Key Takeaways

1. Key terms to know before you start investing include dividends, Earnings per share, Share Price, ticker symbol,  and that Stocks, shares, and equities mean the same thing.
2.  There are no magic formulas for investing success. There’s little standing between you and successful investing, except a little research and a solid understanding of the basics. 
3. The back and forth between buyers and sellers is what drives the stock price
4. Every investor has a different opinion on a stock’s worth but a common way is to estimate the company’s future profits, and then decide how much you’re willing to pay for those profits. 
5. There are many stock exchanges across the world. The main stock exchanges in the U.S. are: The New York Stock Exchange and The Nasdaq
6. Often lots of stocks move up and down together because of things that happen in the economy like Economic growth, Interest rates, and tax rates go up down, Strong Inflation or deflation, Economic growth in other countries, and shocking events. 
7. A bull market is when stocks are generally rising. A bear market is, therefore, a period when stocks are generally falling
8. IPO stands for Initial Public Offering. This is when a company’s shares start trading on a stock exchange and when average people can start investing in the company. Also referred to as “going public”.

    

   Key Terms

   Before I start talking about Stocks let’s go over some must-know key terms that you’ll probably hear me throwing around throughout the episode. Other terms you hear and might not know I’ll define them. These are just the key ones otherwise this whole episode would be me going over the numerous terms that are used.

   Dividends: It’s what a company pays out, periodically, to shareholders. It’s important to note that not all companies pay dividends. The younger companies often prefer to hold on to their cash so they can keep growing their business)

   Earnings Per Share: You might remember me define this in the previous episode. It’s an estimate of what portion of profits, in theory, each shareholder would be entitled to if this was actually the amount they got paid but it isn’t. The formula used to calculate this is the companies total profits for a given period, divided by the number of shares. 

   Share price: The price the stock is currently trading for in the market.

   Stocks, Shares, and equities: All mean the same thing. You can research deeper on how their literal definitions are different but it doesn’t really matter because they are used interchangeably so they are the same thing.

   Ticker symbol: Is a short string of letters that is used to identify a given stock. For example, if you wanted to trade Facebook stock, you would look up its ticker, FB, with your broker. Or if you wanted to trade Tesla stock, you would look up its ticker, TSLA.

   Why Invest in Stocks

   Let’s start off with why people invest in stocks

   • For starters, they hope to earn a better return on their money than they could with a safer alternative, like a savings account.
   • The way investors earn these returns on their stocks is either through 
     • Price gains- so If you buy a stock when the share price is $100, it rises to $150, and then you sell it, then you’ve made a 50% profit.
     • Dividends- is another way. As I’ve mentioned before some companies pay out a portion of profits to their shareholders in the form of cash dividends. So if you own a stock with the price of $100 and it pays out $2 four times a year, then you’re earning about 8% per year by just owning that share for one year.  
   • Now listen carefully because this is a very important reason why you should invest in stocks. Despite what you may have heard from infomercials and unsolicited emails, there are no magic formulas for investing success. The rich and famous don’t have any well-guarded secrets up their sleeves, and there are no secret passwords or handshakes. In truth, there’s little standing between you and successful investing, except a little research and a solid understanding of the basics.
   • You don’t have to be a genius believe me even I’ve made what I consider a good amount of profits from stocks. Yea sure, a seasoned investor might have an advantage over you as you’re getting started, but you don’t have to be a math whiz, rich, or another Warren Buffett to invest in the stock market. Compared to investing in a franchise or creating your own business from the ground up, the requirements for investing in the stock market are modest.
   • Just research the company you’re considering investing in, look over their annual reports which are public, regularly set aside some money to invest, and do a bit of math. 

    

    

   Why Stock Prices Change

   Obviously, stock prices are always changing. Why is this? Well if we think of the stock market as one giant auction that never ends, Buyers and sellers put their bids for what they’re willing to pay or receive for the shares of a public company. This back and forth between buyers and sellers is what drives the stock price.  If a group of investors thinks the Facebook stock is actually worth $400, then they’ll prob be willing to buy it when it’s $300. And If another group of investors thinks the stock is only worth $250, then they’ll probably be willing to sell it at $300.

   How do investors come up with their opinions of what the stock is worth? 

   Well, every investor has a different opinion but a common way is to estimate the company’s future profits, and then decide how much you’re willing to pay for those profits. Also depending on the news about the company, it could either lower the price if it’s something negative like the company is being sued for something significant, on the other side it could also increase a stocks price if the news is positive like the company invents some new tech that will change everyone’s life. Or the news could have no effect. It really depends on the news and other factors.

    

    

   The Stock Market

   You hear about the stock market all the time. It’s where stocks are bought and sold after all. A place where buyers and sellers come together to trade shares. Most (though not all) of the world’s stock trading happens through stock exchanges. You should also know that regular trading hours for the U.S. Stock market are from 9:30 am to 4 pm Eastern time.

   How Exchanges Work

   Stock exchanges are places where stocks are traded.  While in the past these would have always been real locations where people met and made transactions, today a large portion of the trades made in stock exchanges are done electronically.

   There are many stock exchanges across the world. The main stock exchanges in the U.S. are:

   • The New York Stock Exchange (NYSE)- Which has a physical trading floor, but also handles electronic orders.
   • The Nasdaq- is an all-electronic exchange

   Investors can only trade stocks that are “listed” on a given exchange with that exchange. But most investors like myself don’t trade directly with the exchange. Instead, as I’ve covered before you’d set up an account with a broker, like Charles Schwab, Robinhood, or Vanguard which handles the actual mechanics of trading for you.

   Their main roles are to:

   • Match buyers and sellers
   • Keep trade traffic flowing
   • Track and report data on trades, so investors can see what the market is doing

    

    

    

    

   What Makes the Stock Market Move

   The Stock market as a whole is really the sum of all individual stocks. When an individual stock moves the market as a whole moves a tiny bit. Often lots of stocks move up and down together because of things that happen in the economy like Economic growth, Interest rates, and tax rates go up down, Strong Inflation or deflation, Economic growth in other countries, and shocking events. 

   When major or shocking events happen like the pandemic you might hear people talk about Index funds these funds track a particular benchmark index. Like the  S&P 500 which follows 500 of the largest stocks in the market which include apple, Microsoft, Amazon, Facebook you get the idea. Or the Dow Jones Industrial Average DJIA which includes 30 of the largest industrial stocks, or the NASDAQ 100 which follows 100 of the largest technology stocks.  So as you can tell these index funds are made up of a bunch of the largest companies. The S&P 500 represents approximately 80% of the total value of the U.S. Stock market.  It’s for this reason why they are closely followed to see how the market as a whole is performing.  

   Bull or Bear Market

   You might hear people in the news or investors say it’s a bull or bear market. They are referring to how the Stock market is doing.   

   Bull Market

   A bull market is when stocks are generally rising. This could be to the economy expanding, or unemployment is falling or stable and on average last 9 years. You might even hear that an expert is “bullish” on the market, or “bullish” on some particular stock. It just means that person thinks the market, or a particular stock, is like to go up.  

   Bear Market

   A bear market is, therefore, a period when stocks are generally falling or more specifically, a time when major stock indexes have fallen at least 20% Less than 20% would be referred to as a “correction”. Bear markets are usually due to the economy contracting, unemployment rising, and on avg last 1 year. Experts can also be “bearish” on a particular stock or asset class.

    

    

   What is an IPO?

   Lastly, you might hear the term IPO thrown around. IPO stands for Initial Public Offering. This is when a company’s shares start trading on a stock exchange and when average people can start investing in the company. Also referred to as “going public”. 

   The way this works is

   A company starts out as a private company, so it doesn’t have shares that trade. The founders or employees usually own most of the company

   The company then might decide to go public. So it hires an investment bank to help it figure out the details. Like the number of shares to sell and what price.

   After which the company files an S-1 Statement with regulators. This form is essentially a heads up that the company plans to go public and includes details on how much money will be raised, plus info about the company’s finances

   The investment bank then buys up the chunk of shares that are going to be offered

   On IPO day the shares start trading on whatever exchange they are listed on, and the investment bank sells its shares to the public.

   
   Companies usually do this to raise money, which they might need in order to expand their business or for other reasons like raising awareness and letting insiders cash out.

   In the future companies can even sell more shares which is referred to as “secondary offerings”

    

    

    

   Take Your Time Investing in the Market

   It’s true that the earlier you start investing the more you’re going to benefit but there’s no need to rush out right now and invest in the stock market. First, do your homework, be realistic about your goals and expectations, and figure out how to use the information that’s available to you to your best advantage.

   Finance Facts

   1. When the stock market is overvalued it is considered to be a ‘bubble’, and when the bubble bursts usually people lose a lot of money.
   2. September is usually the poorest performing month in the stock market, often blamed on the vacations that investors take in the summer months that decrease trading.
   3.  The most expensive stock in the world is Warren Buffet’s, Berkshire Hathaway.
   4. Since 1903, every day at the New York Stock Exchange starts with the ringing of a bell at 9:30 a.m.