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Basics of Stocks and Investing
Basics of Stocks and Investing
Objectives
• Explain What is a Stock
• Explain the Types of Stocks
• Explain the Classification of Common Stock
• Describe the Role of Beta in Your Portfolio
• List the Various Stock Screening Criteria
• Explain the Types of Analysis in Stock Trading
• Explain the Ratios for Valuing Firms
• List the Criteria for Choosing a Broker
• Explain the Common Stock Investing Strategies
• Explain the Steps of a Typical Stock Transaction
• Explain How to Read Stock Quotations
• Explain the Calculation of Price-to-Earnings Ratio (PE)
• Explain the Key Terms of Stocks and Investments
• Describe the Rights of a Stockholder
• Describe the Various Investment Options
Introduction
There are two main types of stocks that are offered by any company such as
follows:
Common
Stock
Preferred
Let’s look at each in detail. Stock
Common Stock
The following are some of the key asset classes for common stocks:
Small
Capitalization /
Small Cap
Mid Stocks
Capitalization /
Mid Cap Stocks
Large
Capitalization /
Large Cap
Stocks
Key Asset Classes for Common Stocks
The following are some of the key asset classes for common stocks:
Blue-chip Stocks
Growth Stocks
Value Stocks
Income Stocks
Cyclical Stocks
Defensive Stocks
• Blue-chip Stocks:
• Value Stocks:
• Income Stocks:
• Cyclical Stocks:
• Defensive Stocks:
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If Beta = 1.0 = This If Beta > 1.0 = This If Beta < 1.0 = This
means that the means that the means that the
stock has the same stock has more risk stock has less risk
risk as the market. than the market. than the market.
Therefore, a stock Therefore, a stock Therefore, a stock
with Beta = 1 will with Beta > 1.0 will with Beta < 1.0
move with the move more than will move less
market. the market. than the market.
Role of Beta in Your Portfolio
• •
The ‘Beta’ indicator Hence, when you build a So, this weighted ‘Beta’
plays a crucial role portfolio, you should always or the ‘Beta of your
while selecting the track the beta of your portfolio’ will indicate
stocks that will make portfolio. The ‘Beta’ of your and show you how
up your portfolio. portfolio is the weighted risky your portfolio is
Beta of each of your stocks versus the market.
or funds in the portfolio.
Role of Beta in Your Portfolio
• • •
You should always keep Hence, it is So, you should You should not only
in mind that a crucial that you diversify by invest in large-
diversified portfolio should always be buying a broad capitalization stocks,
moves with the diversified in all array of financial but also broaden and
market. So, in a your assets. deepen your portfolio
diversified portfolio, investments. by buying
you will feel less effect international stocks,
from one company. small cap stocks, etc.
Understanding Leverage
6
• So, if you want to invest a larger amount, then
the best thing that you can do is saving for
making the larger investments but never
borrow money for it.
Costs of Investing in Stocks
It is crucial for you to understand that there are a few major costs of investing
in stocks.
Also, the costs of investing in stocks can be divided into the following three
major types:
• Explicit Costs
• Implicit Costs
• Hidden Costs
Custody or
Annual Fees
Dividends
Interest on Margin Loans ‘Account Transfer Fees’ are the charges that
you need to pay for moving assets either
Sales Charges or Loads into or out of an existing account.
Business Risk
Financial Risk
Liquidity Risk
Political or Regulatory Risk
Market Risk
Inflation Risk:
Business Risk:
Financial Risk:
Liquidity Risk:
Market Risk:
When deciding to buy or sell any stock, it is crucial that you should
have thorough knowledge about the sector of the particular stock
that you intend to buy or sell. The performance of the overall
sector in the economy will to a greater extent affect the stocks of
the company belonging to that particular sector.
Stock Market Sectors
The following are some considerations that you should keep in mind with
respect to the sector of any company:
You should always be aware of which sectors are not doing well.
Sector
Stock Split
• ‘Stock Split’ is a process through
which a company splits its own
shares to keep the price of its stock
affordable and in a buying range.
• How muchinvestment
Peter’s was Peter’sbefore
investment before
the split = 300the split?x $600
shares
per share = $180,000.
Consider that Globus’ management decides to split the
stock three-for-one, how many shares would Peter own
Consider that Globus’ management
after the split? decides to split the
stock three-for-one, how many shares would Peter own
What is the new price perafter the split?
share after the split?
What
How is the
much wasnew priceinvestment
Peter’s per share after
beforethethe
split?
split?
•• New price
Peter’s per sharebefore
investment after the
the split
split == $600/3 = $200.
300 shares x $600
per share = $180,000.
How much would Peter’s investment be worth after the
threemanagement
Consider that Globus’ -for-one split? decides to split the
• stock three-for-one,
Peter’s investmenthow
worthmany
aftershares would
the three Peter own
-for-one split
= 900 shares x $200after
per the split?
share = $180,000.
• Number of Peter’s
Therefore, shares that Peter would
investment worthhave
afterafter the -
the three
three-for-one split = 300
for-one split remains thexsame
3 = 900 shares.
as his initial
investment amount.
Objectives
• Explain What is a Stock
• Explain the Types of Stocks
• Explain the Classification of Common Stock
• Describe the Role of Beta in Your Portfolio
• List the Various Stock Screening Criteria
• Explain the Types of Analysis in Stock Trading
• Explain the Ratios for Valuing Firms
• List the Criteria for Choosing a Broker
• Explain the Common Stock Investing Strategies
• Explain the Steps of a Typical Stock Transaction
• Explain How to Read Stock Quotations
• Explain the Calculation of Price-to-Earnings Ratio (PE)
• Explain the Key Terms of Stocks and Investments
• Describe the Rights of a Stockholder
• Describe the Various Investment Options
Analysis in Stock Trading
Before trading in stocks, various kinds of analysis is carried out by investors,
financial experts, financial institutions, etc. to give an indication about the
performance of a stock, its volatility etc.
• Fundamental Analysis
• Technical Analysis
The chief assumption on which ‘Fundamental Analysis’ is carried out is that the
value of the stock can be determined based on the future earnings of the
company.
The chief assumption on which ‘Fundamental Analysis’ is carried out is that the
value of the stock can be determined based on the future earnings of the
company.
The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the
value of a company is the discounted value of the free cash flows to all
shareholders and to equity shareholders.
Cash flow models are built by investors to predict expected cash flows to the
equity shareholders and to the total firm.
Cash Flow Analysis
• Cash Flow Analysis
The chief assumption on which ‘Cash Flow Analysis’ is carried out is that the
value of a company is the discounted value of the free cash flows to all
shareholders and to equity shareholders.
Cash flow models are built by investors to predict expected cash flows to the
equity shareholders and to the total firm.
Technical Analysis
• Technical Analysis
The chief assumption on which ‘Technical Analysis’ is carried out is that supply
and demand are the key factors needed to understand stock prices and market
trends.
The chief assumption on which ‘Technical Analysis’ is carried out is that supply
and demand are the key factors needed to understand stock prices and market
trends.
There are a few key ratios that are used for valuing firms such as follows:
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Limit
Stop Order
Order
Market
Order
Types of Orders
As an investor and stock trader, you can place the following three types of
orders on your stocks:
‘Stop Order’ is an
order to buy or sell
stock holdings
when the market
Limit ‘Limit Order’ is a
price reaches a Stop Order request to buy
certain level. Order
stock at any price
up to a specified
maximum or to
sell stock at any
price above a
Market specified
‘Market Order’ is an
Order minimum.
offer to buy stock at the
market price.
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The following are a few of the most common strategies for investing in stocks:
A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not
selling it for an extended period of time. Hence, this is a long-term strategy. It
proves to be very cost-effective.
Buy and Hold Strategy
• Buy and Hold Strategy
A ‘Buy and Hold Strategy’ is the strategy of buying a financial asset and not
selling it for an extended period of time. Hence, this is a long-term strategy. It
proves to be very cost-effective.
Dollar-cost Averaging Strategy
• Dollar-cost Averaging Strategy