Basics for Beginners

Question 1

What are 3 core concepts for beginning investors?

Answer 1

1. How the stock market works.
2. The difference between long-term investing and stock trading.
3. The importance of diversifying your portfolio.

Question 2

In what way is the stock market like a swap meet or flea market?

Answer 2

The stock market has many vendors, including individual and institutional investors such as hedge funds, pension plans, and investment banks, buy and selling various items.

Question 3

What are 3 notable market exchanges?

Answer 3

1. New York Stock Exchange (NYSE)
2. Nasdaq Exchange
3. OTC Markets

Question 4

In what way is the stock market like an auction house?

Answer 4

Unlike a retail store, where there’s a set price for each item, stock prices change all the time as buyers and sellers attempt to reach a market price.

Question 5

What is an example of an internal factor that can impact stock prices?

Answer 5

A company’s earnings and its growth prospects can affect it’s share price.

Question 6

What are 2 examples of an external factor that can impact stock prices?

Answer 6

Anything from upcoming elections to how investors feels about the economy’s direction can impact share prices.

Question 7

How is the stock market like a shopping mall?

Answer 7

The stock market is a one-stop shop. It houses all publicly listed companies, enabling investors to buy and sell any publicly traded stock they desire.

Question 8

How does stock markets act as both primary and secondary markets for a company’s stock?

Answer 8

They allow companies to directly sell shares via initial public offerings (IPO) to raise cash and expand their businesses.

Companies can complete multiple secondary offerings of their stock when they need to raise additional funding, that is if investors are willing to buy. Exchanges provide investors with liquidity since they can sell shares among each other.

Question 9

What is a stock market correction?

Answer 9

A 10% to 20% decline in a major market index (like the S&P 500).

Question 10

What is a bear market?

Answer 10

A drop of more than 20%.

Question 11

What is a bull market?

Answer 11

A gain of more than 20%. These are often multi-year events driven by a period of economic expansion.

Question 12

What is a stock market crash?

Answer 12

A sharp plunge in the major stock market indexes over a short period.

Question 13

What is stock market volatility?

Answer 13

When stock market prices fluctuate very sharply.

Question 14

Long-term investing vs. stock trading

Answer 14

Some stocks deliver significant gains in short periods, they’re outliers instead of the norm.

Due to this beginners should avoid stock trading or actively buying and selling stocks – especially day trading – and focus on long-term buy-and-hold investing.

Question 15

What is buy-and-hold investing?

Answer 15

Buying a company’s stock with the intention of holding it for three to five years, if not much longer.

Question 16

What are some reasons for long-term investing being a better approach?

Answer 16

1. Higher probability of positive returns.
2. Not missing out on even bigger gains.
3. Benefitting from compound interest.
4. Saving on taxes.

Question 17

What does it mean to diversify your portfolio and why should you do it?

Answer 17

Owning a diverse group of stocks across different stock market sectors.

This reduces an investor’s risk of a permanent loss and the portfolio’s overall volatility.

Question 18

What is an active investor?

Answer 18

One who researches stocks to find a collection of at least 10 companies across various industries that they believe will be winning investments over the long term.

Question 19

What is a passive investor?

Answer 19

One who lets others do the work for them. They diversify quickly by shares of a mutual fund, index fund, or an exchange-traded fund (ETF) that hold a diverse group of stocks.

Question 20

Why does portfolio diversification matter?

Answer 20

This will help cushion the blow during a correction or bear market so that the investor doesn’t experience an irreversible loss of capital.

Question 21

What should an active investor be careful of?

Answer 21

Not to over-diversify since holding too many stocks reduces returns without much of an incremental benefit from a reduction in losses or volatility. A portfolio with more than 100 stocks can be hard to manage. The returns would more than likely be similar to an index fund.

Question 22

What is a financial statement?

Answer 22

Documents designed to give investors a snapshot of how a business is performing over a particular period. They answer important questions investors should ask before buying a stock.

Question 23

What are 5 general questions that financial statements answer?

Answer 23

1. How does the business make it’s money?
2. Have the business’s revenue and earnings grown or shrunk?
3. How much does the business own?
4. How much does the business owe?
5. Is there more money coming in or going out?

Question 24

What is an income statement?

Answer 24

The income statement tells you how much money a company brought in and how much of a profit (if any) it earned from that revenue.

Question 25

What is the top-line number of an income statement?

Answer 25

The company’s net sales or revenues.

Question 26

How do you find the net income (earnings) on an income statement?

Answer 26

net sales - cost of sales = gross income

gross income - operating costs = operating income

operating income - income tax expenses = net income

Net income is also called earnings.

Question 27

What is general takeaway from an income statement?

Answer 27

The statement starts with the company’s sales and shows step-by-step how it turns them info profit.

Question 28

What is a balance sheet?

Answer 28

It provides a snapshot of a company’s financial condition at a given time.

Question 29

What is the asset section of a balance sheet?

Answer 29

What the company owns. It is broken down into current and non-current assets.

Question 30

What is the liability section of a balance sheet?

Answer 30

What the company owes. This is divided to current and non-current liabilities.

Question 31

What is the shareholder equity section of a balance sheet?

Answer 31

Think of this as what the company would have if it shut down, sold all of it’s assets, and paid off all of it’s debt. Its the difference between assets and liabilities and is the company’s net worth.

Question 32

What is a cash flow statement?

Answer 32

This shows the money flowing into and out of the business.

Question 33

What is the operating activities section of a cash flow statement?

Answer 33

This includes the net income for the company’s business, stock based compensation, receivables collected, accounts payable that were paid, and other business-related items.

Question 34

What is the investing activities section of a cash flow statement?

Answer 34

This is there if a company buys or sells stocks or bonds. This is also there is the business buys or sells real estate or equipment.

Question 35

What is the financing activities section of a cash flow statement?

Answer 35

This is there if a company issues new common stock. Dividend payments are a common outflow in this section, as are stock buybacks. If a company repays debt that will appear in this section.

Question 36

What is common stock?

Answer 36

A representation of partial ownership in a common and is the type of stock most people buy.

Question 37

What is dividend payments?

Answer 37

The distribution of a company’s profits to its shareholders. This is generally paid in cash but sometimes in company stock, and companies also use them to return excess profits to investors.

Question 38

Where to find financial statements for a company?

Answer 38

From the company itself. Go to the company’s investor relations (IR) page and look for its most recent quarterly earnings report, which is usually under the “news”, “press releases”, or “financials tab.

You can also go the the SEC’s website and look up the company’s latest quarterly report.

You can also see if your brokerage offers a view of financial statements was part of its stock quotes.

Question 39

What are the major types of stocks?

Answer 39

1. Common
2. Preferred
3. Large-cap
4. Mid-cap
5. Small-cap
6. Domestic
7. International
8. Growth
9. Value
10. IPO
11. Dividend
12. Non-Dividend
13. Income
14. Cyclical
15. Non-Cyclical
16. Safe
17. ESG
18. Blue Chip
19. Penny

Question 40

How do you buy stocks?

Answer 40

Here is a step-by-step guide to buying stocks online:

1. Open a brokerage account
2. Decide which stocks you want to buy
3. Decide how many shares to buy
4. Choose an order type
5. Place the stock order with your brokerage
6. Build your portfolio

Question 41

When thinking of how many shares to buy what role does price play?

Answer 41

1. Find the share price of the stock you want. Be sure you are looking at a real time quote.
2. Divide the amount of money you want to invest into the stock by it’s current share price.
3. If your broker allows you to buy fractional shares, the result is the number of shares you can buy. If you can’t buy fractional shares round down to the nearest whole number.

Question 42

When thinking of how many shares to buy what role does diversification play?

Answer 42

Just because you ‘can’ buy a certain number of shares does not mean you should.

Instead of a large position in one stock, a better investment strategy is spreading your initial brokerage deposit across a few different companies.