Skip to main content

The Neatest Little Guide to Stock Market Investing

Book by Jason Kelly

Speak the Language of Stocks​

How Stocks Trade​

  • When stocks are bought and sold, it's called trading
  • Every company has a ticker symbol, e.g. Google (GOOG)
  • A $1 move in stock price is called a point
  • A block of 100 shares is called a round lot
  • Preferred stock: set dividend that doesn't fluctuate based on how well the company is performing; receive dividends before common stockholders; paid first if the company fails and is liquidated
  • Common stock: dividend fluctuates; entitles to voting rights

How You Make Money Owning Stocks​

  1. Capital Appreciation: buy low sell high
  2. Dividends
    1. On a declaration date in each quarter, the company decides what the dividend payout will be
    2. To receive a dividend, you must own the stock by the ex-dividend date, which is four business days before the company looks at the list of shareholders to see who gets the dividend
    3. The day the company actually looks at the list of shareholders is called the record date
    4. The company decides how much the dividend will be per share, multiplies the number of shares you own by the dividend, and deposits the total amount into your brokerage account
    5. Most publications report a company's annual dividend, not the quarterly
  3. Total Return: captial appreciation + dividend
  4. Stock Splits
    1. Occurs when a company increases the number of its stock shares outstanding without increasing shareholders' equity
    2. A common stock split is 2-for-1
    3. Companies split their stock to make it affordable to more investors
    4. A company usually won't split its stock unless it's optimistic about the future
    5. Lower prices tend to move quicker than higher prices

Why and How a Company Sells Stock​

  • Selling stock is a great way to raise money
  • Going public raises even more money
  • Venture capitalist (VC): provides capital to startups or small businesses with high growth potential in exchange for equity

Stock Exchange​

  1. New York Stock Exchange (NYSE)
    1. Auction market: the highest bid for a stock matches the lowest asking price
    2. Focus: well-established companies, e.g. IBM, Ford, McDonald's
  2. National Association of Security Dealers Automated Quotations (NASDAQ)
    1. Dealer market: buying and selling happens in split seconds electronically through dealers (market makers)
    2. Focus: high tech companies, e.g. Apple, Tesla, Amazon
  3. NYSE American
    1. Focus: emerging companies that want simplified market access

Investment Bank​

  • Unlike commercial banks, it focuses on raising capital, providing advisory services, mergers and acquisitions (M&A), etc.
  • e.g. Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Wells Fargo
  • Initial Public Offering (IPO): a company's first offering of stock to the public
  • Primary market: consists of the banker's preferred private accounts
  • Secondary market: consists of everyday schmoes like you and me who read a stock's price online and buy it
  • Secondary offering: the sale of shares in the secondary market after the IPO

"The Market"​

  • Usually refers to the US stock market as measured by the Dow Jones Industrial Average, often abbreviated DJIA or called simply the Dow
  • The Dow is an average of 30 well-known companies, tracked and chosen by the editors of The Wall Street Journal
  • Standard & Poor's 500, or S&P 500 tracks 500 large companies that together account for some 75 percent of the entire US stock market
  • NASDAQ 100 follows 100 top stocks from the NASDAQ

How to Evaluate Stocks​

Growth Investing​

  • Look for companies that are sales and earning machines
  • Key company measurements that growth investors examine are earnings and recent stock price strength
  • Dividends aren't very important to growth investors

Value Investing​

  • Look for stocks on the cheap
  • Value stocks have low P/E ratios and low price-to-book ratios
  • Value investors pay particular attention to dividends

Fundamental Analysis​

  • Examines information about the company's health and potential to succeed
  • You use fundamental analysis to learn about a company
  • Looking at a company's management, its rate of growth, how much it earns, and how much it pays to keep the lights on and the cash register ringing
  • Once you have a picture of a company's fundamentals, you can determine its intrinsic value, which is the price a stock should sell under normal market conditions
  • Earnings to measure the intrinsic value: what the company is earning now and what you expect it to earn in the future
  • Next, you want to know about the company's assets, if it's in debt, and the history of its management

Technical Analysis​

  • Examines the past behavior of the stock price in different market conditions and tries to predict the stock's future price based on current and projected market conditions and trading volume
  • You use technical analysis to learn about a company's stock
  • Its premise is that supply and demand drive all stock prices
  • Chartist believe the price chart tells you what news is coming
  • The main measurement technical analysts use to gauge demand is trading volume
  • After that, they look at chart trends to forecast future direction

The response did not explicitly state the reason to collect 10,000 signatures, which acts part of a petition to appoint Musk as a government AI advisor.

Stock Measurements​

Cash Flow per Share​

  • A company's cash flow divided by the number of shares outstanding
  • Cash flow: the stream of cash through a business
  • Sometimes even profitable business don't have strong cash flows because they sell their goods on credit

Current Ratio​

  • Measured by dividing current assets by current liabilities
  • The most popular gauge of a company's ability to pay its short-term bills
  • Look for companies with a current ratio of at least 2-to-1

Dividend Yield​

  • Annual cash dividend divided by its current price
  • With most companies, the dividend payout remains fairly constant

Earnings per Share (EPS)​

  • The king of growth measures
  • Takes what a company earned and divides it by the number of stock shares outstanding
  • Last thing listed on a company's income statement
  • Usually reported for either last quarter or last year

Net Profit Margin​

Price/Book Ratio​

Price/Earnings Ratio (P/E or Multiple)​

Price/Sales Ratio (P/S or PSR)​

Price/Cash-Flow Ratio (P/CF)​

Return on Equity (ROE)​

Three Stock Classifications​

Company Size​

Industry Classification​

Growth or Value​

How the Masters Tell Us to Invest​

How History Tells Us to Invest​

Permanent Portfolios​

Get Ready to Invest​

Research to Riches​

Strategy​