Overview of investing and stocks

What is a stock

A stock represents ownership in a company and gives investors a claim on future profits and growth

What is the role of stocks in portfolios

Stocks are most effective as buy-and hold investments

Return = Divident YIeld + Earnings Growth + Valuation Change

Dividend Yield

Earnings Growth

Valuation Change

Compounding

Why are equities most effective as long-term investments

Market Timing

Why is market timinig difficult

What is often the most valuable thing an advisor can do during market stress?

Growth vs Value Stocks

Growth Stocks

Value Stocks

Large Cap vs Small Cap stocks

Active investing

passive investing

Efficient Market Hypothesis (EMH)

Why is EMH important

ETFs

Mutual Funds

SMAs

two common ways to sort and pick stocks

fundamental analysis

technical analysis

Fundamental analysis

A method of evaluating stocks by examining a company's business, financial performance, industry conditions, and broader economic factors to identify stocks with strong growth potential at a good price.

technical analysis

A method of evaluating stocks by studying price and volume patterns on charts to predict future price movements.

which type of analysis is right for you

Both can provide valuable information. Investors may use fundamental analysis to choose stocks and technical analysis to identify entry and exit points.

growth investor’s strategy

Focus on companies with strong future growth potential, often emphasizing revenue growth, earnings growth, and innovative products.

value investor’s strategy

Focus on companies whose stock prices appear low relative to their revenues, earnings, assets, or other fundamental measures.

value stocks tend to have

• elatively lower P/E ratios and pay above-average dividends, but they can trade at a price that is very low or below their book value (total tangible assets minus total liabilities).

growth screening

Using criteria such as strong historical revenue growth, earnings growth, and EPS growth to identify potential growth stocks.

value screening

Using criteria such as low P/E ratios, above-average dividend yields, and low price-to-book ratios to identify potentially undervalued stocks.

selecting stocks using technical signals: 3 steps

1. Screening stocks

2. Scanning charts

3. Setting up the trade

screening stocks

price and market capitaliaztion

sectors and indusgtries

momentum

• support

• resistance

• simple moving average

screening stocks: price and market capitalization

It means filtering stocks based on their share price and company size to narrow the list of potential investments.

What is market capitalization (market cap)?

Market Cap = Stock Price × Number of Shares Outstanding

Think of market cap as the size of the company.

ex:

• Company A

  • Stock price = $1,000

  • Only 1 million shares exist

  • Market cap = $1 billion

• Company B

  • Stock price = $50

  • 100 million shares exist

  • Market cap = $5 billion

• —> Company B is bigger

What does market cap tell us?

Small market cap = smaller company

• risk is higher

  • may grow very fast

  • may also fail

Large market cap = larger company

• risk is lower

  • usually more stable

  • harder to double overnight

• cons

  • slower growth

screening stocks: sectors and industries

It means filtering stocks based on the type of business they operate in so you can focus on stronger areas of the market.

What is the difference between a sector and an industry?

A sector is a broad category of businesses, while an industry is a more specific group within that sector.

ex:

• Technology = Sector

• Semiconductors = Industry

screening stocks: momentum

"Stocks that are moving strongly in one direction tend to keep moving that way for a while."

momentum

• support

• resistance

• simple moving average

screening stocks: momentum support

SUPPORT = FLOOR

A price level where buyers usually show up.

ex:

• Every time Nvidia falls to $100:

  Buyers rush in.

  Price bounces.

  Then:

  $100 becomes support.

why do traders care

• If a stock is bouncing off support:

  It may be a buying opportunity.

  Because buyers have defended that level before.

screening stocks: momentum resistance

RESISTANCE = CEILING

A price level where sellers tend to appear.

ex:

• Every time Nvidia reaches $150:

  Investors sell.

  Price falls.

  Then:

  $150 becomes resistance.

why do traders care

• If a stock breaks through resistance:

  It can be a bullish sign.

  Because buyers finally overpowered sellers.

screening stocks: momentum simple moving average (SMA)

The average closing price of a stock over a specific period used to identify trends.

What does "Going Long" mean?

Going long = buying a stock because you think it will go up.

ex:

• Buy:

  • Nvidia at $100

  Sell:

  • Nvidia at $150

  Profit:

  • $50/share

  This is what most people mean when they say "buying a stock."

What do momentum traders look for when going long?

Stock above its 20-day moving average

• Recent prices are stronger than average.

20-day moving average above 50-day moving average

• The short-term trend is stronger than the longer-term trend.

  That's usually bullish.

High volume

• Lots of people buying.

  Momentum traders like seeing strong moves supported by strong volume.

pros and cons of going long

Pros of Going Long

• Maximum loss = what you invested

• Easier to understand

• Historically the market trends upward

Cons of Going Long

• Stock can fall

• Trend can reverse

What is Going Short?

you make money if the stock falls

ex:

• Stock:

  • Currently $100

  You think it'll fall.

  You short it at $100.

  Later:

  • Stock drops to $70

  You buy it back.

  Profit:

  • $30/share

What do short sellers look for?

Usually:

• Weak companies

• Downward trends

• Negative news

• Falling momentum

Stock below its 20-day moving average

and

20-day moving average below 50-day moving average

These suggest a downward trend.

Pros and cons of going short

pros

• Can profit when markets fall

cons

• This is HUGE:

  Losses can be unlimited

  If you buy at $100:

  Worst case:

  • Stock goes to $0

  Loss = $100

  If you short at $100:

  Stock could rise to:

  • $200

  • $500

  • $1000

  Your losses keep growing.

What is Trading Volume and why is it important ?

Volume = how many shares traded.

tells you how much convicition investors have

scanning charts

P/E Ratio

EPS

Alpha

Beta

Dollar-cost averaging

Buyback

Stock split

Bull market

Bear market

Cyclical stock

Counter-cyclical stock

capital gain

A capital gain is the profit you make when you sell an investment for more than you bought it for.

“realizing your capital gains”

It means selling an investment for a profit and officially turning the increase in value into an actual gain.

Example: If your stock rises from $50 to $70, you have appreciation. Once you sell it, you realize the $20 capital gain.

appreciation

When an investment gains in value between when you buy it and you sell it

How a share of stock can appreciate

when a company creates a hot new product that boosts sales, increases the company’s revenues and raises the stock’s value on the market

ex:

• new product success

• strong earnings report

• expansion into new markets

• interest rate cuts

• AI boom

How a corporate bond could appreciate

when it pays 5% annual interest and the same company issues new bonds that only offer 4% interest, making yours more desirable….

ex:

• interest rates fall

• company’s credit improves

• economic uncertainty

How a commodity could appreciate

mostly driven by supply and demand

ex: gold might appreciate because the U.S. Dollar loses value, driving up demand for gold.

ex:

• supply shortage

• increased demand

• inflation

• natural disaster

• technology trend

  • electric vehicles need lithium

  • data centers being built

How could a property appreciate

ex: A home or condo might appreciate in value because you renovated the property, or because the neighborhood became more desirable for young families with kids.

What Should You Look For In A Stock Competition?

1. Could revenues grow?

Examples:

• New product

• New customers

• New market

2. Could profits grow?

Examples:

• Lower costs

• Higher prices

• Better efficiency

3. Is there a trend helping them?

Examples:

• AI

• Clean energy

• Cybersecurity

• Weight-loss drugs

4. What could surprise investors?

Stocks often move the most when reality is better than expected.

Example:

Expected profit = $1 billion

Actual profit = $1.5 billion

Stock may jump.

capital gain vs appreciation

• Appreciation = value has increased but you haven't sold yet.

• Capital gain = profit realized after selling.

dividends

A payment a company makes to shareholders from its profits.

what does it mean that many stocks pay dividends

ex: Instead of buying and selling stocks, dividend investors hold stocks and profit from the dividend income.

How do dividend investors make money?

By holding stocks that pay dividends and collecting the income over time.

The basic types of investments (the 4 main asset classes)

stocks

bonds

commodities

real estate

stocks

Ownership in companies

benefits

risk: high

return potential: high

Why Do Stock Prices Go Up?

Stock prices move based on expectations.

Not just current performance.

3 main types of stock: common stock

A share of ownership in a company that can be bought as whole or fractional shares.

benefits

• Potential for higher long-term returns, voting rights, liquidity

drawbacks

• Dividends are not guaranteed, more volatility, greatest risk if the company goes bankrupt.

3 main types of stock: preferred stock

A type of stock that combines features of stocks and bonds.

Benefits: Higher and typically fixed dividends, less volatility, greater claim on assets than common stockholders.

Drawbacks: Lower growth potential, usually no voting rights, less liquid.

3 main types of stock: American Depositary Receipts (ADRs)

Receipts for shares of foreign companies issued by U.S. banks and traded on U.S. markets in U.S. dollars.

Benefits: Easier access to foreign companies and often greater liquidity.

Drawbacks: Currency risk and exposure to foreign political and economic events.

bonds

loans to companies/governments

risk: low-medium

return potential: lower

commodiities

gold, oil, wheat, etc

benefits:

risk: high

return potential: variable

real estate

property ownership

benefits

risk: medium

return potential: medium-high

there are funds like mutual funds and exchange traded funds (ETFs) that buy different combinations of these assets. When you but these funds, you’re investing hundreds or thousands of individual assets???

how to think about risk and investing

Higher risk investments may provide faster growth but also have a greater chance of losing money. Lower risk investments are generally safer but may grow more slowly.

risk tolerance

Risk tolerance is the amount of risk an investor is willing and able to take when investing.

risk and diversification

Q: Why is diversification important?

A: It helps reduce risk because losses in one investment may be offset by gains in another.

what is diversification

Diversification is owning a variety of different investments rather than putting all your money into one investment.

What makes a well-rounded investment portfolio?

Having the right level of diversification across different investments, companies, and asset classes.

How does diversification help a portfolio grow over time?

It helps keep the portfolio growing more steadily by buffering losses in one area with gains in another.

how to create a smoother investment experience

single securities create the potential for high risk and high reward —> diversification smooths out some of the bumps

the benefits of asset class diversification

bonds as a buffer: fixed income + stocks

the resilience of capital markets

a disciplined investor looks beyond the concerns of today to the long-term growth potential of the markets

difference between stockholders and bondholders

stockholders are equity owners in the business

bondholders are lenders to a company

• both expect an adequate return for the terms and risks of their investment

10 market rules for investing to remember: 1. Markets tend to return to the mean over time

Things don't stay extremely high or extremely low forever.

A: Prices that move too far above or below their normal levels eventually tend to move back toward their historical average.

ex:

A stock normally trades around $100.

Suddenly everyone gets excited and pushes it to $250.

Farrell says: Eventually it tends to move back closer to normal.

10 market rules for investing to remember: 2. Excesses in one direction will lead to an opposite excess in the other direction

Markets don't just return to normal.

They often overshoot.

Extreme market moves are often followed by extreme moves in the opposite direction.

ex:

Stock:

• Normal value = $100

• Hype pushes it to $250

• Crash begins

Instead of stopping at $100, fear may push it down to $70.

10 market rules for investing to remember: 3. There are no new eras- excesses are never permanent

Market excesses are temporary, and claims that traditional rules no longer apply are usually wrong.

Examples

Past:

• Dot-com stocks

• Housing bubble

• Meme stocks

• Crypto manias

People always find reasons why prices can only go up.

Eventually reality returns.

10 market rules for investing to remember: 4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

What does Rule 4 teach about rapidly rising markets?

A: Extremely overvalued markets usually correct through price declines rather than simply moving sideways.

10 market rules for investing to remember: 5. The public buys the most at the top and the least at the bottom

People often buy when prices are already high.

And sell when prices are already low.

Example

Market up 50%.

Everyone starts talking about stocks.

People rush in.

Market crashes.

People panic and sell.

They did exactly the opposite of what they should have done.

10 market rules for investing to remember: 6. Fear and greed are stronger than long-term resolve

Emotions often defeat logic.

They can cause investors to make emotional decisions instead of following their long-term strategy.

10 market rules for investing to remember: 7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Markets are generally stronger when gains are spread across many stocks rather than concentrated in a few.