Why should you invest in the stock market?

• One of the best tools to grow wealth in human history

  • 10% annual ROI historically

• Savers = Losers

  • Battle inflation

  • Assets > cash

  • Lose purchasing power when you don’t invest

  • Stocks vs Bonds

    • stocks have 11.3% return

    • bonds have 5.3% return

• Cheap

  • $0 trades / fees are normal

  • Low expense ratios for solid investments

• You don’t have to be a genius

  • There are strategies that help you grow your wealth over time

What are stocks?

• A stock is a share in the ownership of a company. Stocks represent claims on a company’s assets and earnings.

• As an owner, (shareholder), you are entitled to your share of the company’s earnings as well as any voting rights attached to the stock

• Why share?

  • Corporations issue stocks to raise money for their business

    • Fund a new product line

    • R&D

    • Invest in growth

    • Pay off debt

• DRIP: Dividend Reinvestment Program

• Example: Microsoft (MSFT)

  • Shares Outstanding = 7.56B

  • Share price = $216.02

  • Market cap = 7.56B * $216.02 = $1.633T

Types of Stocks/Equities

• Preferred stocks = no voting rights

• Common stocks = voting rights

  • last in line to get paid in case of liquidation

  • last to get paid dividends

• Growth stocks

  • big potential for growth, outpacing market (AMZN, FB, MSFT)

  • typically low or no dividends (reinvest retained earnings)

• Income stocks

  • regular dividend payment (MMM, WM, VZ)

  • proven track record / biz model, consistent increase in dividends

Stock Sectors

• Area of the economy in which business share a product / service

• 11 broad sectors:

  • Energy (oil, gas, coal, fuel, etc)

  • Materials (chemical, metals, paper)

  • Industrials (defense, aerospace, manufacturing)

  • Consumer discretionary (apparel, household products, etc.)

  • Consumer staples (food, beverages, etc.)

  • Healthcare (pharma, healthcare equip)

  • Financials (banks)

  • Information technology (internet, software, semiconductor)

  • Telecommunication services (AT&T, Verizon, etc.)

  • Utilities (electric, gas, water companies)

  • Real estate (REITs, apartments, malls, office space)

Market Caps     = shares outstanding * share price

• Companies are typically measured by their market cap

• Change over time because # shares and prices can change

• Buying and selling company’s stock drives share price

• Types of caps:

  • Large cap: huge, well established companies

    • $10B+ market cap

    • typically hard to achieve massive growth due to size

    • proven track record

    • frequently offer dividends

  • Mid Cap: More established track record, can still be acquired

    • $2B-$10B market cap

    • not quite large

    • more established track record than small cap

    • often target of M&A (mergers & acquisitions)

  • Small cap: younger aggressive growth. high risk, but higher risk means higher rewards. penny stocks

    • $300M-$2B market cap

    • younger, seek aggressive growth

    • higher risk

    • don’t usually offer dividends

• Blue-chip stocks are generally large-cap stocks, meaning they have a market valuation of $10 billion or more

Types of Stocks / Equities (p.2)

• Mutual funds = pools of money from the public to buy securities

  • professionally managed

  • diversified portfolio strategy consisting of a variety of investments including stocks, bonds, options, currencies, etc

  • pros: liquid, diverse, professional management, lots of options (balanced, fixed-income, money market, income, etc.)

  • cons: higher fees, not FDIC insured, large cash holdings

• Individual stocks

  • pros: reduced fees, no management fee, complete control, easy managing of taxes

  • cons: hard to diversify, more effort/time needed

• Index funds = basket of stocks to mimic a certain market index

  • An index fund is an investment that tracks a market index, typically made up of stocks or bonds. Index funds typically invest in all the components that are included in the index they track, and they have fund managers whose job it is to make sure that the index fund performs the same as the index does.

  • pros: low fees, outperform active management over time, easy to operate

  • cons: no control over holdings, no downside protection, lack of strategies

• ETFs = basket of stocks to mimic a certain market sector that trade on exchange

  • pros: access to many stocks, low expense rates, easy to operate

  • cons: actively managed ETFs have higher fees, no downside protection, diversification is limited (only 1 industry)

  • can be bought and sold throughout the day

• REITs = a company that owns, operates, or finances income-producing real estate

  • pros: access to historically inaccessible asset class, liquid, stable cash flow through dividends,

  • cons: dividends taxed as regular income, subject to market risk (like 2008)