We hoped you enjoyed our last segment, Investing 101, where we shared ways to get involved in investments along with some advice about risk taking. Today, I want to branch off and provide an overview of the stock market, a place where anyone can invest thanks to the power of technology.
This article is tailored to newcomers and beginners who are interested in investing in the stock market. Please keep in mind we will build on this article and explore the various channels that exist in the stock world as we move forward.
What is a stock?
A stock is simply a piece of a company, when you buy a stock you are purchasing part of a company.
Stocks are sold on the stock exchange, there are many different exchanges such as the New York Stock Exchange (NSYE), Nasdaq and many more all around the world. All companies in the United States who exist on these exchanges are known as publicly traded companies who are governed by the Securities and Exchange commission (SEC). After an initial public offering (IPO), stocks are issued by a corporation in order to raise funds.
Stocks are then bought by people and institutions under the assumption that their will be a return on investment. Of course, in reality their are winners and losers in the economy, same can be said about the stock market.
You can lose money just as fast as you can earn it.
I hope I didn’t discourage you, fortunately there are many companies out there that you may be familiar with that have been around for many years such as Disney, Apple, Microsoft, Intel, Amazon, and many more.
With the advancement of technology, the stock market isn’t limited to just Wall Street. The democratization of the stock market and accessibility has been intensified with brokers such as Robinhood who as a first mover, offer all trades for free. Since then , in order to compete, many other companies like Webull and existing giants like E Trade now offer free trading.
There are also an abundance of resources that exist out there to help you better understand stocks, such as Market Watch, Yahoo finance, Investopedia, and International Business Daily.
As an introduction to stocks, I want to introduce you to some fundamentals that will help you make smart investments.
Let’s start with “qualitative factors.”
Qualitative Factors
Simply put, the numbers.
The Securities Exchange Comission governs the stock market and requires all publicity listed companies to release financial statements every quarter (every three months). These statements include the income statement, the balance sheet, and the cash flow statements.
These financial statements are an important tool to understanding if a company is creating value or losing value in terms of profitability. All traders including Warren Buffet have mastered reading these statements and the great thing is, many of these websites as the ones mentioned like Marketwatch and Yahoo Finance house this data per company. You can easily go to one of these websites, type in a company such as Apple, and read their financial history. You could of course go to the Apple website and obtain the same information.
Before we move on, I want to briefly cover each financial statement, starting with the income statement:
Income Statement
The income statement is a screenshot of a particular time period used to help highlight financial performance of a given company.
Here you can review revenue (how much their operations generate in revenue), Expenses (how much is the company spending on resources and other items) profits and loss (are they operating at a profit or a loss), and of course net income (the bottom line, revenue minus expenses) or net loss to better understand a company’s value.
One analysis tool I use is simple, I look for positive growth on revenue and net income over several quarters. Seeing a positive trend on both is a good indicator of a strong consistent company.
The Balance Sheet
Similar to the income statement, the balance sheet is a snapshot that highlights a company’s assets (cash, inventory, liabilities, accounts recievables and shareholder equity) and liabilities (expenses, taxes, loans) for a particular time period. What i look for here is to make sure the company owns more assets then liabilities.
Cash Flow Statements
The cash flow statements is the last required financial statement required by the SEC. The cash flow statements are classified into three different reports: operating, financing, and investing cash flow.
Cash flow statements act as a bridge, linking the balance sheet and income statement from consecutive periods.
- Operating Cash Flow: Operating cash flow is the money generated through a company’s business operations.
You want these figures to be positive, because it demonstrates the company is generating a positive cash flow through its operations. - Financing Cash Flow: Finance is the money generated through its financial operations that involve debt, equity, and dividends. For example, to increase cash flow from finance a company could take out a loan (not really what investors want to see) or buy back stock (increases stock value). You want these figures to be lower, if there is alot of flow coming from here it can indicate borrowing debt which is what many investors shy away from.
- Investment cash flow: Investment cash flow is the cash generated (or a loss) through a company’s investing activities. This could be investments in securities, investing in properties, equipment, plants, or selling properties, equipment and plants.
These financial statements provide transparency, and more importantly key information before making an investment decision. It is best to compare these different statements over a period of time and look for a positive trend amongst these statements.
We will be releasing an article to dive deeper into these statements soon. These quantitative factors play a decisive role, however, qualitative factors also must be factored.
Qualitative factors to consider
Politics
Politics will always be a force that could boost or derail the price of a stock. One example is Marijuana stocks, as more states begin to decriminalize Marijuana, Marijuana stocks will go up in value as more investors will buy in response to the political news. For example, because of many states such as Arizona to decriminalize Marijuana, Canopy Growth a company who focuses on medical Marijuana products has seen a percentage jump following deregulation in key states due to the November elections to 46.8% growth in stock price. Tilray, another Marijuana stock company saw a similar increase of 48.97%.
The politics is different towards each industry, some industries are more regulated and some are less.
Regulations can make stocks go up or down, and before regulations become law much speculation is generated across the media, internet, social media,and other outlets providing you with the opportunity to be proactive when you are purchasing or selling a stock.
Industry Trends
Industry trends can help you identify new and upcoming stocks. Historically, it is rare for industries to stay stagnant, there are many different ways companies must adapt to certain trends. For example, the automotive industry has been fueled by gasoline, but companies like Tesla are shifting the way automotive carmakers design cars. With the rise of electric vehicles and a population who seems to care a little more about the environment, automakers are changing the way they design cars in response to Tesla. GM and Volvo are recent examples of companies who have committed to fully electric cars in the very near future.
For us peeps who play with stocks, we can identify and make money on companies who champion these changes.
Study the industry Overview of Stocks and look for any new trends along the way, companies who capitalize on these trends make money, and us who buy the stocks could get a piece of the pie.
Health Crisis
As you all have experienced, we are almost at year one living post covid. Covid has changed the way we live, and has shifted how companies do business. Many industries have taken a hit from the pandemic, cruise ships, tourism, airlines, sports, the list goes on and on. Some of you who had prior investments maybe took a hit. Regardless, there are many stocks that have thrived such as tech stocks, zoom, Microsoft, Google, Amazon etc. With crisis always comes opportunity, do your research and you will see there are many stocks out there to buy.
Culture
Each stock represents a real company. Consider the working culture and reputation of a company, understand its mission and vision, is it committed to excellent customer service? What type of reputation does the company have? Do they have consistent leadership or is the company on its 5th CEO in five years? Ask the right questions about a company and use the answers to your advantage.
The reality is, there are many qualitative factors to consider, and they are all important. Preparation and research will help you identify the most important ones for a particular stock.
Strategy
Strategy is key, there are many ways to make money off of stocks. Personally, I like to choose stocks that I believe will grow in the long term. So I tend to choose stocks that have healthy Financials over several quarters.
Of course there are many strategies in Overview of Stocks that many people follow. You can choose option trading where you basically bet a stock will go up (call) or a stock will go down (put).
You also have day traders, who literally take advantage of the small shifts in price as it changes throughout the day. Played correctly you can definitely make some money, but of course it comes with its risk.
I take into account many qualitative factors of course, and then I do my best to make a rational decision. I prefer the long game, just like Warren Buffett who champions long term investments in healthy (fundamentally sound) stocks.
Overview of Stocks: Stocks such as Amazon and Starbucks have held healthy Financials and are considered reliable companies. These companies have less volatility (known as Beta). Many investors refer to this volatility (fluctuation in stock price) as risk.
Risk
There are of course risks when buying a stock. You can lose all your money in an instant. Take into consideration the risk you take when you buy a particular stock. From a financial stand point I gave the example above about beta, a stocks volatility.
The higher the beta the more volatile and vice versa.
High risk, high reward.
This is why the stock market is more risky then the bond market for example. Its volatilty is higher..
Take into consideration the volatility of a stock before you make a final decision.
Emotion
Humans are emotional, we tend to make decisions on a daily basis based off of impulse. The DOW Jones dips low, people sell in panic. Other people don’t care about the fundamentals or the rules of the game. This is why investing for the long term is the safest bet. Great companies will make it through the tough times, through economic dips, pandemics, wars, as it always has. Every ten years exist what economists call “Black Swans.”
As Warren Buffett points out, if you look at the historical stock performance of the S&P 500, the index has always trended upwards.
Regardless we are all different, feel free to come up with your own strategy that best suites your stock ambitions.
The stock market can also be manipulated as some reddit geniuses have shown. Take Gamestop for example, Reddit’s Wallstreetbets were able to orchestrate to bet on the stock and encourage mass buying. This was done to execute what is known as a short squeeze.
A mainstreet strategy against the Wallstreet professionals, a short squeeze is when there is a sudden spike in the stock. This then forces option traders who bet that the stock would go down (short sellers) suddenly scramble to buy the stock as it goes up to reduce their losses.
In this case, these “option traders” are hedge funds who prey on companies doing poorly to bet that the stock would go down. Thus taking advantage by short selling.
This story is a great example of vindication.
When common people become enlightened, the masses hold true power. Instead of the stock going down, millions began to purchase the stock in masses. Consequently, mass purchasing occurs in a stock, it catapult a stock upwards; Gamestop in this case reached record heights forcing short sellers to sell losing as much as 5 billion.
Sadly, many of these brokerage firms such as Robinhood and many others have disallowed the purchasing of Gamestop, Express, and Amc. This is due to “volatilty concerns” or so they say.
The truth is these hedge funds who have preyed on our economy in the past, take advantage of failing businesses. In the long run, they are being protected by Robinhood and these other exchanges. Hopefully, as we move forward together, we can change the culture of stocks together.
Conclusion, Overview of Stocks
To conclude, the stock market is only gaining in popularity with only a half of our population participating. There is money to be made. Of course as a safe bet, I like to promote long term strategy with both qualitative and quantitative elements. This helps guide your decision making.
I hope this helps give you some insight about the stock market. Of course if you have any questions, feel free to reach out. Till next time!-Phan
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