Introduction to Stocks [Part 1] (Presentation from May 31, 2008)

I know that I have been ranting and raving about the presentation that took place last week, but honestly, it was really that good! With that said, as mentioned before, to those who were unable to attend, I am posting this article to disseminate the information learned from the presentation. For those who do not know, our presenter was a member of Pamplona Finanace who works for an investment firm in Atlanta, GA. Due to the large amount of information that was covered during this presentation, this will be part of a series of articles containing the different parts presented.

What is the Stock Market

• The stock market is an actual market with people who buy and sell stock.
• Much like in an actual marketplace, if someone wants to buy something, they will typically pay whatever price that is being ask for the item that the buyer wants to purchase.
• Conversely, for the seller, they typically have a price at which the stock is set, but if the buyer is not willing to pay that, then the seller will most likely sell it for the price that is bid for the stock by the buyer.
• The simple economic principle of Supply and Demand are the driving factors behind the stock market. The more people want of something of a set volume, the higher the price will be. The less people want it (the more people trying to get rid of it), the lower the price will be.

Different types of investments

1. Fixed Income (Bonds)
2. Money Markets (cash) - Savings Accounts, Treasury Bills (backed by the government)
   
3. Home Ownership (Real Estate)
4. Company Equity (Stocks)

*Please Note, Money Markets and Home Ownerships will have their specifics omitted as stocks and bonds were the focus of the presentation*

Fixed Income

Safe but think of inverse relationship between bonds and stocks. People buy bonds when interest rates are high, and a guaranteed investment will give you a yield (the difference between a coupon payment, like a dividend, compared to the price paid for the bond) higher than what they can get in a savings account, money markets, e. You recoup your initial investment at the end of the maturity of the bond, and you had little risk if the credit rating of the company/person who sold you the bond is trustworthy of not defaulting on the loan. Also, keep in mind that when inflation goes up, normally interest rates are too low, too much liquidity is a cause/result, and there is a lot of dollars floating around so more money can be charged for items.

Bonds should be purchased when interest rates are typically high.

Company Equity (Stocks)

Stocks give you ownership in a company. As a stockholder, you are entitled to ownership to a companies earnings. Dividends are the only way to evaluate a true company’s worth. Capital gains are just an outcome of future potential to pay out dividends (or just keep re-investing in the company and growing).

Why Investing in stocks is the best in terms of accessibility, liquidity, risk/reward, etc.

1. Stocks are easy to research and understand with some effort. We can see the basics of the how the companies make money (either a product or a service that they provide).
2. Accessibility is normally high for large-cap stocks, and low for small-cap stocks, which presents opportunities to make large amounts of profits if you find a small company that you think will grow to be very big one day. As in a market place, if nobody knows about (or wants) an item, then it will probably not be valued as a lot in investors eyes. Given the person that takes the risk, the chance to make a good long term investment, as the company’s works come into fruition increases dramatically.
   
3. On the same note, small names that nobody covers can lead to big risks. Yet the golden rule is that more risk equals more reward, less risk equals less reward (normally this holds true, but you can always find an exception).

How to value stocks, what makes them go up/down, attractive etc.

1. Valuation is a unique craft. Do not waste time trying to perfect it. Most come up wrong when trying to make predictions, and when you’re right, the market may react in the total opposite of how it should react.
2. To baseline principals of the stock market:
1. Stocks go up because people are buying more.
   
2. Stocks go down because people are trying to sell.
3. The Institutional Investor comes into play at this point. They, along with the other millions of shareholders, buy/sell/cover/short stocks all day, everyday. They are responsible for the large moves in the markets. Individual investors have little say in the price of a stock day-to-day. Its best to think long term as an investor, not getting caught up in trends, but thinking fundamentals of a company (not so much valuations, but understanding top-line, how the company is controlling margins, costs, and how they generate bottom-line, the only thing that the shareholder is entitled to as an investor)

As for now, this is the first post of a multi-article series covering the information that was presented at our last financial meeting. As usual, if you have any questions, please leave a comment or email me directly. Please stay tuned as more posts covering the Introduction to Stocks will be following shortly. Stay Disciplined!