Investment Seminar Notes

By Eric Ewanco

In February 2007, a friend who respected my investment knowledge asked me for help with notes for a seminar he was planning on giving to some people from his church. Well, one thing led to another and I ended up with enough notes to do virtually a complete talk.

I decided to post the rough notes on the Internet in the hopes that someone else might benefit from them. (If you ever use these for your own talk or seminar, I'd love to know, drop me a line at ).

NOTE: These notes are simplified for a beginner audience and the definitions are intended to be easier to understand rather than academically rigorous. I'm sure someone could pick nits with them. If there are any significant errors let me know but otherwise it's not worth it.

• What is stock? (represents a share of ownership in a publically traded company; investors pay the company for stock, which allows the company funds to get started or grow, and in return they take ownership of the company)
• What is the stock market? (the market where stock is bought and sold or "traded")
• What is a stock exchange?  (A place or system that facilitates trading shares of stock between buyers and sellers.)
• What is capital?  Capital in general is "accumulated goods devoted to the production of other goods *:* facilities or goods utilized as factors of production" (Merriam Webster's). Stock is considered "capital" because it represents an investment that enables the company to do business.
• What is the most important principle of investing?  BUY LOW, SELL HIGH!  The difference between the price you buy stock for and the price you sell it for is your profit (or capital gain).  Your goal is to make a profit!
• How are stocks identified?  With a "ticker symbol" of one to four letters.  (Comes from the days when stock prices were broadcast on a machine that made a ticking noise as it printed prices on a paper tape.)  Biggest stocks have one letter symbols, e.g. "T' (AT&T). Higher-end stocks have two or three letters.  More average stocks have four.  A European stock exchange is called a "bourse" (BUHRS)
• What are the U.S. stock exchanges? 
• New York Stock Exchange (NYSE): Biggest and oldest, until recently still conducted trades by humans getting into a pit and yelling at each other
• NASDAQ: Upstart exchange, first in U.S. to go all electronic, now #2.  Originally stood for National Association of Securities Dealers Automated Quotations system and that it was the world's first electronic stock market.
• What is OTC or Over the Counter?  (This is a form of trading that happens direct between parties rather than on a stock exchange.  There is a service called the OTC Bulletin Board, that provides quotation and last-sale information to facilitate over the counter trades.  Stocks which appear on the Bulletin Board, indicated by a ".BB" suffix to their symbol, are generally not valuable or viable enough to trade on NASDAQ.  Think of trading by posting to a bulletin board.  Riskier, but still fairly safe if you are careful.)
• What is the Pink Sheets? (Stocks on the Pink Sheets are the riskiest, most dubious stocks.  These are the bottom-dwellers of stocks.  Like the OTC BB,  Pink Sheets is a quotation service, not an exchange.  They can trade on the OTC Bulletin Board but Pink Sheets is run by an separate company.  Avoid these stocks until you really know what you are doing and understand they are the riskiest stocks you can buy.  Ticker symbol ends in ".P" or ".PK".
•  American Stock Exchange (AMEX): Long time #2, focuses on small stocks and exchange-traded funds
• How is stock priced?  (In shares, varying from a few cents to thousands of dollars, to the hundreds of a cent.  Getting the price of a share of a given stock is called getting a "stock quote".)
• Why are free stock quotes often delayed?  (Free stock quotes are delayed 15 or 20 minutes so that they can sell real-time quote features to people!  Usually individuals can get real-time quotes from their brokers at no cost.)
• How are shares of stock traded?  (Through a stock broker or broker, to whom you pay a commission.  There are two types of broker: A full-service broker, e.g. Merrill Lynch, who offers advice and often solicits you to buy stocks, and a discount broker, such as Charles Schwab, who merely executes trades you request and doesn't get involved in the question of what you want to trade.  Obviously, full-service brokers are pricier.)
• Shares can usually be traded in any quantity, but traditionally are sold in blocks of 100 shares, some restrictions may apply if you don't use a "round lot" of 100 shares
• What are the normal hours for trading?  (Trading hours are 9:30am to 4:00pm M-F.)
• Can I trade after hours? (Yes, under restricted conditions.  Extended hours are 8am to 9:15am and 4:15pm to 8pm.)
  
• Warning:  The price of a stock at market close is not necessarily the same as the price at market open the next day.  If something happens overnight, for example announcement of very bad news or very good news, the stock price may jump significantly.
  
• How does stock ownership work? (briefly) (investors have a right to vote on board of directors and other issues facing the company, also have right to company's assets should they liquidate)
• Can you own fractional shares of a stock?  (In general, you can only trade whole shares of stock.  In fact, when a split occurs that would result in fractional shares of a stock, you are given "cash in lieu" for the fractional shares.  However, in some dividend reinvestment programs, you can acquire fractional shares of stock.  A dividend reinvestment program is a program where dividends are automatically used to buy new shares of stock.  This is useful because when a dividend is issued, the value of the stock goes down by the amount of the dividend, thus reinvestment preserves your original capital.  Also, mutual funds operate using fractional shares.)
  
• What represents stock ownership?  (Stock ownership is represented by an official stock certificate.  It is like a title to your stock.  This is not often issued, however.  Usually your broker holds your shares on your behalf; also, typically today, stock ownership is also maintained in a central database, so if you lose your stock certificate, with some effort it is replaceable.)
• What is a position?  (To have a position in a stock is to either own it or owe it (in the case of a short position).)
• What are "bid" and "ask"?  ("Bid" is the highest price a buyer is willing to pay for a share.  The "ask" is the lowest price the seller is willing to sell. The difference is the "spread" and constitutes a profit made by the market maker.
• What is a stock's market capitalization or market cap?  (The number of shares issued to investors times the market price of the stock.  It represents the total market value of a stock and is used in comparisons.  You cannot compare the share price of two stocks; a stock that is $50 a share is not necessarily more valuable than one at $5 a share.  You have to compare the market cap of the two stocks.) 
• [Advanced topic]  What is an option?  (An option is a contract to buy or sell a particular stock at a specific price and time.  It is essentially a bet that a stock will be above or below a particular price (called a strike price) at a particular time.  Say I have 100 shares of Pfizer.  I can write an option that allows someone to buy my 100 shares of Pfizer in June at $30 a share.  If someone buys that option, and the price hits $30 before it expires in June, they have a right to buy my shares for $30 a share.  Therefore if say it hits $35, I lose $500 (($35 - $30) * 100).  If it doesn't reach $30, my shares are safe and I pocket the price of the option.  Options are only offered for specific dates and specific prices; I cannot sell an option for June 16th at $31.55, for example.  Each option covers 100 shares of stock.  An option you write to offer to sell stock you own to a buyer should they so choose is called a call; an option you write to agree to buy stock from someone else should they so choose is called a put.  An call option that someone holds where the strike price is below the market price, or a put option that someone holds where the strike price is above the market price, is said to be "in the money", i.e., it makes money for the option holder.  A call option is either covered or uncovered (or "naked"); if I have the stock to sell, it is covered.  If I have to buy the stock to cover the option should it be exercised, potentially making a loss, it is uncovered.  Naturally brokers put restrictions on whether you can write uncovered options.)
• What is equity?  (Equity can mean a few things.  It can mean the amount you have invested in a particular investment, such as your house, I have $100k in equity in my home.  It is also a synonym for stock, usually used in the plural, e.g., I rely on equities for my income.)
• What is a bond? (a loan to a company for a fixed term at a fixed interest rate that can be traded on a market, pays regular interest)
• How does a bond's price behave? (It is inversely proportional to the prevailing interest rates; if currently issued bonds go up in interest rate, it devalues existing bonds, since the rate of a bond is fixed throughout its life)
• There are two distinct aspects to the value of a bond that are important remember.  One is the interest rate it pays, called its "yield".  If you hold on to a bond, you will be paid, assuming the company is around, fixed interest on the bond at regular intervals, until the end of its term (its "maturity").  Obviously that is valuable.  Second is the value of the bond should you choose to sell it. You can make a profit off of this as well, as with a stock, by the difference between the price you bought it at and the price you sold it at.
  
• What is a junk bond?  (A high yield [that is, high interest-rate] bond -- high yield to attract investors due to unstable nature of company.)
• What is an investment grade bond?  (This is a bond carrying an average degree of risk, in contrast with a junk bond.)
• What is a mutual fund?  (A mutual fund is a pool of assets used to buy a combination of stocks, bonds, or other securities managed by a professional investment advisor.  Suppose you were good at investing, so all your friends decided to give you their money, which you then used to buy stocks you felt in your best judgment were valuable.  Mutual funds provide economies of scale and cost less to operate than buying individual stocks.  They are also more diversified than buying individual stocks.  Diversification is when you invest in many stocks, bonds, and other instruments to lower your exposure to risk; think of not putting your eggs in one basket.  Mutual funds are available for nearly every investment goal under the sun.  However, be aware that mutual funds have hidden costs.  A mutual fund trade generally does not incur a commission, but it may incur a fee known as a load.  Some mutual funds penalize you for early redemption; they are meant as long-term investments, not for trading.  Mutual funds can be bought and sold only once a day, at the end, of trading, and the price cannot be predicted exactly.)
• [Advanced topic] What is an American Depositary Receipt?  (This trades like a stock, except that the capital represented by the depositary receipt is invested in some other security, typically a foreign stock [in order to make it easier to trade in the U.S.])
• What is an exchange-traded fund?  (This is similar to both a Depositary Receipt and a mutual fund in that it has a fixed investment in some number of securities and based on that value trades on an exchange like a stock.  Unlike a regular or open-ended mutual fund, it can trade at any time during the trading day.)
• What is Net Asset Value (NAV)?  (This is the value per share of a fund: the total assets of the fund divided by the outstanding shares.)
  
• What is a money market fund?  This is a fund that invests in very short-term, low-risk securities [come up with good examples maybe].  It adjusts itself to maintain a NAV of $1/share and acts like a cash equivalent.  This is where you park your cash when you aren't using it and want a return but need to have it quickly available.  Practically speaking, it's virtually impossible to lose money in a money market fund.
  
• Bonds are considered conservative, low-risk investments.  Stocks are considered more speculative, higher-risk.  Invest in bonds if you need the money in the short term.  Stocks are appropriate for longer term investments.  Money market funds are lowest risk.
  
• What is the second most important principle of investing? (The higher the risk, the higher your return [i.e. profit]; the lower the risk, the lower your return.  There is no easy way to make big bucks in the stock market.  If you want to earn a bigger profit, you have to take bigger risks.)
• How much money am I making on my stock? (When a stock rises $1 in price, you make on paper $1 per share.  If you were then to sell that stock, you would realize a capital gain of that same amount, minus commission.)
• What is the settlement period?  (When you sell a stock, the buyer has three business days to convey the funds.  Your proceeds will not be 100% available for three days after a sale.)
  
• What is a penny stock?  (A penny stock is a stock that trades under $5 a share.  Generally they have lower capitalization and are riskier investments.  Brokers may impose restrictions on on trading penny stocks, especially on margin.)
• What is a security?  (Merriam-Webster: "a written obligation, evidence, or document of ownership or creditorship (as a stock, bond, note, debenture, or certificate) giving the holder the right to demand and receive property not in his possession."  Generic term for various instruments of value in the investment world.)
• What is a prospectus?  (A prospectus is a document your broker is required to give you by law before you invest that explains what a company does, what its balance sheet is like, what risks it has, and so forth.)
• What is an annual report?  (A publication that by law the company must issue yearly to every shareholder, describing the company's financials for the year.)
• Explain supply and demand and its impact on prices
• How to place a trade:  Market order:  You will get whatever the prevailing price is, and will execute the order immediately.  Limit order:  You specify a price; the order will not be executed below that price (if a sell order) or above that price (if a buy order).  Stop order:  Does not execute until the price falls below a certain point (sell) or rises above a certain point (buy).  For a limit order, you can also specify a stop price, which will trigger a limit order when the price hits the stop.  You can also specify whether it is a day order, which will be cancelled if not executed by the end of the trading day, or a "Good Til Cancelled" order, which despite the name expires in 30 days.
• Trades may be executed partially, especially if they are limit orders, unless you specify All Or None.
• What does it mean to be marketable?  (For a limit order, this means that the market bid price exceeds the limit price for a sell, or the market ask price falls below the limit price for a buy.  For a stock, it means there are buyers for the stock.  A stock no one wants is not marketable.)
• Indexes or Averages -- these are numbers representing the overall value of a given collection of stocks.  They are gauges of market value.
• What is the Dow Jones Industrial Average (DJIA)?  This is a ubiquitous index with importance far beyond reality.  It is one of several averages the Dow Jones company (publishers of the Wall Street Journal, not to be confused with Dow Chemical) created many years ago as a barometer for the market.  It covers industry (as opposed to the Dow Jones Transportation Average, for example), although today it's more broader based than it used to be.  It is based on a weighted average of a small handful of companies considered to be important to the economy.  It is weighted so that when companies are added or subtracted, as they must be from time to time, the results don't artificially change and can be meaningfully compared with previous averages.  Despite its overwhelming popularity as a stock market metric the DJIA does not fairly represent the market at large.
• What is the S&P 500?  The Standard and Poor's 500 (Standard and Poors is a company that compiles investment data) is a price average of the top 500 stocks by market capitalization, that is, the 500 most valuable companies in the U.S. markets.  This is a much better measure of the value of the stock market than the DJIA.
• What is the Russell 2000?  This is a popular index of 2000 small stocks.
• What is the Wilshire 5000?  This is an index of nearly every publicly-traded stock.
• Asset classes, or types of stocks:
• Growth: Moderately risky, aggressive returns (i.e. increase in value) -- up and coming companies.  Good when you are several years away from needing the money.
  
• Value:  Stocks that haven't done so well lately and may be poised for a comeback.  Often older stocks.
• Income or Fixed-Income: Fairly staid low-risk stocks that pay a steady dividend (retirees like these)
• Large Cap: (Large Capitalization)  As it says, stocks with a large capitalization, bigger stocks
• Small Cap: Like it says
• Mid Cap:  Between large and small cap
• Emerging markets: Stocks doing business in industrializing or emerging regions of the world.
• What is a "rally"?  (This is when a stock rises in a sustained fashion, often used when a stock is recovering from a dip.)
• What is a "dead cat bounce"?  (This is when a stock appears briefly to recover after a precipitous fall, just as a cat might appear to be alive because it moves after it hits the ground at high speed.)
• What is margin?  (Margin is when you borrow cash against stock, typically in order to buy it. For an eligible stock, if you qualify you can borrow up to 50% of its value, so, for example, if your stock cost $500, you could pony up $250 in cash and buy it.  If it goes down, however, you will get a "margin call", and will have to pony up more money.  If you don't do so in time, they will liquidate (i.e. sell) your stock to pay the debt off.  As you might imagine, when there is a bursting market bubble, there is a lot of carnage.  You can also use margin to pay off your bills.)
• What is selling short?  (it is possible to sell stock you do not own.  In this case, you borrow it from someone else and pay interest.  Selling short is what you do when you want to bet a company's stock price will fall in the very near term. When the stock falls (or you get a margin call), you place a buy order to cover your position.)
  
• What does it mean to be long or short?  (To be short a stock, as explained in selling short, means to borrow shares of a stock so you can sell it.  The opposite is to be long a stock:  to own actual shares of the stock.  You might say, "Are you long on Ford?")
• Who is the SEC?  (The Security and Exchange Commission is the government agency that regulates investment activity.)
• Who is the SIPC?  (The Securities Investor Protection Corporation.  It is a federally mandated non-profit corporation that insures consumer investment accounts in case the brokerage goes bankrupt.  While in many ways it is analogous to the FDIC, FSLIC, and other agencies that insure bank accounts, it is critical to remember that the SIPC does not protect you from losing money if your securities go down or bankrupt, it rather protects you should your broker screw up or mismanage your securities.) 
  
• Explain tax liabilities, different tax brackets, important things to do (keep track of your basis), explain what "basis" is :-)
• What is a Public Offering? (This is when shares are offered for sale by the company to the public.  This is the only time the company gets capital in exchange for shares of stock; after the public offering, shares are traded between investors and the company is not involved [except to track the owners of the shares].  A company can do this multiple times.)
• What is an Initial Public Offering (IPO)? (This is the first time shares are sold to the public, when a company first gets on the stock exchange and starts trading publicly.)
• What is a dividend?  (A dividend is a cash premium paid, usually on a quarterly basis, to stockholders on a per-share basis.  Companies offer dividends to attract stockholders; they forgo dividends to invest in growing the company.)
• [Advanced topic] What does it mean to go "ex-dividend"?  (This is the cut-off date for owners to receive a dividend.  If you buy the stock on or after this date, you will not receive that particular dividend distribution, but you will receive a corresponding discount in the price of the stock.)
• [Advanced topic] What is volatility?  (A stock's volatility is governed by how rapidly and unexpectedly it moves up and down.)
• What is volume?  (Volume is the number of shares that are traded on a given day, whether of one stock or across the whole market.  High volume obviously indicates high interest in the stock and will happen when something hits the news or even if something behind-the-scenes is happening.)
• What is a stock split?  (A stock split is when a stock needs, for various reasons, to adjust its price by some ratio.   Two for one is a typical split.  The price is cut in half, and in return shareholder's shares are doubled, so the total value remains the same.  For example, Google might choose to split their stock because at several hundred dollars a share, it makes it difficult for the average investor to trade in it. Reverse splits are possible, too; they are done to make the price more attractive to investors, to avoid the "penny stock" label, or to remain listed on exchanges that have minimum share price requirements.  Generally stocks that do reverse splits are struggling.)
• What is a "trader"?  (A trader is someone who actually conducts the trade on behalf of the buyer and the seller.  Today, due to electronic trading, traders are more removed from the transaction but there is still a need for traders to oversee the market.  "Trader" can also refer to someone who buys and sells stock in the hope of make a very short term profit due to variations in the stock price over seconds or weeks; such a person who attempts to make a living out of exploiting hour by hour fluctuations is called a "day trader".)
  
• [Advanced topic] What is a "market maker"? (A market maker is a person or a firm who quotes both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread.)
• [Advanced topic] What is the float of a stock?  (The float is the portion of outstanding shares that are not held by people who won't sell (typically founders with large positions) and do not have restrictions on being sold (typically employees).  In other words, the float is what is free to trade on exchanges.). 
  
• [Advanced topic] What is the difference between fundamental analysis and technical analysis?  (These terms describe two different approaches to choosing what stocks to invest in.  Fundamental analysis refers to choosing stocks that have good fundamentals, such as profit, market share, industry outlook, product viability, and other economic factors.  Technical analysis, also called charting, refers to choosing stocks based on patterns in stock data.  For example, one may note that a stock jumps fairly reliably every January.)
• [Advanced topic]  What is momentum investing?  (This might be called the "lemming effect".  When people invest because everyone else is investing, it generates a self-sustaining [for a time] rise in price.)
• What is a "buy and hold" investment strategy verses "market timing"?  What is "dollar cost averaging"?  ("Buy and hold", as the name implies, means that you are in for the long term; you accumulate stock over time relying on the fact that for many companies, the stock price, overall, tends to go up with time.  The buy and hold strategy takes advantage of something called dollar cost averaging.  With dollar cost averaging, you buy regularly using fixed sums.  When the stock is down, you get more shares for your money, giving you a boost when the stock goes up. You don't worry too much about temporary fluctuations or predicting brief downturns; you just persevere. It's a very effective way to make money over time.  It's the best choice for people who just want their money to grow and don't have time to get deeply involved.  It works best with mutual funds.  Obviously, though, some stocks will hit a terminal dive at some point, and you need to watch for that and sell as necessary.  With market timing, you focus on predicting which way the stock will go, buying on the rises while selling before predicted downturns.  You actively try to "beat the market".  While you might enjoy the adrenaline rush, you are unlikely to succeed with this strategy for a sustained period and you will be socked with commission fees.  Stick with buy and hold.)
• [Advanced topic] What is liquidity? (Liquidity is the ease with which a security or other asset can be sold without significantly affecting its price.  At the top of the liquidity ranking is cash; cash is always able to buy something.  Real estate is at the bottom; it takes a lot of time and effort to sell a piece of real estate and the process in some cases can take years.  [Use Ann Arbor real estate market as an example.]  Various factors affect the liquidity of a stock.  Obvious a stock with high volume is also very liquid; there are many buyers.
  
• What is the third fundamental principle of investing?  (Past performance is no indicator of future results.  This is a tempting pitfall; a stock has been going up for months, and it is natural to assume it will continue to go up.  A mutual fund makes an impressive profit one year, it is natural to assume it will the next year.  Don't make this assumption.)
• Go through a detailed example of how you would go about buying a stock.
• Come up with a candidate: maybe a company with technology you find interesting, maybe something recommended by your brother-in-law, maybe something you've heard about in the news.  Determine its stock symbol.
  
• Research the candidate:  historical stock price, highs, lows, press releases, analyst recommendations, products, markets, industry, competitors, etc.
• Get a prospectus
• Find a broker and open a brokerage account, if you don't have one
• Deposit funds.
• When you want to buy, remember the principle to buy low and sell high.  Choose a time when the stock is a little on the downside.  You can use a limit order to help you.
• Decide how many shares of stock you want to buy.  Use round lots of 100 if possible. 
  
• Watch your total sum --  commission will be added to your order.
• Decide if you want dividends reinvested (if applicable).
  
• Decide on a limit order or market order.  Ordinarily you would choose market.  If you want to limit the price you pay, at the expense of waiting a bit, determine what your limit price is and place a limit order.  Don't get too greedy though -- your order may never execute.
  
• If placing a limit order, decide on a day order or Good Til Cancelled order.  If the latter case, be careful you don't forget about the order and move the money out of the account!
  
• Place the order.  Market orders execute in seconds.  
• Wait for the confirmation.  Typically brokers will send you a written confirmation of the order.
• Do anatomy of a stock quote, go to Yahoo or whatever and explain all the fields
• [Advanced topic] What is the difference between common stock and preferred stock?  (Common stock is what your average investor buys. Typically it has voting rights that preferred stock does not.  Preferred stock comes with extra rights, chief of which is preference in dividends and in liquidation.  Since stockholders own the company, when it liquidates, any assets go first to preferred stockholders, and nearly last to common stockholders.
• What is a pump and dump scheme?  (This is a scheme whereby unscrupulous entities buy large quantities of a thinly-traded stock, launch a massive PR campaign to promote the stock and stoke demand so the price rises, and then they sell their stock to the victims and the price collapses.  Often this is done without the knowledge or involvement of the company principals.  This is what is happening when you get breathless stock promotions on the Internet.)
• What should I do if I get a "cold call" from a broker?  (If someone you don't know calls you out of the blue to sell you stock, hang up.  It is a scam.)