The BasicsSeptember 16th, 2014

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]

Efficient Market Reminder

• 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”

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]

The E-Trade Account

• Every year students come to us asking how they can start “Investing”

• Usually entails using an online discount broker

• Discount brokers, while “cheap”, eat away your money

• Each trade reduces your return

• We suggest starting a Roth IRA, although most require a minimum deposit

Growth vs Value

Growth• Substantial potential for growth

• Expected to grow faster than the market

• Baidu

• 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”

• Less risky and more-established

• McDonalds

• Money is distributed to shareholders in the form of dividends

• Seen as stable “blue chips”

How do we value stocks?• Through Fundamental Analysis, many investors seek to find a company’s “Intrinsic Value”

• Accounting Numbers: Revenue Increase = Growth

• Macroeconomic Factors: What does this industry look like 10 years down the road?

• ‘Value’ comes from current cash flow, expected growth, and the riskiness of expected future cash flows

• Financial models [Often Excel spreadsheets] can be developed to calculate these values• DCF Model: Discount cash flows to the present value and divide by the outstanding shares to find the “true

value” of a stock

• 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.

• With FA we are looking at firm viability and not trying to time the market

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

Value Tools: Style Box

• Segregates by cap size and style

• Used to determine:

• Asset Allocation

• Risk-Return structure

Value Tools: Economic Moat

• The competitive advantage that one company has over other companies in the same industry.

• Coined by renowned investor Warren Buffett. 

• The wider the moat, the more sustainable the advantage

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