Summary
Highlights
A stock represents ownership in a company, with two main types: common stock (voting rights, claim on profits, non-guaranteed dividends) and preferred stock (usually no voting rights, steady dividends, priority in payouts). Investors build a portfolio, which is a collection of investments. Public companies list shares on the stock market, while private companies retain private ownership. Indexes like the S&P 500, NASDAQ, and Russell 2000 track groups of stocks, serving as benchmarks to 'beat the market'.
Stocks trade on stock exchanges like the NYSE through brokerages. Each stock has a ticker symbol. Trading occurs during official market hours (typically 9:30 a.m. to 4:00 p.m. ET), but also includes pre-market and after-hours trading, which have lower volume and liquidity. Volume indicates trading activity, and liquidity refers to the ease of buying or selling a stock without significant price impact.
Financial metrics include market capitalization (total value of a company's stock), enterprise value (stock, debt, and cash), revenue (total income), and net income (profit after expenses). A company's assets (what it owns) and liabilities (what it owes) are found on its balance sheet. Common ratios include Earnings Per Share (EPS), Price-to-Earnings (P/E) ratio, PEG ratio (P/E adjusted for growth), dividend yield, and free cash flow. Profitability margins include gross margin, operating margin, and net profit margin.
Stocks can be classified as growth stocks (expected to grow quickly), value stocks (undervalued by the market), and blue-chip stocks (large, well-established companies). Cyclical stocks move with the economy (e.g., car companies), while defensive stocks are stable in any economy (e.g., food, utilities). Stocks are also grouped by market capitalization: large-cap (over $10 billion), mid-cap ($2-10 billion), small-cap (under $2 billion), and penny stocks (under $5, highly speculative).
Investment vehicles include mutual funds (professionally managed portfolios), ETFs (exchange-traded funds that trade like stocks), and index funds (track market indexes). Hedge funds use advanced, high-risk strategies for wealthy investors. Tax-advantaged accounts like Roth IRAs allow tax-free growth and withdrawals for retirement. Other investment types include commodities (gold, oil), bonds (loans to companies/governments), currencies, and cryptocurrencies.
Volatility measures how much stock prices fluctuate. The VIX, or 'fear index,' indicates expected S&P 500 volatility. A bull market signifies rising prices and investor optimism, while a bear market indicates falling prices and pessimism. A correction is a temporary 10% market drop, and a rally is a sharp climb after a dip. A crash is a sudden, severe price drop. Market bubbles occur when prices rise far above actual value, driven by speculation. Market sentiment reflects overall investor feelings, influencing trends.
Passive investing involves holding broad market indexes or funds long-term, often employing dollar-cost averaging (regular fixed investments). Lumpsum investing is investing a large sum at once. Active investing involves picking individual stocks or timing the market to outperform averages. Common strategies include buy the dip, buy and hold, and market timing. Analytical approaches include fundamental analysis (company financials), technical analysis (price charts), and macro analysis (overall economy).
An Initial Public Offering (IPO) is when a private company first sells shares to the public. A secondary offering is issuing additional shares. A buyback (share repurchase) is when a company buys its own stock. Stock splits increase the number of shares (e.g., 2-for-1 split), while reverse stock splits combine them. An acquisition is one company purchasing another. For dividend stocks, the ex-dividend date is the cutoff to qualify for a dividend, and the payment date is when the dividend is issued. Insiders are individuals with access to non-public company information, and their trades are monitored.
Diversification spreads investments across different areas to mitigate risk. Asset allocation involves dividing money among asset types based on goals and risk tolerance. Rebalancing adjusts holdings to maintain target allocations. Performance metrics include Alpha (outperformance relative to the market), Beta (portfolio sensitivity to market movements), and the Sharpe Ratio (risk-adjusted return). Correlation indicates how closely investments move together. Systematic risk affects the entire market, while unsystematic risk is specific to a company or sector. Economic indicators include inflation (rising prices), deflation (falling prices), stagflation (rising prices with stalled growth), and recession (economic shrinkage). Monetary policy (central bank actions) and fiscal policy (government spending/taxes) are used to manage the economy.