| Stock Market Investing - The Basics | | | | purchase price of one share. A classic good P/E |
| Stock markets allow you to buy a small portion | | | | ratio is one that's under 10 - ten years of |
| of a company (called a share). You'll get a | | | | earnings will equal the value of one share of a |
| proportional share of the revenue generated by | | | | stock. This fundamentally regulates the perceived |
| the firm, and be able to vote in the company's | | | | value of a stock - a stock with a higher P/E ratio |
| elections on choosing its board of corporate | | | | than 10 may be one that's overvalued by the |
| governance, selecting its Chief Executive Officer | | | | market, or it may be a company with huge |
| and Chief Financial Officer. | | | | growth expectations (such as Google). |
| A publicly traded company is one that has its | | | | Stock prices change over time - in the long haul, |
| shares of stock traded on a stock exchange, like | | | | decades or more, stocks out perform most other |
| the Dow Jones Industrial Average, or the New | | | | investment vehicles by a significant margin, and |
| York Stock Exchange. Publicly traded companies | | | | automatically index for inflation. However, on a |
| have significant burdens of public disclosure to live | | | | quarter by quarter, or year by year average, |
| up to, mandated by the Securities and Exchange | | | | stocks will have a lot more variance, and changes |
| Commission (SEC). The SEC mandates that | | | | in corporate governance, a bad market decision, |
| financial reports maintain a certain level of | | | | or just changing demographic trends can make a |
| transparency, and appropriate disclaimers. | | | | stock's price fluctuate wildly. |
| Not all funds are publicly traded - for example, | | | | One way to manage stock volatility is through an |
| purchasing shares of Berkshire-Hathaway, Warren | | | | investment vehicle called a mutual fund. A mutual |
| Buffet's holding company, can only be done by | | | | fund is, in essence, buying a share of a company |
| contacting the company directly. | | | | that buys lots of shares of stock, paying a fund |
| When investing in stocks, there are some very | | | | manager a very large sum of money to pick |
| basic principles to keep in mind. The first is that | | | | stocks carefully and manage your investments |
| there are two strategies - buy and hold (Buffett's | | | | for you. The aim of a fund is to build up stock |
| strategy) and buy for resale (which is speculation | | | | diversity, so that a downturn in one sector of the |
| that a stock's price will rise in the near term, | | | | economy doesn't wreck your investment in short |
| allowing you to sell it for more than you paid for | | | | order, and funds are generally broken into |
| it.) Both of these are regulated by the Price to | | | | categories by their relative risk, from growth |
| Earnings Ratio. Take the average annual earnings | | | | funds that are fairly risky, to wealth preservation |
| of one share of the stock, and figure out how | | | | funds that hold on to companies with nice, steady |
| many years of earnings it would take to equal the | | | | earnings ratios. |