Stock Market Basics

When a company wants to raise money, it can sell shares of its stock to the public. This is called an initial public offering (IPO). Once the stock is listed on a stock exchange, it can be bought and sold by investors. The price of a stock is determined by supply and demand. If more people want to buy a stock than sell it, the price will go up. If more people want to sell a stock than buy it, the price will go down.

For example, let's say that there are 100 shares of stock in a company and 10 people want to buy the stock. If each person is willing to pay $10 for a share, then the total value of the company is $1,000. However, if only 5 people are willing to buy the stock, then the total value of the company is only $500.

To buy or sell stocks, you need to open a brokerage account. A brokerage account is a type of account that allows you to buy and sell securities, such as stocks, bonds, and mutual funds. Once you have opened a brokerage account, you can start buying and selling stocks.

To buy a stock, you simply place an order with your brokerage firm. The order will specify the number of shares you want to buy, the price you are willing to pay, and the type of order (market order, limit order, etc.).

To sell a stock, you simply place an order with your brokerage firm. The order will specify the number of shares you want to sell, the price you are willing to sell for, and the type of order (market order, limit order, etc.).

There are many different types of stocks, each with its own unique characteristics. Some of the most common types of stocks include:

• Common stock: Common stock is the most basic type of stock. It gives shareholders the right to vote on company matters and to receive dividends, if any, that are declared by the board of directors.
• Preferred stock: Preferred stock has a higher claim on a company's assets and earnings than common stock. Preferred shareholders also receive dividends before common shareholders.
• Convertible stock: Convertible stock is a type of stock that can be converted into another type of security, such as a bond or a share of common stock.
• Warrants: Warrants are a type of security that gives the holder the right to buy a certain number of shares of stock at a predetermined price.

When you are considering buying a stock, it is important to analyze the company and its financial performance. You should also look at the stock's price history and its valuation relative to other stocks in the same industry.

To analyze a company, you should look at its financial statements, such as its balance sheet, income statement, and cash flow statement. You should also look at the company's management team, its products or services, and its competitive landscape.

To analyze a stock's price history, you should look at its price chart. You should also look at the stock's valuation ratios, such as its price-to-earnings ratio (P/E ratio) and its price-to-book ratio (P/B ratio).

When you invest in stocks, you are taking on risk. The price of a stock can go up or down, and you could lose money if you sell the stock for less than you paid for it. To manage your risk, you should diversify your portfolio and invest in a variety of stocks. You should also consider using stop-loss orders and limit orders to protect your profits.

Diversification is the practice of investing in a variety of assets, such as stocks, bonds, and real estate. By diversifying your portfolio, you can reduce your risk if one asset class performs poorly.

Stop-loss orders are orders that automatically sell a stock if it falls below a certain price. Limit orders are orders that automatically buy a stock if it rises above a certain price. By using stop-loss orders and limit orders, you can protect your profits and limit your losses.

The price you pay for a stock depends on the company's perceived value and future earnings potential. But how do you determine whether a stock's price is fair or if it's overpriced or underpriced? This is where valuation metrics like the Price to Earnings (P/E) ratio come in.

The P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings. Let's take an example of Company A with a share price of $50 and earnings per share (EPS) of $5. The P/E ratio in this case would be $50/$5 = 10.

This means investors are willing to pay $10 for every dollar of earnings. A high P/E ratio could indicate that a company's stock is over-valued, or else that investors are expecting high growth rates in the future.

While the P/E ratio gives you an idea of a stock's price relative to its earnings, it doesn't tell you about the company's future growth prospects. This is where the Price/Earnings to Growth (PEG) ratio comes into play.

The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth in the future. It is calculated by taking the P/E ratio and dividing it by the projected growth in earnings.

Let's consider an example with Company B. Company B has a P/E ratio of 20 and expected earnings growth of 15% per year. The PEG ratio would be 20/15 = 1.33. A PEG ratio of 1 indicates the company is fairly valued, less than 1 undervalued, and more than 1 overvalued. In this case, Company B might be considered slightly overvalued.

The Pack ratio is a refinement of the PEG ratio. It further refines valuation by considering the quality of earnings, the strength of the balance sheet, and the sustainability of the business model, among other factors.

The Pack ratio is calculated as the P/E ratio divided by the projected earnings growth rate (PEG) and then adjusted for quality, balance sheet strength, and sustainability. This gives a more comprehensive picture of a company's valuation. Ideally, the Pack ratio should be 1 or below. If the Pack ratio is more than 1, it suggests that the company might be overvalued.

Whale investing is a hybrid strategy that combines the principles of value investing and momentum investing. It seeks to identify companies that are undervalued but are beginning to see an uptrend in their share price. The strategy seeks to capitalize on the upward momentum, expecting other investors to recognize the value and push the price up further.

For instance, let's take a hypothetical company, Company C. Let's say it's been overlooked by investors, and its stock is undervalued (low P/E ratio), but recently, it reported stronger than expected earnings, leading to increased investor interest and an upward price momentum. A Whale investor would look for such opportunities to buy into the stock, expecting the positive momentum to continue.

Many companies distribute a portion of their profits to their shareholders in the form of dividends. Companies that pay dividends tend to be mature, with relatively stable profits. They're often less volatile than companies that don't pay dividends.

Let's look at Pfizer, for example. Pfizer has a consistent history of paying dividends. As of Q1 2023, its dividend yield (annual dividends per share divided by the share price) was about 3.6%. If you had 100 shares of Pfizer, you would receive about $144 in dividends annually (assuming the yield and your share quantity remains constant).

Remember, investing for dividends is a long-term strategy. While dividends can provide a steady income stream, it's also important to choose companies that have the potential for capital appreciation.

Stock market indices provide a snapshot of a country's overall stock market performance. They are composed of a selection of stocks that represent a broader market or a segment of it. The Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq Composite are three of the most widely followed indices in the U.S.

Let's use the S&P 500 as an example. This index includes 500 of the largest U.S. companies by market capitalization, meaning it represents a broad swath of the U.S. economy. If the S&P 500 is rising, it generally indicates that the U.S. stock market (and by extension, the U.S. economy) is doing well.

It's important to understand that while stock market indices can fluctuate dramatically in the short term, they have historically increased in value over the long term. For instance, from 1990 to 2020, the S&P 500 has grown by over 700%, despite recessions and market crashes during that period.

Analyzing the performance of these indices over a period of time can provide valuable insight into the health of the market and the overall economy. However, remember that past performance is not indicative of future results.

This wraps up the first lesson. Remember, the key to successful investing is not just about picking the right stocks but also about timing your investments correctly. 

Stock Market Basics

When you buy stock, you're buying the right to an ownership of a business and its profits. You can buy any number of shares, which are divided into parts of the company. Shareholders get voting rights and profits.

Shares Outstanding and Free Float

Shares outstanding is the total number of shares a company has, while free float is the actual number of shares available for purchase in the market.

Stock Market Overview

The stock market is a way to buy shares in successful companies without starting a business. Warren Buffett is an example of someone who made his fortune this way. For every buyer, there must be a seller.

Bulls and Bears: Buyers think stock prices will go up, sellers think they will go down. Transactions occur when opinions differ.

Stock Price Direction

Share prices are driven by demand and supply, buyers and sellers. In the long term, share prices are determined by company's intrinsic value. In the short term, stock markets are irrational and driven by fear and greed.

Understanding Technical Analysis

Driven by news events and sentiment, technical analysis studies the emotions that cause stock prices to rise and fall in the short term.

Fundamental and Technical Analysis

Analysis of stock prices based on company's intrinsic value and current market sentiment to maximize profits.

Fundamental vs. Technical Analysis

Investing based on fundamental analysis involves looking at the intrinsic value of a stock. Technical analysis looks at the emotions that drive the stock by reading the price trend or movement.

Fundamentals vs. Technicals

Comparing stock market and dating, technicals are important for short-term traders and one-night stands, while fundamentals are important for long-term investors.

Whale Investing

Combining the best of fundamentals and technicals to get superior results from other investors. Analyzing a company's intrinsic value and stock price to determine if it is undervalued or overvalued.

Valuing a Business
Most private businesses tend to be valued at three to five times their annual earnings, based on the Price-to-Earnings ratio. This is because investors consider the breakeven period when investing.

Stock Exchange Listing
Companies list on stock exchanges to increase their value from 3-5 times to 15-25 times. Examples of companies and their PE ratios are given.

PEG Ratio
The PEG ratio is used to compare a company's PE ratio to its projected earnings growth rate in order to determine if it is fairly valued. Exceptions like Amazon can have a PE ratio of 181 times, but this does not mean it is too high without comparing it to the company's projected earnings growth rate.

PE Ratio and Fair Value
The PE ratio should be equal to the earnings growth rate for a company to be fairly valued. A PE ratio above one indicates the stock is overvalued, while a ratio below one means it is undervalued. Investing in companies with a PE ratio below one can be beneficial, but not always. A PE ratio between one and one point six is still investable, but above one point six is too expensive.

Stock Valuation

You can't tell which stock is more expensive by looking at share price or PE ratio. Intrinsic value and earnings growth rate must be considered to determine if a stock is expensive or cheap.

Adobe and TD Ameritrade Analysis

Comparing the PE ratio and earnings growth rate of Adobe and TD Ameritrade to determine if they are expensive or cheap. Adobe is expensive with a PE ratio of two point one eight, while TD Ameritrade is cheap with a PE ratio of 0.4.

Fundamental Analysis of TD Ameritrade

TD Ameritrade is undervalued based on fundamental analysis, but on a downtrend it could get even cheaper. It should be put on a watch list until the down trend ends and the stock begins to consolidate or reverse into an uptrend.

Greater Fools Trade
Buying a stock at a high price and hoping a bigger fool will pay an even higher price. Short term trading is possible, but not recommended for long term investing.

Valuation and Trend Summary

The sweet spot is when a stock is undervalued and on an uptrend. To buy the stock is called going long. If the stock is undervalued but on a downtrend, wait for the trend to end and consolidate. Lastly, if the stock is overvalued and on a downtrend, it's best to stay in cash.

Capital Appreciation
Buying stock of a company over time as the price increases in value, your wealth in the stock increases.

Stock Market Investing
Investing in stocks can be done through collecting dividends or capital gains. Certain companies, such as Amazon, Facebook, and Netflix, are growth companies and will not pay dividends. Other companies, such as McDonald's, Pfizer, and Procter & Gamble, are mature companies that do pay dividends. The US market is the largest in the world and is comprised of 30 stock exchanges.

Stock Market Performance

Measured by stock indices, the performance of a stock market is represented by a basket of stocks used to represent a section of the market. Examples include the Dow Jones Industrials Average Index, S&P 500 Index, and Nasdaq Composite Index.

Stock Market Performance
Average of thirty representatives of US stock market (Dow Jones) has increased over 2200% in value in 30 years, yielding 11.84% return. S&P 500 has grown 7.48% with 10.98% return. Hong Kong and London stock markets have grown 10.75% and 8.16%, respectively.

FTSE One Hundred Performance
The FTSE one hundred has compounded at 8.12% annually with dividends included over the last 30 years. The US market has been the best performer in the long run