1. The World of Stocks
“In the business world, the rear view mirror is
always clearer than the windshield”.
Warren Buffett

2. Agenda of the module
1
Stock
2
Types of Stock
3
Company Development Cycles
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Mechanics of Stock Investing: Buying Stocks
5
Cash and Margin Trading
6
Getting the Low Down on Quotes
7
Types of Orders
8
Getting Started

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Stock
• Another name for the shares, or
partial ownership, of a
corporation
• There are 2 kinds of shares:
common and preferred:
– common shares:
• larger potential rewards and
larger potential losses
• eligible to receive dividends,
companies are not obliged to
distribute a portion of their
profits

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Stock
– preferred shares:
• hybrid between bonds and common stock, the more
like a bond the more the return will reflect the
return of a bond / the more like a stock the more
the return like reflect the return on a stock
• features of preferred may or may not include:
– guaranteed dividends at regular intervals
– limited dividends, does not rise relative to profits
– voting superiority depending on agreement
– possible convertibility into common stock or bonds
– in case of bankruptcy preferreds get paid before
common stock

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Stock
• stock certificate:
– legal document used to transfer ownership
– includes stock’s issuer, shareholder’s name, corporate
seal, number of shares it represents
– each certificate is assigned a number by the
Committee on Uniform Securities Identification
Procedures (CUSIP)
– par value is also found on the certificate: not the
price you paid for the share (market price)
• street name: when the brokerage holds your
certificate for safekeeping

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Stock
• stock certificate:
– legal document used to transfer ownership
– includes stock’s issuer, shareholder’s name, corporate
seal, number of shares it represents
– each certificate is assigned a number by the
Committee on Uniform Securities Identification
Procedures (CUSIP)
– par value is also found on the certificate: not the
price you paid for the share (market price)
• street name: when the brokerage holds your
certificate for safekeeping

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Type of Stock
• No official list divides stocks into
separate categories
• Stocks are unofficially classified by:
– size (primarily dependent on its
market capitalization)
• (multiply the number of
outstanding shares X price)
– sector (technology, industrial
energy or biotechnology)

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Type of Stock
• Using Market cap, stocks can be broken down into
four size categories:
– large-cap: blue chip (more than $ 5
billion) – AAPL, GE, MSFT,PG
• Dow Jones Industrial Average is
comprised of Blue Chip stocks
• name comes from chips in poker with
the highest value
– mid-cap (500 million to 5 billion)- S&P
400 MidCap ($MID)

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Type of Stock
• Market cap:
– small-cap (150 million to 500 million) – Russell 2000
Index ($RUT) & S&P SmallCap 600 ($SML)
• often undervalued because analysts have not began
coverage
• institutional investors often can not buy because
smaller stocks do not meet fiscal requirements that
govern the investments of many money managers and
pension funds
• http://www.smallcapnetwork.com/
– helps investors find undervalued and overlooked small
cap stocks

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Type of Stock
• Market cap:
– micro-cap (less than 150
million) – penny stocks and
stocks under $ 2
– extremely risky, many
companies fail early on
• http://www.otcmarkets.com/ho
me

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Type of Stock
• Another way to classify a stock is by its nature of its
objectives:
– income (conservative)
• solid companies that offer slow but steady growth
• regularly pay dividends
• i.e. Exxon Mobil (XOM), Bank of America (BAC)
– cyclical (conservative)
• fluctuate in relation to the economy , seasons, events
• good gauge of the economy
• i.e. Alcoa (AA)

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Type of Stock
• Nature of its objectives:
– growth stocks (aggressive)
• rarely pay dividends: prefer to
reinvest profits for future
growth
• two kinds: established growth
and emerging growth
• i.e. Apple (APPL), Charles
Schwab (SCH)

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Type of Stock
• Nature of its objectives:
– turnaround (aggressive)
• suffered sever losses and are
due for a turnaround
• offer explosive growth
• no guarantees and high risk
• Warren Buffet favorite stockpicking method
• i.e. Rite Aid Corp. (RAD), Net
Flicks, Bank of America
(BAC) – “lately”

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Type of Stock
• Nature of its objectives:
– green stocks (varies)
• environmentally friendly
and socially conscious
i.e. Ben & Jerry’s (BJICA)
• www.greenmoney.com or www.goodmoney.com
• The advantages and disadvantages of each stock
depend on your investment goals and risk tolerance

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Company Development Cycles
1. Private company: (birth)
– fundamentals not easily
discerned due to private
nature
– stock has limited availability
– risk is generally high due to
requirements: operating
capital and lack or revenue
– examples: Twitter, In n Out
Burgers

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Company Development Cycles
2. Initial public offering: (childhood)
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stock performance not available (no technical analysis)
IPO is subject to acceptance by investing community
profitability may be years in coming
long established companies, privately held, name
recognition
Example:
Groupon, IPO of $700 million
Facebook, IPO of $ 16 billion

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Company Development Cycles
3. Early-stage growth: (adolescence)
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rarely (if ever) pay dividends
stocks in thus stage are considered aggressive
critical stage of “make it or break it”
example: Facebook (460 million shares/$ 16 billion/cap 125
billion-September 30, 2013), Skype
4. Successful growth: (adulthood)
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can start paying a percentage of their profits as dividends
still needs to reinvest most of its profits back into company
paid its dues to create a successful infrastructure
examples: Google, Microsoft, Intel, Amazon

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Company Development Cycles
5. Mature company: (old age)
– larger percentage of its profit is consistently paid out
– needs to fight just as hard to stay in game
– examples: GE, Proctor and Gamble

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The Mechanics of Stock Investing
• Buying stocks: buying or going long is to make
money in a rising bull market

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The Mechanics of Stock Investing
• Buying stocks:
– two ways to buy stocks: cash and margin
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cash is a straight debit from your account
margin: brokerage lends you part of the purchase price
maximum risk: price of the stock as it approaches zero
maximum profit: unlimited
– in volatile markets, traders hedge their positions
with options or bonds

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The Mechanics of Stock Investing
• Short Selling Stocks:
– strategy used by George Soros in 1992: Black Wednesday
• made $1 billion dollars from a $10 billion short position on the
sterling
• he was dubbed the man who broke the bank of England
– can be used to take advantage of a drop in prices
– you can borrow shares from your brokerage and sell them at
a higher price and later buy them at a lower price to
replenish them
– cover the short: to buy shares of stock to replenish those
borrowed from your brokerage to place a short sale

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The Mechanics of Stock Investing
• Short Selling Stocks:
• example of the mathematics of shorting:
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EMC is currently trading @ 85 ½ per share
you want to short 100 shares
you will receive 8,550 in your account for shorting
to place the trade, most brokerages will require
you to post a margin deposit of $150% or $12,825
($8,850 x 1.5)
• price drops to $75
• you profit $1,050 = $8,550 – 7,500 ($75 x 100
shares to close position)

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The Mechanics of Stock Investing
• Short Selling Stocks:
– holding a short position in the stock for over a year
does not constitute a long term capital gain
– capital gain shelters are for long term stockholders not
short sellers
– examples of short selling: Bank of England, Goldman
Sacks
– maximum risk: unlimited to the upside
– maximum profit: limited to the full price of the stock
shares as they fall to zero

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The Mechanics of Stock Investing
• Short selling stocks:
– differences between buying and short
selling stock comes in the form of risk:
short selling means unlimited risk and
buying stock means limited risk
– a good strategy if you are going to short
sale is to use a combination of stocks and
options to create a non-directional trade
that make money regardless of whether
the stock goes up or down

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Cash and Margin Trading
• Cash trades
– require that you put 100% of the money in cash
– EMC goes from $85 ½ to $90 ½, so if you bought 100
shares you made a profit of $500, or a 5.8% return on
investment (ROI)
• ROI – the reward on a trade divided by the trade’s risk

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Cash and Margin Trading
• Margin trades
– allows you to put a percentage of the
total cost of the trade amount in cash
and the rest in “on account”
– the term margin refers to the
amount of money an investor must
pay to enter a trade with the
remainder of the cash being
borrowed from the brokerage firm:
the shares you have bought secure
the trade

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Cash and Margin Trading
• Margin trades
– margin account is usually
required for short positions and
options trading
– brokerages are usually willing to
let you borrow 50% of a trade’s
cost but require a certain
amount of money be left
untouched in your account to
secure the loan – this money is
referred to as a margin
requirement

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Cash and Margin Trading
• Margin trades
– if the stock you bought goes down, you
receive a margin call
– based on SEC rules and clearing firms,
margin equals 50% of the amount of
the trade – at this rate margin accounts
give traders 2 to 1 buying leverage
– if the price of the stock falls below 75%
of the total value of the total initial
investment, the trader receives a
margin call from the broker

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Cash and Margin Trading
• Margin trades
– brokers may set their own margin requirements, but they
are never less than 75% - the amount required by the Fed
– margin interest is cheaper than most loans , as it is a
secure loan
– margin on short selling is extremely expensive, cost of
stock plus 50%

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Getting the Low Down on Quotes
– there are hundreds of websites that provide quote, some
real time (eSignal – www.dbc.com) while more are delayed
(15 to 20 minutes)
– example: www.optionetics.com - Qualcomm (QCOM)
– bid: the highest price a prospective buyer is prepared to pay
(floor trader) – off floor trader buys at the ask price
– ask: the lowest price acceptable to a prospective seller
(floor trader) – off floor trader sells at the bid price
– the quote price gives you a general feel for the stock, but if
you want to know the stock you must look deeper than that
– off floor trader buys at the ask price and sells at the bid
price

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Getting the Low Down on Quotes
– snapshot quote is just the beginning of the process,
but it will combine the basic elements of the three
basic analytical approaches: fundamental, technical
and sentiment

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Getting the Low Down on Quotes
– Quote terms Definitions
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Last – last price that the option/stock traded at
Open – price of the first transaction of the current day
Change – amount last sale differs from previous closing
% Change – percentage price change from previous day
High – highest price for current trading day
Low – lowest price for current trading day
Bid – highest price a prospective buyer (floor trader) is
prepared to pay
• Ask – lowest price acceptable to a prospective seller
(floor trader)

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Getting the Low Down on Quotes
– Quote terms Definitions
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52-Week High – the highest stock price in the past 52 weeks
52 Week Low – the lowest stock price in the past 52 weeks
Earnings per Share – net pre-tax profit divided by the shares
Volume – total number of shares traded that day
Share Outstanding – total number of shares the Co. issued
Market Cap – shares outstanding multiplied by the price
P/E Ratio – stock price divided by the earnings per share
Exchange – indicates where a company lists its shares

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Getting the Low Down on Quotes
– fundamental analysis:
• trading approach that uses economic
and production data to determine
company’s fair value
• forecast future stock price movements
based on the balance sheet and income
statements, past records of earnings, sales,
assets, management, products and services
(example: US vs. Europe when it comes to emphasis on
questions from VC’s)

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Getting the Low Down on Quotes
– technical analysis:
• based on the theory that market prices display
repetitive patterns that can be traced and
used to forecast future stock price movement
• analyze chart patterns and statistics generated
by market activities , such as, past prices,
volume, momentum and stochastic

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Getting the Low Down on Quotes
– sentiment analysis:
• attempt to gauge investor sentiment by analyzing the
subconscious of the market place through the use of
specific psychological market criteria
• the interpretation is not
cut and dried, hence the
utilization of psychological
market indicators
• depends on a trader’s
unique interpretation of the
facts

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Types of Order
• As a trader you have to find the right trade and use
the right order technique that will enhance the trade’s
success
• The two most popular ones are the market order and
the limit order
– at-even order: wait until the market gets to the right price
for your trade to be placed
– at-the opening order: executed at the opening of the
market or be cancelled
– day order: remain good only for the duration of the day

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Types of Order
– good til cancelled: remain in effect until executed or
explicitly cancelled
– immediate or cancel order: must be executed in whole or
part as soon as entered, any part not executed is
automatically cancelled
– fill or kill orders: must be executed immediately or by a
specific date as a whole order, if not order is cancelled
– limit order: specify a maximum buying or a minimum selling
price
– limit-buy-order: must be executed below current price

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Types of Order
– limit-sell-order: must be executed above current price
– market-on-order: must be executed during the opening of
trading
– market-on-close-orders: must be executed during the
closing of trading
– market-orders: the most common type at the price given at
the time the order reaches the market / only order that
guarantees execution
– market-if-touched-orders: combined market and limit
orders, where the order becomes market order when the
options or stocks reach a specified price

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Types of Order
– market-if-touched-buy-orders: become buy market orders
when the options or stock fall below the current price
– market-if-touched-sell-orders: become sell orders when the
options or stocks rise above the current price
– stop-orders: used to limit risk, they become market orders
when the options or stocks reach a certain price
– buy-stop-orders: become market buy orders upon trade at or
above the specified price

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Types of Order
– sell-stop-orders: become market sell orders upon trade at or
below the specified price
– stop-limit-orders: an extension of stop orders, where the
activated order becomes a limit order instead of a market
order

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Getting Started
• Time should be considered
along with risk
• The trick is to invest
according to your personal
time frame, so that you are
not creating a market risk
• When markets go up, it is
called a bull-market, because
bulls buck up with their horns

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Getting Started
• When markets go down, it is called a bear market,
because bears paw swat down with their paws
• Create a portfolio of stocks that best suits your
particular needs, time horizon and risk tolerance –
known as your “investment profile”

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Getting Started
• Categories of stock:
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income: utility stocks
growth and income: blue chip stocks with a dividend
growth: mid sized to large cap stocks
aggressive growth: small to mid-cap stocks
speculative: start-ups, turnaround situations
• great potential lies in identifying growth companies with
mid to large capitalization
• future prospects of high tech stocks

46. THANK YOU VERY MUCH