Stock Market Fundamentals

By Obtuse Moose

What is Investing?

Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.

I often hear it is associated with gambling which is not the case. Gambling is defined as the betting or staking of something of value, with consciousness of risk and hope of gain, on the outcome of a game, a contest, or an uncertain event whose result may be determined by chance or accident or have an unexpected result by reason of the bettor’s miscalculation.

The stock market is not a game however you are not without risk either.

I asked a number of friends & co-workers some rudimentary questions about investing to gauge where their knowledge is and what types of information that they felt was difficult to understand regarding economics, finances, and basic investing. The age group is 18 years old up to mid 30's for the people I interviewed and there was a recurring set of responses for each question. The majority gave me the following concepts and questions to go over with you.

What common terminology is found in the financial world?

Ticker Symbol – An abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. For example the company Microsoft has a ticker symbol of MSFT. Apple has a ticker symbol of AAPL

Stock– A stock is a security that represents the ownership of a fraction of a company or business.

Security– Ownership or debt that has value and may be bought or sold.

Share– a share represent equity or ownership in a company or business.

Equity– the money value of a property or of an interest in a property in excess of claims or liens against it in this case a stock or a share.

Often times you hear people interchange the words stock, share, holding, and equity when speaking casually about the stock market and their portfolios.

Holding– a security or any other asset that one holds in their portfolio.

Portfolio– a range of investments held by an individual person or an organization. You can have a stock portfolio, a real estate portfolio, a baseball card portfolio. It all depends on your own “investment strategy”.

the difference between the terms: bear market, and bull market. I find myself giving emphasis to my audience on what the difference between these two are so nobody else has any confusion. Its quite simple I am just dense in the head sometimes.

What is a Bear Market? Investopedia gives a fantastic definition and explanation. However a bear market means that the securities in the stock market have a prolonged decline of around 20% or more for 2 months or more typically. The stock market as a whole can be referred to as being in a bear market but an individual stock/security can also be referred to as being in a bear market if it fits within those definitions.

Inversely…

What is a Bull Market? Again Investopedia came to the rescue with a much more eloquent definition than I could write. A bull market can be summed up as the securities in a stock market having a prolonged period of upward trends of 20% or more for a period of 2 months or more.

Exchange– A place where publicly listed companies are traded. There are many exchanges around the world but the most common ones in the United States are: New York Stock Exchange (NYSE) and the National Association of Security Dealers Automated Quotations (NASDAQ).

Market Sector– This term is used in economics and finance to describe a part of the economy. There is a standard known as the Global Industry Classification Standard or (GICS) that defines the 11 different sectors and their complete breakdown from a hierarchy standpoint. Please take the time to check that out because it gives you a breakdown from a zoomed out satellite perspective of the market as a whole.

Dividend– A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits or reserves. This is one of my favorite parts of investing which was sparked by YouTuber Andrei Jikh.

How much money should you bring to the table to start investing with?

This question is one that often asked by complete beginners and is completely innocent. The problem is that it is dependent on the individuals financial situation. However, I like to think of investing in percentages rather than a dollar value. The typical answer from gurus such as Dave Ramsey is 15% of your income should be invested.

Measuring how much you should invest from your income & investment success as a whole in percentages is a fantastic way to determine success among all investors no matter their financial situation rather than a dollar value. Also different strategies have different expectations or have a different expected traditional return of investment (ROI).

Example: Index investing is expected to have a 15% annual rate of return and day trade investing is expected to have a 5% daily rate of return. At least that’s what a majority of investors aim for. Although their dollar value will differ substantially depending on the investor and what investments are purchased from person to person.

What are some exceptional resources to use to self educate?

My favorite websites to use for financial education are:

Investopedia – this is the go to for any investing terminology that you may come across as well as any investing concept that may seem foreign to you.

Nerd Wallet – this website goes over all sorts of financial leveraging techniques and is a great go to for anybody trying to better their financial situation.

Youtube Channels

I highly recommend subscribing to the following YouTube channels as they are my primary source for learning investing strategies. Everything from the basics of investing to more complex investing strategies like stock options and real estate.

In no particular order here are my top 10 channels:

Chicken Genius Singapore

Recommended Books

These are the most recommended books by me and if you dig further into financial book recommendations by other notable investors, you will find these on their list most likely as well. They are extremely influential and have altered peoples psychology about money

Top 5 to get started:

The Intelligent Investor by Benjamin Graham

Common Sense Investing by John C. Bogle

Think & Grow Rich by Napoleon Hill

Rich Dad Poor Dad by Robert Kiyosaki

The Richest Man in Babylon by George S. Clason

What are some common investing strategies?

Dividend Investing is one of my favorite styles of investing because it is one of the easiest ways to add passive income to your life. If you remember what a dividend is from the the common terminology earlier, you can draw the conclusion that dividend investing is purchasing a specific stock that pays dividends and holding it for long term. The best way I have found to do this is to research the Dividend Aristocrats and find the companies that best fit your interest. Example: You buy (AAPL) Apple stock for $149.10 at the time of this writing. You then hold the stock indefinitely and earn a dividend of $0.22 every quarter. They pay out on the months of January, April, July, & October. That is a total of $0.88 per year per share of stock you hold. You can find the dividend Ex date with a simple google search or on the companies website. That is the date that you must hold stock on to be paid the dividend a few weeks later. I can speak from experience, it is extremely satisfying to see passive income be paid to you on a regular basis.

Growth investing -This investing strategy is solely focused on buying stock that is solely focused on growing your capital. You buy a stock of a company that you believe has high potential to increase in price over time so that you may sell at a later date. Many investors do very well with this and it can be extremely fun. Some top stocks that people have been successful with are Amazon, Netflix, Facebook, Tesla. As you might notice they are tech focused stocks. Not all growth stocks are tech focused though. These are just some very popular ones that get headline news. It may even be debatable that crypto currencies are a growth investment tool.

Swing Trade Investing – This investing strategy can be used by buying a stock at a “dip” or low price and selling it a day or week later at a higher price. It has to be more than a day or it would be considered day trading but it shouldn’t be more than a few weeks or you’re referring more to growth investing. However, honestly swing trading is technically a subsidiary of growth investing because it has the same concept. The main difference is, one is considered trading and one is considered investing. they are two different strategies with two different risk tolerances. Definitely do your research and define your own personal risk tolerance before doing any sort of trading.

Day Trading – The act of buying and selling a stock within the same day. In order for it to be considered a day trade, your positions in stock should be closed out or sold in layman’s terms on the same day. This is very risky and I have lost thousands of dollars personally doing this. I am sure if you spend anytime in the markets this will entice you one day and you may try it. Do your research and define your risk tolerance. There are multiple statistics out there stating that 95%-98% of people that day trade end up losing money.

Options Trading –Options trading is a flexible market tool that can help you take advantage of any market condition. Bear market or bull market alike. I will refer you to investopedia for this one because it is a very deep concept strategy that takes time to research and fully understand.

Value Investing – Perhaps the most well known of all investing strategies thanks to Warren Buffet. This is the investing strategy that is done by buying stocks that are under appreciated by investors and the stock market as a whole. They are cheap compared to the underlying earnings and revenue from their business. This style of investing is very lucrative and can lead to other investment strategies. It takes a great deal of research to find these discounts but the longer you are in the market shopping around the more apparent these discounts become. It simply just takes time to understand the value of different stocks.