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Investing Lesson 1 - Introduction to the Stock Market

Financial Terms and Introduction

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Financial Terms

Earnings per Share: The amount of profit to which each share is entitled.
Going Public: Slang for when a company is planning an IPO.
IPO: Short for Initial Public Offering. An IPO is when a company sells stock in itself for the first time.
Market Cap: The amount of money you would have to pay if you bought ever share of stock in a company. (To calculate market cap, multiply the number of shares by the price per share.) Short for Market Capitalization.
Share: A share represents an investor's ownership in a "share" of the profits, losses, and assets of a company. It is created when a business carves itself into pieces and sells them to investors in exchange for cash.
Ticker Symbol: A short group of letters that represents a particular stock (e.g., "Coca Cola" is referred to as "KO".) Underwriter: The financial institution or investment bank that is doing all of the paperwork and orchestrating a company's IPO.

Introduction

The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are not ground in facts and are the result of personal experience. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists.

The second category consists of those who know they should invest for the long-run, but don’t know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to “this stock is going up. We should buy it.” This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating).

In this series of lessons, I set out to prove that the average investor can evaluate the balance sheet of a company, and following a few relatively simple calculations, arrive at what they believe is the “real”, or intrinsic value of the company. This will allow a person to look at a stock and know that it is worth, for instance, $40 per share. This gives each investor the freedom to know when a security is undervalued, increasing their long-term returns substantially.

Before we examine how to value a company, it is important to understand the nature of businesses and the stock market. This is the cornerstone of learning to invest well.

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