The Basics“If you don’t know these then you know nothing

and you will learn nothing”

A Stock/Share

• Represents a piece of a company

• Your % ownership depends on how many shares you own and how many shares are outstanding

• Why does it have any value?

• Companies own assets and (generally) bring in revenue

• If you own part of that company, you have a right to those assets/revenues

• And, if you want a right to that wealth, you have to pay, thus establishing the value

Market Capitalization = “Value” of Company

• Market Cap is how we refer to the markets valuation of a company

• It is simply the shares outstanding multiplied by the currently traded value

• Just because a stocks value is higher than another does not mean that company is worth more than the other

• Companies are often segregated by their “cap size”

• We generally use Small, Medium, or Large cap although there are more subsections

• [Reference: http://www.investopedia.com/articles/basics/03/031703.asp]

How do we value stocks?

• Through Fundamental Analysis, many investors discount cash flows to the present value and divide that Terminal Value by the outstanding shares to find the “true value” of a stock

• Fundamental Analysis is a method of analyzing a company by using it’s accounting numbers given in the company’s annual/quarterly reports, analyzing macroeconomic factors that can affect the company’s operations, and much more

• [Reference: http://www.investopedia.com/terms/f/fundamentalanalysis.asp]

• Generally financial models [Often Excel spreadsheets] are developed to calculate these values

• Complexity and results can range by the analyst

• Ultimately, we never know exactly why a stock is trading at x value one day and y value the next. There are simply too many market forces at work to truly understand all pricing movement.

Trading vs Investing

• Investing

• Long-term in nature

• Utilizes a Buy-and-Hold strategy

• More focused on buying fundamentally sound investments with a perceived longevity

• Trading

• Jumps in and out, trying to feel out market highs and lows

• Relies on “timing the market”

• More focused on short-term pricing movements than if a company will exist in 20 years

[Reference: http://www.investopedia.com/ask/answers/12/difference-investing-trading.asp]

Growth vs Value

Growth• Expected to grow faster than the

market

• Most of revenue is reinvested to fund growth

• Generally reside in the technology & alternative energy sectors

• Are more volatile and risky

Value• Companies that are currently

undervalued and are “due for a market correction”

• Money is distributed to shareholders in the form of dividends

• Seen as stable “blue chips”

Efficient Markets

• The Efficient Market Hypothesis is the idea that share prices generally reflect all relevant information and therefore, it is impossible to consistently “beat the market”

• While it is highly unlikely that the markets are perfectly efficient, research has shown that over long enough time horizons, trying to consistently beat the market is folly

• This was discussed in our summer reading “A Random Walk Down Wall Street”

Additional Information

• You will need to familiarize yourself with security statistics. FIN 300 covers most of these

• Some statistics include: P/E, EPS, P/B, PM, OM, Etc.

• If you’re feeling up to it, we also suggest revisiting variance & standard deviation

Thank you for reading and we hope to see you at one of our meetings this

fall.