How to start investing - Basics Flashcards

Question

What is the method of narrowing your focus when doing stock research?

Answer 1

There are a lot of numbers in the financial documents for a company. To save time you can focus on these items: - Revenue: The amount of money a company brought in during a given period. It's the first thing you will find on the income statement which is why it's called "top line". - Net Income: The total amount of income a company has made after operating expenses, taxes, and depreciation are subtracted from the revenue. It is at the end of the income statement which is why it's called the "bottom line". - Earnings and Earnings Per Share (EPS): When you divide the earnings by the number of shares available to trade you get the earnings per share. This shows the profitability on a per share basis. - Price-Earnings Ratio (P/E): Dividing a company’s current stock price by its earnings per share — usually over the last 12 months — gives you a company’s trailing P/E ratio. This measure of a stocks value gives you how much investors are willing to pay to receive $1 of the company's current earnings. - Return on Equity (ROE) and Return on Assets (ROA): Return on equity reveals, in percentage terms, how much profit a company generates with each dollar shareholders have invested. The equity is shareholder equity. Return on assets shows what percentage of its profits the company generates with each dollar of its assets. Each is derived from dividing a company’s annual net income by one of those measures. These percentages also tell you something about how efficient the company is at generating profits.

Answer 2

If quantitative stock research reveals the black-and-white financials of a company’s story, qualitative stock research provides the technicolor details that give you a truer picture of its operations and prospects. Here are questions to ask about potential companies to invest in: - How does the company make money? A good rule of thumb that’s served Buffett well: Invest in common-sense companies that you truly understand. - Does this company have a competitive advantage? The harder it is for competitors to breach the company’s moat, the stronger the competitive advantage. - How good is the management team? Also research the company’s board of directors, the people representing shareholders in the boardroom. Be wary of boards comprised mainly of company insiders. You want to see a healthy number of independent thinkers who can objectively assess management’s actions. - What could go wrong? We’re not talking about developments that might affect the company’s stock price in the short-term, but fundamental changes that affect a business’s ability to grow over many years. Identify potential red flags using “what if” scenarios: An important patent expires; the CEO’s successor starts taking the business in a different direction; a viable competitor emerges; new technology usurps the company’s product or service.

Answer 3

Before you buy any stock, you want to build a well-informed narrative about the company and what factors make it worthy of a long-term partnership. And to do that, context is key. For long-term context, pull back the lens of your research to look at historical data. This will give you insight into the company's resilience during tough times, reactions to challenges, and ability to improve its performance and deliver shareholder value over time. Then look at how the company fits into the big picture by comparing the numbers and key ratios above to industry averages and other companies in the same or similar business. Many brokers offer research tools on their websites. The easiest way to make these comparisons is by using your broker's educational tools, such as a stock screener.

Answer 4

1. When to sell stocks When you sell depends on your investing strategy, your investing timeline, and your tolerance for risk. Ongoing poor performance relative to the competition, irresponsible leadership and management decisions you don’t support may all make the list of good reasons. Maybe you’ve decided your money would do better elsewhere, or you’re harvesting losses to offset gains for which you’ll owe income taxes. Bad reasons typically involve a knee-jerk reaction to short-term stock market fluctuations or one-off company news. Bailing when things get rocky only locks in your losses, which is the opposite of what you want. (You know the saying: Buy low, sell high.) Before you sell, think about why you bought the stock in the first place. Did you consider what news or circumstances would make you sell it? Go over your reasoning to ensure you’re not giving in to an emotional response you might later regret. 2. Decide on an order type Market order The order will execute within a few seconds at market price. The risk: Your stock could sell at any price, with no restrictions. Limit order You set a limit price and the order will execute only if the stock is trading at or above that price. The risk: You could end up not selling if the stock never rises to your limit price. Stop-loss order You set a stop price and your order will execute only if your stock begins trading at or below that price. The risk: You could sell for less than your stop price — there is no floor. Also, a temporary drop in price may trigger a sale when you don’t want it to. Stop-limit order You set both a stop price and a limit price. The risk: You’ve added a floor, but if the stock drops below it too quickly — which can happen in a volatile market — you may not sell at all. 3. Fill out the trade ticket Filling out the trade ticket is a quick process: You’ll select sell, plug in the symbol of the stock, the number of shares, your order type (and limit or stop price, if applicable) and what’s called the “time in force” or order expiration: essentially, how long the order should remain open.