Table of Contents
1 The Basics 1
What Is a Stock? 2
Prices in Stock Markets 2
Rights of Ownership 3
Why Invest in Stocks? 4
Long-Term Growth Potential 4
Easy Buying and Selling 5
Important Part of Investment Plan 6
Buying the Business, Not the Stock 6
Relating a Company's Value to Stock Price 7
Buying Great Companies 7
Avoiding Greed and Fear 8
Taking the Long View 9
Investing for the Long Term 9
The Market Moves-in Mysterious Ways 10
2 Establishing a Plan 11
Investment Goals 11
Major Financial Goals 12
Timing of Your Goals 12
When to Avoid Stocks 13
Investment Strategy 14
Investing for Growth Strategy 15
Investing for Safety Strategy 15
Balanced Investing Strategy 16
Risk and Reward 17
Understanding Risk 17
Measuring Risk Against Reward 18
Will I Achieve My Financial Goals? 19
Minimize Risk-Maximize Reward 19
Having Reasonable Expectations 20
Types of Risk 21
Systematic Risks 21
Nonsystematic Risks 22
Minimizing Risks 23
The Traps of Trading-Your Biggest Risk 24
3 Finding and Understanding Information 25
Finding Information on the Internet 26
Morningstar 26
Yahoo! Finance 27
Other Resource Websites 29
Information You Should Avoid 30
Which Numbers Are Important? 31
How to Use a Stock Screen 31
The Best Stock Screen 32
Using Morningstar's Stock Screen 33
4 Financial Statements 35
Company Reports (Financially) Tell All 36
Three Main Financial Statements 37
The Balance Sheet Must Balance 37
Assets: What the Company Owns 38
Liabilities: What the Company Owes 39
Shareholders Equity: Value to Investors 40
The Income Statement Is Home to Bottom Line 41
Revenue Is Sales 42
Expenses: The Cost of Doing Business 42
Operating Income: Sales Minus Cost of Sales 43
Net Income: The Bottom Line 43
Statement of Cash Flows Tracks Cash In and Out 44
Cash Flows from Operating Activities 45
Cash Flows from Financing Activities 46
What the Statement of Cash Flows Tells You 46
5 Types of Stocks 47
Growth Stocks 47
Defining "Growth" 48
Growth Stock Characteristics 49
Taking a Chance on Growth Stocks 50
Value Stocks 51
Not Cheap Stocks 51
Value Stock Characteristics 52
The Value Stock Investor 53
Long-Term Buy 53
Core Stocks 54
Core Stock Characteristics 54
Safety and Stability 55
The Cost of Safety 56
Size Matters in Stocks 56
Stock Sectors 57
Defensive Sectors Defined 58
Cyclical Sectors Defined 59
6 Stock Price vs. Stock Value 61
No Clear Answers on Stock Prices 62
How Daily Stock Prices Are Set 63
Price and Value Are Not the Same 63
Intrinsic Value Determines Potential Success 64
Analyzing a Company's Economic Moat 65
Strong History of Making Money 66
Evaluating an Economic Moat's Width and Depth 67
Durability of an Economic Moat 69
The Next Step: Analyzing the Business 70
Using Ratios in Analysis 70
Earnings Per Share (EPS) 71
Price Earnings Ratio (P/E) 71
Intrinsic Value Using Discounted Cash Flows 73
Understanding Discounting and Future Value 73
The Weakness of the Discounted Cash Flow Model 75
The Strengths of the Discounted Cash Flow Model 76
Alternative to Discounted Cash Flow Method 77
7 When to Buy or Sell 79
Don't Follow the Crowd 80
Following the Buyers 81
Following the Sellers 82
A Planned Approach to Buying and Selling 83
Margin of Error 83
Creating a Buy Plan 84
When to Buy Different Types of Stocks 86
When to Buy Core Stocks 86
When to Buy Growth Stocks 87
When to Buy Value Stocks 87
Have a Plan to Sell Stocks 88
Taxes and Investing 90
Choosing to Defer Taxes 90
Taxes and Investing in Stocks 91
8 Building a Portfolio 93
Understanding Asset Allocation 94
Asset Allocation and Diversification 94
The Importance of Asset Allocation 94
Those Other Two Asset Classes: Fixed Income and Cash 95
Why Include Cash? 96
Fixed-Income Securities (Bonds) 96
Timing Is Everything 98
How to Build a Portfolio That Fits You 98
Fixed-Income (Bonds) Asset Class 99
Stocks Asset Class 99
Diversification and Stocks 100
Portfolio Models 100
An Aggressive Portfolio 101
A Moderate Portfolio 103
A Conservative Portfolio 105
Portfolio Lessons 106
9 Getting Started with a Stockbroker 107
The World of Stockbrokers 108
Full-Service Brokers 108
Discount Brokers 110
Online Brokers 113
Which Broker Type Is Right for You? 114
Opening a Brokerage Account 115
Full-Service Broker Accounts 115
Discount/Online Brokers Accounts 116
Types of Accounts 116
Cash Accounts 117
Margin Accounts 117
Discretionary Accounts 118
Stock Market Orders You Should Know 118
Market Orders 119
Limit Orders 119
Stop-Loss Orders 120
Trailing Stops 120
Placing an Order with Your Broker 121
How to Keep Investing Expenses Low 122
What You Do When Things Go Badly 123
The SEC 123
Financial Industry Regulatory Authority (FINRA) 124
Individual States 124
Brokers In-House Monitoring 124
10 Mistakes to Avoid and Tools to Use 125
Common Investing Mistakes and How to Avoid Them 126
Playing Catch-Up 126
Fall in Love with a Stock or a Company 128
Market Timing 129
Abandoning Your Plan When the Market Drops 130
Rules Have Changed 132
Some Other Investing Mistakes 133
Index 135
