Savings account • Trading account • Mutual funds • 401(k) • IRAs SUBTOTALS Long-Term Assets • House (mortgage) • Vehicles • Fixtures • Recreation • Equipment • Miscellaneous SUBTOTALS NET TOTALS Assets – Liabilities = Amount __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ Figure 1.1 Personal Balance Sheet MONTHLY INCOME STATEMENT Amount Monthly Expenses Basic Living Expenses __________ • Rent/mortgage __________ • Food __________ • Utilities __________ • Phone/ISP bill __________ • Heating __________ • Transportation • Clothes • Entertainment • Miscellaneous Insurance Payments • House/renter's insurance • Health insurance • Dental insurance • Car insurance • Life insurance • Long-term care insurance Debt Payments • Credit card (minimum payment) • Alimony • Child support • Tuition loan • Miscellaneous loans __________ Monthly Income Cash Received • Wages after taxes • Alimony income • Child support • Rental income • Business income • Additional income Amount __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ Totals Income Total – Expenses Total = __________ __________ __________ __________ __________ __________ __________ Figure 1.

____ 50-year bond market . ____ 30-year bond market B. 1.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 6 6 QUESTIONS AND EXERCISES RISK TOLERANCE AND INVESTMENT GOALS Risk Tolerance Investment Goals __________ __________ __________ __________ __________ __________ Investment goal ÷ Years until retirement Annual return goal Financial Potential • Tax bracket • Utilities • Phone/ISP bill • Heating • Transportation • Clothes • Entertainment • Miscellaneous Insurance Payments • House/renter's insurance • Health insurance • Dental insurance • Car insurance • Life insurance • Long-term care insurance Debt Payments • Credit card (minimum payment) • Alimony • Child support • Tuition loan • Miscellaneous loans __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ Monthly income – Monthly expenses Net profit/loss Total assets – Total liabilities Net worth 3 × monthly expenses (aggressive) 6 × monthly expenses (moderately aggressive) 9 × monthly expenses (conservative) __________ __________ __________ __________ __________ __________ __________ __________ __________ Totals Income Total -– Expenses Total = _________ __________ __________ __________ __________ __________ __________ __________ Figure 1. ____ 25-year bond market D. When investors talk about the bond market. ____________________________________________________________ 2.CCC. ____ 20-year bond market C. ____________________________________________________________ 3. ____________________________________________________________ 9.3 Risk Tolerance and Investment Goals 8. Name and define the three types of risk. they are referring to the: A.

One-third B. True or False: Where a trade takes place does not depend on whether that particular company is listed on the New York Stock Exchange. while the brokerage lends the trader the rest at a small interest rate. One-tenth . or the American Stock Exchange. How is the Nasdaq different from the other exchanges? _______________________________________________________________ _______________________________________________________________ 14.CCC. Company ownership C. the Nasdaq. A. Cash debt obligations 11. ____ Cash equivalents 3. ___________________________________________________________ 2.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 7 WELCOME TO THE STOCK MARKET 7 10. ____ Stocks 1. NYSE:______________________________________________________ D. ____ Bonds 2. Easy conversion B. ___________________________________________________________ 3. a trader needs to put up only _________ of the total amount to purchase shares. ___________________________________________________________ 12. If your stocks are listed on the Nasdaq. Based on margin rules. ECN:_______________________________________________________ 13. Decipher these acronyms: A. 16. Nasdaq: ____________________________________________________ C. why would they sometimes be referred to as four-letter stocks? _______________________________________________________________ _______________________________________________________________ 15. What are your three basic rights as a shareholder? 1. Match up the three basic investment products with their defining statements: A. OTC: ______________________________________________________ B. One-fourth C. AMEX: _____________________________________________________ E. Two-thirds D. One-half E.

____ Technological developments E. ____ A buy-and-hold kind of guy 1. it is a very good indication of: A. A. This is called the ______. Correctly match these three descriptions of the chief players in the stock market today along with the terms that follow: A. matching them up as prices fluctuate. The short-term trader 2. Bid B. ____ Declines in the offing B. Spread C. it is left with a _____________ who keeps a list of all the unfilled orders. ____ A person who buys and sells often. Market maker 21. ____ Further price increases D. ____ Declines in the offing B. it’s a fairly reliable indication of: A. Investor D. ____ Technological developments E. ____ Trend reversals C. If your floor broker cannot fill your order. Specialist C. Trader B. ____ Financial losses 18. A. or ______.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 8 8 QUESTIONS AND EXERCISES 17. When a stock sells off on heavy volume. Check those that apply. The market maker makes a profit by bringing together buyers and sellers and taking a small amount from each of them to process the transaction.CCC. The individual investor 3. Floor broker E. The professional 20. even intraday C. Hedging instrument D. ____ Financial losses 19. Slippage E. ____ A person hired to make buying and selling decisions who is paid for his or her work B. ____ Further price increases D. Bid/ask spread . ______. ____ Trend reversals C. When a stock surges up on heavy volume.

Check the items associated with the Small Order Entry System or SOES: A. _____ The birth of day trading G. What are the advantages and disadvantages of the three different classes of load funds? Class A: Advantage:_____________________________________________ Disadvantage: __________________________________________ Class B: Advantage:_____________________________________________ Disadvantage: __________________________________________ Class C: Advantage:_____________________________________________ Disadvantage: __________________________________________ . _____ Detailed research reports on the stock market and companies H. _____ Financial web sites that cater to individual investors F. A. a professional investor who is hired by the investment company makes the investment decisions on which stocks to buy or sell.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 9 WELCOME TO THE STOCK MARKET 9 22. _____ A trading account hosted by a firm that acts as an agent for a customer J. _____ Market makers who create liquidity by narrowing the spread E. Quote 23. What is the difference between a load and a no-load mutual fund? _______________________________________________________________ _______________________________________________________________ 27. _____ The ability to trade directly from offices using telephones and continuously updated computerized prices B. _____ Significant reduction of the current position held in the market C. The difference between them is called the ______. Fill in these blanks with the following terms: The ______ is the highest price a prospective buyer is prepared to pay for a share of a specified security.000 shares I. _____ Permitting lightning-fast executions for orders up to 1. Spread C. _____ The market crash of 1987 24. _____ Permitting the little guy to compete with institutional traders D.CCC. Bid D. These two prices constitute a ______. True or False: The net asset value (NAV) of a mutual fund is calculated by dividing the market value of the fund’s portfolio by the number of shares. The ______ is the lowest price acceptable to a prospective seller of the same security. 25. 26. Ask B. True or False: With a mutual fund.

Start a trading journal and make notes on why these stories draw your attention. Both of these papers are mainstays of the investment world and have a big effect on the markets.CCC. you have to make a start by just getting to know the markets one story at a time. Start by looking for trends and industry movements in the stories provided. What are three basic methods of stock investing? 1. ___________________________________________________________ 3. so recognize that there is an agenda and underlying strategy behind every company announcement. You may want to subscribe to the Wall Street Journal or Investor’s Business Daily. If you are new to the investment world. 31. True or False: When the economy is hot. ___________________________________________________________ 2. You need to incorporate all of these news sources into your daily investment habits. Find stories about one or two companies that pique your interest. also like a stock? _______________________________________________________________ _______________________________________________________________ 30. and some that have a hand in swaying public opinion. What are two reasons why an investor would want to mirror an index rather than have a professional make individual buy and sell decisions that reflect the sensitivity of market movement? 1. learning is a cumulative experience. Follow their progress to get a feel for your instinctive abilities. ___________________________________________________________ 29. does the stock rebound? Remember. . make it a habit to read the business section of the newspaper daily. How do they affect the market in general? What other stocks are affected? How are their respective industries affected? As a story fades. Keep in mind that most stories originate as press releases from corporate public relations (PR) desks. You should also keep yourself informed on a state and local level by reading the local papers. ___________________________________________________________ Media Assignment If you’re not already doing it.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 10 10 QUESTIONS AND EXERCISES 28. The Internet is a media world unto itself. There are multitudes of sites that report about the markets. which are similar to index funds. How are index shares. ___________________________________________________________ 2. inflation begins to accelerate and adds to the purchasing power of money over time.

CCC.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 11 WELCOME TO THE STOCK MARKET Vocabulary Study Be able to use these terms: • Annual report • Ask • Auction-style market • Bid • Bond • Brokerage account • Cash equivalents • CD (certificate of deposit) • Closed-end fund • Commodities • Currencies • Day trading • Dividends • Earnings • Executed • The Fed • Float • Floor trader • Futures • Gap-down • Hedging • Index • Index fund • Index share • Inflation • Institutional investor • Interest rates • Investor • Liquidity • Load fund • Margin • Market maker • Mutual fund • National Association of Securities Dealers (NASD) • Net asset value (NAV) • No-load fund • Open-ended fund • Quotation • Risk • Risk tolerance • Rule 144 • Shorting a stock • Specialization • Stock • Stock market • T-bill • Ticker symbols • Trader • Trading pits 11 .

graphs. market reports.CCC. and the “Catch of the Day” column for investment ideas.etrade.com This site offers a plethora of insider news. finders.com Controversial and extremely popular.marketwatch.asp This site has it all—quotes. Look for Wolf picks. company profiles. screeners. as well as impressive commentary from prime financial journalists.com www.Wkbk 1 (1-55) 1/20/01 1:56 PM Page 12 12 Useful Web Sites QUESTIONS AND EXERCISES CBS MarketWatch cbs. custom portfolios.msn. Check out the search tools and the featured links to hot web sites.herring.com The mother of all online brokerages hosts this excellent site to help you get your bearings with quotes. option picks. charts. Excellent journalists and plenty of timely market data are mainstays of this premier news-oriented web site. E*Trade www.com An absolute must for any trader who wants to stay aware of scheduled and breaking news. and trading tools.thestreet. this site has cornered the market on public appeal through its clever journalism. TheStreet. Red Herring Online www. research. Microsoft Investor moneycentral. online workshops. analysis. insightful articles.com/investor/home. as well as an excellent e-mailed newsletter. and everyday analyses of market performance. feature news and investment articles from MSNBC. . and commentary by highly respected journalists.

Sign up to vote on this title
UsefulNot useful