Chapter 3: Introduction to Stocks
- Page ID
- 79432
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)“Don’t gamble! Take all your savings and buy some good stock and hold it till it goes up. If it don’t go up, don’t buy it.” -- Will Rogers
Question: How do you make a small fortune in the stock market?
Answer: Start with a large fortune!
In this chapter, you will
- Be introduced to the definition of stocks, their advantages and disadvantages, and historical returns
- Review the rapidly changing universe of the various entities that constitute the stock market
- Investigate the various stock transactions and associated fees
- Explore the major stock market indices, the major characteristics of stocks, and various stock measurements
- Examine the major stock types, market capitalization, and stock investing strategies
By the end of this chapter, you should be able to
- Describe the various components, characteristics, benefits, advantages, and disadvantages of stocks and stock investing
- Identify and describe the various major stock markets, stock transactions, and fees
- Outline the major mutual fund categories and their risk/return aspect
- Calculate stock measures including earnings per share, dividend payout ratio, price-to-earnings ratio, and market capitalization
- Describe the advantages and disadvantages of the major stock investing strategies
Stocks are exciting! Stocks are sexy! Stocks are risky!
Yes, Dear Students, stocks are where the action is in the investment world, especially for those with a long-term time horizon. We are going to spend the six weeks immersing ourselves in the world of stocks.
Remember that you are Rising Investment Gurus for your family, friends, and co-workers. They are counting on you to cut through all the hype and hoopla and show them the good news of prudent, long-term investments. So let's get started on our journey. All of us at Southwestern are very proud of you!
- 3.1: What Are Stocks?
- Stocks are exciting! Stocks are sexy! Stocks are risky! Let's get started on the long march. What are stocks? What are the rewards of investing in stocks? What kind of investment returns can we expect from stocks over the long term? And just what do professionals mean when they say, "Stocks are volatile"?
- 3.2: The Stock Market
- What exactly are we referring to when we say, "the stock market?" What is it? Where is it? Actually, the stock market is not just one entity. It is composed of many competing elements. Let's explore.
- 3.3: Stock Transactions, Transaction Costs, and Stock Quotes
- What are the basic types of stock transactions? How much does it cost to buy and sell stocks? (No, Dear Students, it is not free to buy and sell stocks, no matter what Robinhood tells you.) Where can we find stock quotes? We will answer these burning questions in this section.
- 3.4: Stock Market Averages and Indexes; Volatility Reexamined
- How can we say that, "the stock market has returned 10% over the last 80 years?" The industry uses various benchmarks measures called averages and indexes. It is time to take a close look at these tools.
- 3.5: Stock Characteristics and Measurements
- It is time to start peeling away the first layers of research and exploration of our potential stock investments and their corresponding businesses. "Show me the numbers!" exclaimed Benjamin Graham, author of The Intelligent Investor and Warren Buffett's mentor.
- 3.6: Types of Stocks, Growth versus Value, and Market Capitalization
- Although people tend to lump all stocks together, the truth is no two stocks are exactly alike because no two businesses are exactly alike. However, there are certain broad categories that are discernable. Let's take a look at them.
- 3.7: Stock Investment Strategies
- There are various stock investment strategies. A few are worthwhile. Some others, not so much. You decide!
- 3.S: Summary
- Congratulations ‒ You Have Finished Chapter 3 ‒ Introduction to Stocks
Thumbnail: Pennsylvania Power and Light Stock Certificate, public domain, Wikimedia Commons