Stocks

key concepts

• Stocks (= shares = equity): represent your degree of ownership in a company
  • Publicly traded
  • Privately traded
• Underwriter: investment bank that helps other companies raise money
• Secondary market (= public market): a public marketplace (stock exchange) where buyers and sellers meet to trade securities and assets.
• SPAC: special purpose acquisition company used to raise money from investors, with the intent that the money will be used to acquire another company
• Bid price: highest price a buyer will pay for shares at specific time
• Ask price: lowest price seller will sell a share
• Earnings per share (EPS): measures the amount of a firm’s profit per each outstanding share of common stock
• Dividends: some companies distribute portion of earnings every 3 months
• Direct stock purchase plan (DSPP): can purchase with little to no transaction costs
• Dividend reinvestment plan (DRIP)
• Brokerage account: account with investment company that you deposit money into to buy stock and other investments
  • Full-service
  • Discount
• Primary stock exchanges
  • New York Stock Exchange (NYSE)
  • NASDAQ
• Valuing stocks
  • Stock price
  • Market cap: the larger the company, the “safer” the stock
    • Large: $10B+
    • Medium: $2–10B
    • Small: < $2B
  • P/E ratio: price per share over earnings per share
    • Usually between 10 and 30
      • Value-oriented: low to buy shares at lower price
      • Growth-oriented: high for large future earnings
  • Dividend
    • Discounted dividend valuation model: $StockValue=\frac{D\times (1+DGR)}{(RRR-DGR)}$
      • Let D = Dividend = dollar amount received annually for each share
      • Let DGR = Dividend Growth Rate = how quickly it has grown and will grow
      • Let RRR = Your Required Rate of Return = what you need to earn in order to invest in the stock
        • Depends on risk tolerance; 5–9%

notes

• Creation
  • New business
  • Expansion with loans and investments
  • Approach underwriter for more money
  • Convert to corporation to create shares of ownership
  • Initial public offering (IPO) to raise money from investors
• Purpose
  • To raise large amounts of money
• After IPO, investors can buy and sell on secondary market
• Investors appoint board of directors, who can hire and fire CEO
• Ways to earn
  • Growth stocks: focus on stock price appreciation
  • Income stocks: large portion of earnings in dividends
  • Growth and income stocks

resources

• Yahoo! Finance
• Google Finance
• Morningstar