Basics of Stocks and Investing

Introduction to Stocks
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
Peter Looney works as an executive.
For a long time, Peter has felt that he

should invest the extra amount of money
that he makes from his job.
Introduction
He has been saving in cash form for a long

time.
However, he wants that he should use the

saved amount to invest in something that
could help him multiply his money and
help grow his finances.
Introduction
Peter has always thought of starting a

business venture to grow his money,
however, he is greatly averse to the huge
amount of risk involved in any business
venture.
So, Peter starts asking advice from his

colleagues about what possible investment
options are available in the market.
Introduction
George, one of Peter’s colleagues, advices

him to invest in stocks and mutual funds.
Stocks are the capital raised by a

corporation through the issue of shares
entitling holders to an ownership interest
also known as ‘equity’.
Introduction
Mutual funds are an investment vehicle

made of pool of funds collected through a
regulated investment company from many
investors.
This pooled money is then used for the

purpose of investing in securities such as
stocks, bonds, money market instruments
and similar assets.
Introduction
Money managers operate the mutual

funds by investing the fund's capital and
attempt to produce capital gains and
income for the fund's investors.
George tells Peter that by investing in

stocks and mutual funds, Peter can earn a
small share of the great profits that big and
successful organizations make for
themselves and their shareholders.
Introduction
George tells him that although Peter will
get to enjoy a part of the profit made by
the organization, he will be spared of the
hassles of running a business on his own,
and also will undertake a much lesser risk
than if he would have to run a business on
his own.
Therefore, although stocks and mutual

funds would help Peter to multiply and
grow his money, he would be able to do so
by taking advantage of the stability and
experience of these fast growing and
stable organizations that have been
operating and making profits for decades.
Introduction
George also adds a word of warning for

Peter.
He tells Peter that the most important

thing that he should keep in mind while
investing in stocks and mutual funds is that
he should determine the maximum risk
that he is willing to take.
Introduction
Peter should always make sure that he

never invests more than his risk taking
capacity.
George assures Peter that if he takes

calculated risks and invests wisely; then
stocks and mutual funds prove to be a very
lucrative way of growing his money.
Introduction
Therefore, you can understand that
investing in stocks and mutual funds are a
great way to multiply and grow your
money by undertaking calculated amount
of risk according to one’s own risk taking
capacity.
Let us learn about stocks and investing in

detail.
Objectives
What is a Stock?
• Any business needs money or

capital whenever it has to start
its operations or expand its
business operations.
• Thus, in order to raise this capital

for a business start-up or
expansion, the corporation
would offer shares of stock for
sale to the public.
What is a Stock?
• By selling these shares or stock
to the public, the company is
able to increase its finance
reserves and also get the
necessary funds to start
operations or expand its
operations.
• So, any individual who purchases

a ‘share’ or ‘stock’ of a company
becomes a part owner of a
portion of that company, based
upon the number of shares
purchased compared with the
number of shares that make up
the company’s total stock
offering.
What are Stock Exchanges?
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Why Stocks should be in Your Portfolio?
• It has been found over

several decades that, as an
asset class, common stocks
have outperformed all other
major asset classes.
• Also, stocks deliver strong

long-term capital gains.
• They prove to be one of the

best and most tax-efficient
types of return.
Why Stocks should be in Your Portfolio?
• You should include stocks in

your diversified portfolio
because the individual
stocks in a diversified
portfolio can reduce the
overall risk of your portfolio.
• Dividends and capital gains

are taxed at a lower
preferential federal tax rate
and so if tax planning is
done wisely, then stocks can
prove to be tax-efficient
assets.
Objectives
Types of Stocks
12
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
1
Common Stock is a ‘voting stock’. Hence, any individual
who has purchased the common stock of a company is
entitled to vote for appointing the officers of the
company and it’s Board of Directors. Thus, common
stock is the ownership share in publicly held company.
Common stock holders have a residual claim on a

company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights
Common and obligations. Thus, each common stockholder has
Stock the right to vote. Moreover, if a common stockholder is
not able to vote in person, he can give a written consent
to give permission to someone else to vote on his behalf
as a proxy.
Common Stock
1
Common Stock is a ‘voting stock’. Hence, any individual
who has purchased the common stock of a company is
entitled to vote for appointing the officers of the
company and it’s Board of Directors. Thus, common
stock is the ownership share in publicly held company.
Common stock holders have a residual claim on a

company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights
Common and obligations. Thus, each common stockholder has
Stock the right to vote. Moreover, if a common stockholder is
not able to vote in person, he can give a written consent
to give permission to someone else to vote on his behalf
as a proxy.
Preferred Stock
2
‘Preferred Stock’ as the names suggests has a
preferential position over common stock.
Therefore, during the payout of dividend to share
holders, it is first paid to preferred stock owners
before common stock holders.
Preferred stock is also ownership shares of a
company.
However, it differs from common stock because

Preferred in preferred stocks, the dividend is guaranteed
Stock and paid before dividends on common stock are
paid. On the other hand, if profits of the
company increase, the dividend for preferred
stocks isn’t increased accordingly.
Preferred Stock
2
‘Preferred Stock’ as the names suggests has a
preferential position over common stock.
Therefore, during the payout of dividend to share
holders, it is first paid to preferred stock owners
before common stock holders.
Preferred stock is also ownership shares of a
company.
However, it differs from common stock because

Preferred in preferred stocks, the dividend is guaranteed
Stock and paid before dividends on common stock are
paid. On the other hand, if profits of the
company increase, the dividend for preferred
stocks isn’t increased accordingly.
Key Asset Classes for Common Stocks
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:
Large Cap stocks are

stocks of companies with
market capitalization Small
(shares outstanding Capitalization /
times’ price) of greater Small Cap
than $10 billion. Mid Stocks
Capitalization /
Mid Cap Stocks
Large
Small Cap stocks
Capitalization /
are stocks of
Large Cap
companies with
Stocks
Mid Cap stocks are stocks market
of companies with market capitalization of
capitalization of between less than $2
$2 billion and $10 billion. billion.
Objectives
Classification of Common Stock
Common stock can be classified as follows:
Blue-chip Stocks
Growth Stocks
Value Stocks
Income Stocks
Cyclical Stocks
Defensive Stocks
Let us look at each in detail.

Blue-chip Stocks
Blue-chip Stocks
• Blue-chip Stocks:
o ‘Blue Chip Stock’ is a stock

that is issued by a large,
stable, mature company.
o This is not a specific list, but
changes over time.
Growth Stocks
Growth Stocks
• Growth Stocks:
o ‘Growth Stock’ is the stock

that compensates investors
primarily through increase
in value of the shares over
time.
o These are issued by
companies which are
growing faster than average
and which generally
reinvest dividends.
o They generally have higher
PE and PB ratios than the
market as a whole.
Value Stocks
Value Stocks
• Value Stocks:
o Value Stocks are issued by

companies which are less
expensive compared to the
market.
o They generally have lower
PE and PB ratios than the
market as a whole.
Income Stocks
Income Stocks
• Income Stocks:
o ‘Income Stock’ is the stock

that compensates investors
primarily through the
regular payment of
dividends.
companies which pay
dividends regularly.
Cyclical Stocks
Cyclical Stocks
• Cyclical Stocks:
o ‘Cyclical Stock’ is stock

exhibiting above-average
sensitivity to the business
cycle.
o These are issue by
companies whose share
prices move up and down
with the state of the
economy.
Defensive Stocks
Defensive Stocks
• Defensive Stocks:
o ‘Defensive Stock’ is a stock

that is relatively insensitive
to the business cycle.
companies whose share
prices move opposite to the
state of the economy.
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Objectives
What is ‘Beta’?
e m o st im p o rta n t co ncepts
‘Beta’ is one of th e trying to
to un d e rs ta n d w h il
that you need
ar n a bo u t sto c ks a nd in vestments.
le
rt an t in d ica to r o f h o w susceptible
‘Beta’ is an impo
to m o ve m e n ts o f th e market.
a stock is
re, ‘Beta ’ indicates the sensitivity

Therefo
in
of a stock to movements
the overall market.
Interpreting Beta
It is very important that you

understand how to interpret
‘Beta’ to understand how a stock
is behaving with respect to the
movements in the overall market.
Interpreting Beta
The following are some important points that you should bear in mind while
interpreting ‘Beta’:
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 will
move with the move more than move less than the
market. the market. 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 market. diversified in all array of financial but also broaden and
So, in a diversified your assets. deepen your portfolio
portfolio, you will feel investments. by buying
less effect from one international stocks,
company. small cap stocks, etc.
Understanding Leverage
1
• ‘Leverage’ is another important concept while
learning about stocks and investing. ‘Leverage’ is
the process of increasing your purchasing power
by borrowing money to invest in more assets.
2
• Therefore, it is very natural that the ‘Leverage’
increases your risk as you invest more than your
own financial capacity by borrowing from
others.
3
• Also, when you borrow money for investing the
rate of return on the loan is fixed, however,
there is no fixed or guaranteed rate of return on
your investments.
Understanding Leverage
4
• Therefore, Leverage magnifies capital gains
and losses.
5
• As a ground rule, you should always keep in
mind that you should ‘never’ use leverage to
invest. Leverage is as pure and simple as an
ordinary ‘debt’.
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

Explicit Costs
• Explicit Costs
‘Explicit Costs’ includes the costs that are
reflected in and you see each month in your
financial statement. Therefore, ‘Explicit Costs’
include:
Brokerage Commission
Costs and Fees
Custody or
Annual Fees

Explicit Costs
• Explicit Costs
Commission include:
Brokerage
Costs and
Costs and Fees
Fees
Brokerage Commission Costs and Fees:
• ‘Explicit Costs’ include the brokerage

commission costs and fees.
• Brokerage commission costs and fees is
Custody or
a service charge applied by a broker in
Annual Fees
return for arranging the purchase or sale
of financial assets.

Explicit Costs
• Explicit Costs
Commission include:
Brokerage
Costs and
Costs and Fees
Fees
Brokerage Commission Costs and Fees:
• ‘Explicit Costs’ include the brokerage

commission costs and fees.
• Brokerage commission costs and fees is
Custody or
a service charge applied by a broker in
Annual Fees
return for arranging the purchase or sale
of financial assets.

Explicit Costs
• Explicit Costs
include:
Costs and Fees
Custody or Annual Fees:
• ‘Explicit Costs’ include custody or annual

fees.
Custodyor
or • Custody or annual fees are fees the
Custody
AnnualFees
Fees brokerage house charges to hold the
Annual
stocks, bonds, or mutual funds in your
account.

Explicit Costs
• Explicit Costs
include:
Costs and Fees
Custody or Annual Fees:
• ‘Explicit Costs’ include custody or annual

fees.
Custodyor
or • Custody or annual fees are fees the
Custody
AnnualFees
Fees brokerage house charges to hold the
Annual
stocks, bonds, or mutual funds in your
account.

Implicit Costs
• Implicit Costs
‘Implicit Costs’ are the taxes that you pay.
Hence, it is crucial that you should take into
Capital Gains Taxes account these ‘implicit costs’ as these are
critical costs that must be taken into account to
get the true return of your portfolio but which
are not noted on your monthly financial reports.
Short-term Capital
The following are some of the ‘Implicit Costs’
that you may have to pay:
Long-term Capital
Dividends

Implicit Costs
• Implicit Costs
CapitalGains
Capital GainsTaxes
Taxes account these ‘implicit costs’ as these are
Short-term Capital
Long-term Capital
Capital Gains Taxes:
Dividends You may have to pay taxes on the gains you

have made by selling financial assets.

Implicit Costs
• Implicit Costs
Short-termCapital
Capital are not noted on your monthly financial reports.
Short-term
Long-term Capital
Short-term Capital:
Dividends You may have to pay taxes on the gains that

you made in selling assets owned for a
period of less than one year.

Implicit Costs
• Implicit Costs
Short-term Capital
Long-termCapital
Long-term Capital
Long-term Capital:
Dividends You may have to pay taxes on the gains that

you made in selling assets owned for a
period of more than one year.

Implicit Costs
• Implicit Costs
Short-term Capital
Dividends:
Long-term Capital
You may have to pay taxes for the dividends
that you receive from the companies.
Dividends
Dividends Dividends are the returns you get from the
company. Different countries have different
rules and policies for taxing stock dividends,
bonds and other dividends at federal tax
rate and your stateLet us looktax
marginal at rate.
each in detail.
Hidden Costs
• Hidden Costs
‘Hidden Costs’ are the costs that you have to
bear while investing in stocks that are not
Account Transfer Fees included in the ‘Explicit Costs’ and the ‘Implicit
Costs’. Some of the ‘Hidden Costs’ that you
Account Maintenance Fees should look out for while investing in stocks are
as follows:
Inactivity Fees
Minimum Balance Fees
Interest on Margin Loans
Sales Charges or Loads

Hidden Costs
• Hidden Costs
AccountTransfer
Account TransferFees
Fees included in the ‘Explicit Costs’ and the ‘Implicit
as follows:
Inactivity Fees
Account Transfer Fees:
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.

Hidden Costs
• Hidden Costs
Account
Account Maintenance
Maintenance Fees
Fees should look out for while investing in stocks are
as follows:
Inactivity Fees
Account Maintenance Fees:
Interest on Margin Loans ‘Account Maintenance Fees’ are the charges

that you need to pay for maintaining your
Sales Charges or Loads account.

Hidden Costs
• Hidden Costs
as follows:
InactivityFees
Inactivity Fees
Inactivity Fees:
‘Inactivity Fees’ are the charges that you
Interest on Margin Loans need to pay because you did not trade or did
not perform any account activity during a
Sales Charges or Loads specified period.

Hidden Costs
• Hidden Costs
as follows:
Inactivity Fees
Minimum Balance Fees:
MinimumBalance
Minimum BalanceFees
Fees
‘Minimum Balance Fees’ are the charges that
Interest on Margin Loans you need to pay because you failed to
maintain a minimum balance in your
Sales Charges or Loads account.

Hidden Costs
• Hidden Costs
as follows:
Inactivity Fees
Interest on Margin Loans:
Interest on Margin Loans ‘Interest on Margin Loans’ is the amount

that you need to pay as an ‘interest’ on
Sales Charges or Loads money you borrowed to buy securities.

Hidden Costs
• Hidden Costs
as follows:
Inactivity Fees
Sales Charges or Loads:
‘Sales Charges or Loads’ are the sales charges
Interest on Margin Loans that you need to pay to the broker for
helping you purchase specific securities such
Sales Charges or Loads as mutual funds.

Risks in Stocks
You should always bear in mind while investing stocks that all kinds of stocks are
susceptible to a number of risks. Moreover, the amount of risk may not be
equal in all stocks. The following are the major types of risks faced by stocks:
Interest Rate Risk

Inflation Risk
Business Risk
Financial Risk
Liquidity Risk
Political or Regulatory Risk
Exchange Rate Risk
Market Risk

Interest Rate Risk
Interest Rate Risk
Interest Rate Risk:
• ‘Interest Rate Risk’ is the risk

caused by the rise or fall in
interest rates which may
result in a decline or rise in
the stock’s value.
Inflation Risk
Inflation Risk
Inflation Risk:
• ‘Inflation Risk’ is a risk caused

due to a rise or fall in inflation
which will result in a decrease
or increase in the value of the
stock.
Business Risk
Business Risk
Business Risk:
• ‘Business Risk’ is risk that the

share price will fall due to
problems with the business.
Financial Risk
Financial Risk
Financial Risk:
• ‘Financial Risk’ is a risk is

caused due to any adverse
effect caused on the financial
performance of the firm due
to ways in which the firm
raises money.
Liquidity Risk
Liquidity Risk
Liquidity Risk:
• ‘Liquidity Risk’ is a risk that

investors will be unable to find
a buyer or seller for a stock
when they need to sell or buy
that particular stock.
Political or Regulatory Risk:
• ‘Political or Regulatory Risk’ is

a risk that unanticipated
changes in the tax or legal
environment will have an
adverse impact on a business.
Exchange Rate Risk
Exchange Rate Risk
Exchange Rate Risk:
• ‘Exchange Rate Risk’ is a risk

that changes in exchange rates
will impact the profitability of
firms that operate and
function on a global or
international level.
Market Risk
Market Risk
Market Risk:
• ‘Market Risk’ is risk of the

impact on price due to the
overall market movements.
Stock Market Sectors
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.
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 doing well.
You should always be aware of which sectors are not doing well.
Keep a track of the performance history of the various sectors

to determine the high performing sectors.
You should always be aware of what are the new rules and
regulations that have come up in different sectors of the
economy in your country.
Always keep abreast of the latest news and trends with
respect to the different sectors.
The given image shows the various sectors in an economy of any country:
Objectives
Stock Screening Criteria
It is very important that you should

screen each and every stock that you
intend to buy or sell before deciding on
a purchase or sale.
Screening the stock carefully on certain

crucial criteria will help you make
informed and wise decision to
safeguard your money against risk as
well as losses.
Stock Screening Criteria
The following are some of the crucial criteria that you should screen the stock
upon:
ket
o-
atio
s
(P/E) R s
52-Week
e
nd
Change
g
Price-t
ng
Cap
Price
Earnin
Mar
e
ide
Vol ly
Sector
ha
um
Dai
Div
Exc
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.
• Generally, a stock price of $6-$100

per share is considered affordable.
• A company may decide to split each
of its shares into a number of shares.
• So, a company may split its stock (x)
for 1, which results in the stock price
declining by the same multiple (x).
• You should bear in mind that a stock

split has no impact on firm value, but
it may give information on the firm’s
prospects.
Stock Split
• For Example:
o Assume you had 20 shares priced

at $100 each or 20 * $100 =
$2,000.
o If the stock split 2 for 1, you

would have 40 shares (2 * 20)
and the price would adjust to $50
each, or 100 / 2.
o Your value would be 40 * $50 =

$2,000, the same as before
Reverse Split
lit ’ is the o ppo s ite of a stock split.

A ‘Reverse Sp
ie d o ut by a co m pany if the
A reverse split is carr
pa ny ’s sto ck price is to o low.
com
ay do a re vers e split to reduce

So, a company m
f s ha res o uts tan d ing an d raises
the number o
the stock price.
Real Life Example
Let us now look at a

real life example to
understand stock
splitting.
Real Life Example
Peter Smith owns 300

shares of Globus Stock
selling at $600 per share.
At a recent Board Meeting,

Globus’ management has
decided to split the stock, in
order to make the stock
more affordable for the
average investor.
Real Life Example
Look at the questions given below and try answering them in

context of the changing situations at Globus.
How much was Peter’s investment before the split?
Consider that Globus’ management decides to split the

stock three-for-one, how many shares would Peter own
after the split?
What is the new price per share after the split?
How much would Peter’s investment be worth after the

three -for-one split?
Now, let’s take a look at the answers.
Real Life Example
Look at the questions given below and try answering them in

How much was Peter’s investment before the split?
context of the changing situations at Globus.
• How muchinvestment
Peter’s was Peter’sbefore
investment before
the split = 300the split?x
shares
$600 per share = $180,000.
Consider that Globus’ management decides to split the
Consider that Globus’ management
after the split? decides to split the
after
What is the new price per the split?
share after the split?
• How much would

Number Peter’s
of shares that investment
Peter wouldbe worth
have after
after thethe
three
three-for-one split -for-one
= 300 x 3 = split?
900 shares.
Now, let’s take a look at the answers.
Real Life Example
What
How is the
much wasnew priceinvestment
Peter’s per share after thethe
before 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 thex same
3 = 900
as shares.
his initial
investment amount.
Objectives
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.
The following are a few key types of analysis performed on stocks:
• Fundamental Analysis
• Cash Flow Analysis
• Technical Analysis

Fundamental 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.
Financial Analysts carry out thorough research on the background and

operations of a company, the state of the industry to which the company
belongs, the global industry and the global economy etc.
Fundamental 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.
Financial Analysts carry out thorough research on the background and

operations of a company, the state of the industry to which the company
belongs, the global industry and the global economy etc.
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.
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
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.
Therefore, the company’s value is determined in Technical Analysis by focusing

on psychological factors such as greed and fear and also economic factors.
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.
Therefore, the company’s value is determined in Technical Analysis by focusing

on psychological factors such as greed and fear and also economic factors.
Objectives
Ratios for Valuing Firms
There are a few key ratios that are used for valuing firms such as follows:
• Price-to-Earnings Ratio (PE)
• Price-to-Book Ratio (PB)
• Return on Equity (ROE)
• Dividend Payout Ratio

Price-to-Earnings Ratio (PE)
• The ‘Price-to-Earnings Ratio (PE)’

is defined as the market price of
the stock divided by the Earnings-
per-Share (EPS). This basically
means it is what you would pay
for $1 of earnings.
• The PE Ratios is one of the most

widely used ratios. It is chiefly
used to compare financial
performance of different
companies.
Price-to-Earnings Ratio (PE)
• The ‘Price-to-Earnings Ratio (PE)’

is defined as the market price of
the stock divided by the Earnings-
per-Share (EPS). This basically
means it is what you would pay
for $1 of earnings.
• The PE Ratios is one of the most

widely used ratios. It is chiefly
used to compare financial
performance of different
companies.
Price-to-Book Ratio (PB)
• The ‘Price to Book Ratio (PB)’ is

defined as the price of the
company’s stock divided by the
book value per share.
• The PB ratio basically indicates

the price you are paying for a $1
worth of assets as shown on the
balance sheet.
Price-to-Book Ratio (PB)
• The ‘Price to Book Ratio (PB)’ is

defined as the price of the
company’s stock divided by the
• The PB ratio basically indicates

the price you are paying for a $1
worth of assets as shown on the
balance sheet.
Return on Equity (ROE)
• The ‘Return on Equity (ROE)’ is

defined as a ratio of the
company’s Earnings-per-Share
(EPS) divided by the company’s
• Thus, ROS measures how well the

company is utilizing the assets of
the company to make money.
Return on Equity (ROE)
• The ‘Return on Equity (ROE)’ is

defined as a ratio of the
company’s Earnings-per-Share
(EPS) divided by the company’s
• Thus, ROS measures how well the

company is utilizing the assets of
the company to make money.
Dividend Payout Ratio
• The ‘Dividend Payout Ratio’ is

defined as the ratio of dividends
paid divided by the earnings of
the company.
• Also, it is also calculated as

dividends per share divided by
earnings per share.
• So, when this ratio is high, it

shows that a firm is returning to
the shareholders a large
percentage of company profits.
Dividend Payout Ratio
• The ‘Dividend Payout Ratio’ is

defined as the ratio of dividends
paid divided by the earnings of
the company.
• Also, it is also calculated as

dividends per share divided by
earnings per share.
MCQ
Q. Which of the following ratios is

often seen as a measure of future
earnings potential?
Click on the
radio button
to select the
correct
answer!
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e a
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Types of Orders
As an investor and stock trader, you can place the following three types of
orders on your stocks:
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.
MCQ
Q. You have invested in a stock. The

stock prices go up and have made a
profit for you. Which of the following
should you do to help you protect
your gains?
Click on the
radio button
to select the
correct
answer!
MCQ
GGooooYou
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whheenn tthhee m m a r k r stoocckk
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Types of Brokers
There are various types of brokers who offer various kinds of services for
buying and selling of stocks and various securities such as follows:
Let’s look at each in detail.

Full Service Brokers
• ‘Full Service Brokers’ are the

traditional brokers who are
present since the start of stock
exchanges across the world.
• Such full service stock brokers

develop and maintain personal
relationships with clients.
• Such brokers recommend to

their client the purchase and
sale of securities based upon
the client’s needs.
• ‘Full Service Brokers’ are the

traditional brokers who are
present since the start of stock
exchanges across the world.
• Such full service stock brokers

develop and maintain personal
relationships with clients.
• Such brokers recommend to

their client the purchase and
sale of securities based upon
the client’s needs.
Discount Brokers
Discount Brokers
• ‘Discount Brokers’ is a relatively

new kind of brokerage service
offering that has come up in the
brokerage business.
• The discount brokers through

the firm execute a customer’s
transaction on behalf of the
client.
• However, a discount broke does

not give any advice to the
customer regarding the
purchase or sale of the security.
Discount Brokers
Discount Brokers
• ‘Discount Brokers’ is a relatively

new kind of brokerage service
offering that has come up in the
brokerage business.
• The discount brokers through

the firm execute a customer’s
transaction on behalf of the
client.
• However, a discount broke does

not give any advice to the
customer regarding the
purchase or sale of the security.
Electronic Trading Platforms
• Another more modern and

latest form of trading can be
done electronically by
customers.
• In such electronic trading, the

customers can through the use
of computer on-line services
initiate their own buy and sell
orders.
• Another more modern and

latest form of trading can be
done electronically by
customers.
• In such electronic trading, the

customers can through the use
of computer on-line services
initiate their own buy and sell
orders.
Objectives
Criteria for Choosing a Broker
• As a new investor, it is important that you should start

investing with the help of an experienced broker.
• Hence, it is very crucial that you should choose the right

broker who can guide you to make stock trades in a wise
manner.
Criteria for Choosing a Broker
There are a few criteria that you should keep in mind before choosing a broker.
So, before you choose a broker, keep in mind the following considerations:
• The brokerage site should have a useful and informative website and trading
platform.
• The trading platform and interface should be able to allow you to trade during
high-traffic trading periods.
• The account should be properly insured and valid as per local and national
regulations.
• Check and find detailed information about the commission structure.
• Find out detailed information about all the types of services offered by the
brokerage firm.
• Find out if the brokerage firm offers any daily updates on the stock listings,
news, information and dedicated relationship manager as well.
• Check and find detailed information if the broker or brokerage firm is willing to
pay you interest on any un-invested cash in your account. Also, what is the
interest rate that the broker is willing to pay?
Objectives
Common Stock Investing Strategies
You can use a number of different strategies for investing in stocks.
The following are a few of the most common strategies for investing in stocks:
• Buy and Hold Strategy
• Dollar-cost Averaging Strategy
• Dividend Reinvestment Strategy

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.
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:
A ‘Dollar-cost Averaging Strategy’ is a strategy of purchasing a fixed dollar

amount of a security at regular intervals, such as every month.
Dollar-cost Averaging Strategy
Dollar-cost Averaging Strategy:
A ‘Dollar-cost Averaging Strategy’ is a strategy of purchasing a fixed dollar

amount of a security at regular intervals, such as every month.
Dividend Reinvestment Strategy
Dividend Reinvestment Strategy:
A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock

are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is
also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’.
Dividend Reinvestment Strategy
Dividend Reinvestment Strategy:
A ‘Dividend Reinvestment Strategy’ is a strategy where additional shares of stock

are purchased with the dividend payments. ‘Dividend Reinvestment Strategy’ is
also known as ‘Dividend Reinvestment Plans’ or ‘DRIPs’.
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Basics of Stocks and Investing

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Introduction to Stocks

Peter Looney works as an executive.

For a long time, Peter has felt that he

He has been saving in cash form for a long

However, he wants that he should use the

Peter has always thought of starting a

So, Peter starts asking advice from his

George, one of Peter’s colleagues, advices

Stocks are the capital raised by a

Mutual funds are an investment vehicle

This pooled money is then used for the

Money managers operate the mutual

George tells Peter that by investing in

Therefore, although stocks and mutual

George also adds a word of warning for

He tells Peter that the most important

Peter should always make sure that he

George assures Peter that if he takes

Let us learn about stocks and investing in

• Any business needs money or

• Thus, in order to raise this capital

• So, any individual who purchases

• It has been found over

• Also, stocks deliver strong

• They prove to be one of the

• You should include stocks in

• Dividends and capital gains

Common stock holders have a residual claim on a

Common stock holders have a residual claim on a

However, it differs from common stock because

However, it differs from common stock because

Large Cap stocks are

Let us look at each in detail.

o ‘Blue Chip Stock’ is a stock

o ‘Growth Stock’ is the stock

o Value Stocks are issued by

o ‘Income Stock’ is the stock

o ‘Cyclical Stock’ is stock

o ‘Defensive Stock’ is a stock

Q. Which of the following is a stock

re, ‘Beta ’ indicates the sensitivity

It is very important that you

Let us look at each in detail.

Let us look at each in detail.

• ‘Explicit Costs’ include the brokerage

Let us look at each in detail.

• ‘Explicit Costs’ include the brokerage

Let us look at each in detail.

• ‘Explicit Costs’ include custody or annual

Let us look at each in detail.

• ‘Explicit Costs’ include custody or annual

Let us look at each in detail.

Let us look at each in detail.

Dividends You may have to pay taxes on the gains you

Let us look at each in detail.

Dividends You may have to pay taxes on the gains that

Let us look at each in detail.

Dividends You may have to pay taxes on the gains that

Let us look at each in detail.

Minimum Balance Fees

Interest on Margin Loans

Sales Charges or Loads

Let us look at each in detail.