¶ Introduction
Stocks represent ownership shares in a company.
By holding stocks, you are entitled to a portion of the company's earnings and, depending on the type of stock, voting rights in company decisions.
¶ Types of Stocks
¶ Common Stock (also ordinary share)
Common stocks give shareholders voting rights in a corporation, but they are last in line when it comes to dividends.
- Voting Rights: Typically, one share equals one vote.
- Dividends: Paid out after preferred stockholders receive their dividends.
¶ Preferred Stock
Preferred stocks don't offer voting rights, but they do promise a fixed dividend payment.
- Dividend Preference: Higher priority than common stockholders.
- No Voting Rights: Shareholders cannot influence corporate decisions.
¶ Stock Exchanges
Stocks are typically traded on stock exchanges, which act as marketplaces for buying and selling shares.
Examples include:
- NYSE: New York Stock Exchange
- NASDAQ: National Association of Securities Dealers Automated Quotations
- LSE: London Stock Exchange
Different Stock exchanges around the world might offer different fees to you. Usually it is cheapest to buy locally but it might not always be possible
Be aware on the opening hours. Prices are usually best while an exchange is open.
While an excnange is in closing hours, you may not trade the given stock at all
¶ Investment Strategies
Investing in stocks can be approached in various ways depending on your financial goals, risk tolerance, and investment timeline.
Whether you opt for short-term or long-term investment strategies, it's essential to diversify your portfolio and consult with a financial advisor.
¶ Truisms About Stock Investments
These are some truisms about the stock market with my opinion on them.
Click to reveal a detailed list of immediate sell signals
> **Past Performance is Not Indicative of Future Results** What has happened in the past is not a guarantee for what will happen in the future. {.is-success}Time in the Market Beats Timing the Market
Long-term investment generally yields better results than trying to time market fluctuations.
From my experience 110% true. That beeing said, look at japanese stocks in the recent decade(s)
Diversification Reduces Risk
Spreading your investments across different asset classes can reduce your exposure to any single asset's performance.
True for a big part but beware overdiversification, it is also not a full protection at all.
Costs Matter
Taxes, fees, and transaction costs can significantly erode gains over time.
110% true
Emotions are the Enemy
Investing based on emotional reactions often leads to poor decisions.
110% true. Hence I do long term investment now.
If It's Too Good to Be True, It Probably Is
Be wary of investments promising guaranteed or unusually high returns.
Especially when you get a call by a crude oil mining inversor, which wants to sell you a golden Cow.
Buy Low, Sell High
The core principle of making a profit in any investment; easier said than done.
True but hard to execute depending on the Market situation
Risk and Reward are Inversely Related
True to a good degree but certainly not a golden rule
Cash is Not King in the Long Term
Holding cash for too long can result in lost opportunities and reduced purchasing power due to inflation.
This is highly situational. Look for example in Japan or in crysis. Yes, Holding cash will cause loss due to inflation. But makes up for it x-fold if you do not have to sell your stock in a crysis to the worst time and if you can realize chances in special occasions. You should always have an emergency buffer as well. At best you can live from your emergency money for > 1 year
¶ Short Term (eg. Daytrading)
¶ What Is It?
Daytrading involves buying and selling stocks within the same day, aiming for quick profits. The idea is to capitalize on short-term movements in stock prices.
¶ Key Techniques
Daytraders often use charts and patterns to predict future price movements.
Some use automated systems to make large numbers of trades in seconds.
¶ Risks and Rewards
- Risks: High. Quick price changes can result in significant losses.
- Rewards: Potential for quick profits but requires constant monitoring.
¶ Example
Buying a tech stock at $50 in the morning, selling it at $52 in the afternoon for a $2 profit (4%) per share.
¶ Long Term Investment
¶ What Is It?
Long-term investing involves buying and holding stocks for several years or decades. The goal is to build wealth gradually over time.
¶ Risks and Rewards
- Risks: Lower than daytrading, but still exposed to market and company risks.
- Rewards: Potential for long-term growth, usually less stressful than daytrading.
¶ Example
Buying shares of a stable company and holding them for 20 years, benefiting from price growth and dividends.
¶ Key Techniques
¶ Immediate Sell Signals: Reddest Red Flags for Long-Term Investors 
This is a long, but incomprehensive list of catastrophic failure selling signals.
For a more general list, check the next section, "red flags".
Click to reveal a detailed list of immediate sell signals
You get a very cringe feeling about a company, its products, services, policies or management
High Debt-to-Equity Ratio Exceeding Industry Norms
Example: J.C. Penney faced high levels of debt compared to equity, leading to bankruptcy.
Frequent Share Dilution
Example: AMD had a history of diluting shares to raise capital, which was a red flag for long-term investors.
Pending or Ongoing Regulatory Investigations
Example: Enron faced regulatory investigations before its downfall.
Suspicious or Excessive Insider Selling
Example: ImClone Systems had an insider trading scandal involving its CEO.
Frequent Legal Disputes with High Financial Stakes
Example: Purdue Pharma faced multiple lawsuits over the opioid crisis.
Failing to provide financial repports (hello Wirecard)
Faked product showcases, such as trucks which are beeing rolled downhill without Motors (hello Nikola_Corporation)
Drastic Management Changes
(e.g., Sudden CEO resignation without a clear succession plan)
Revenue and Profit Warnings
Illegal Activity and connected major fines
Volkswagen emissions scandal
Negative Media Coverage Confirming Scandals or Mismanagement
Boeing's 737 MAX crisis
Volkswagen emissions scandal
Auditors Resigning or Issuing Going Concern Warnings
(e.g., Patisserie Valerie)
Significant Drop in Key Performance Indicators
(e.g., a sudden drop in user engagement for social media companies)
Unexplained or Frequent Changes in Accounting Methods
(e.g., WorldCom accounting scandal)
Causing Major Community uproars and Shitstorms in repeated manner (hello Artesian_Builds)
Repeating major Quality Issues (product fails) which the Company is unable to resolve
¶ Red Flags
The below list of red flags does not mean immediate bankrupcy but prompts the investor for immediade attention in order to check how to move forward with the company.
Please note this list is by far not comprehensive
Click to reveal a detailed list of red flags
¶ Financial Metrics and Ratios:
Declining or Negative Earnings Per Share (EPS)
High Debt-to-Equity Ratio
Declining Free Cash Flow
Increasing or High P/E Ratios compared to Industry Average
¶ Management and Governance:
High Turnover Among Senior Management
Frequent Changes in Business Strategy
Lack of Transparency
Failure to disclose important information to shareholders can indicate unethical or deceptive practices.
Example: Enron
Poor Communication Skills
Inconsistent or vague communication from leadership can create investor uncertainty, affecting the stock price.
Example: Tesla's Elon Musk's Twitter Usage
Unrealistic Goals or Forecasts
Setting and failing to meet overly ambitious targets can erode investor trust.
Example: Theranos
¶ Market and Competition:
Decreasing Market Share
No Sustainable Competitive Advantage
¶ Corporate Actions:
Frequent Share Dilution
Suspicious or Excessive Insider Selling
¶ Economic Indicators:
Deteriorating Macroeconomic Conditions
¶ Regulatory and Legal:
Pending or Ongoing Regulatory Investigations
Frequent Legal Disputes
¶ Other:
Inconsistent or Opaque Financial Reporting
Declining Industry or Market
Lack of Innovation or R&D Investment
History of Dividend Cuts
Overreliance on Few Customers or Suppliers
¶ Fundamental Analysis
Long-term investors focus on a company's overall health, management team, and key financial indicators. The objective is to obtain a comprehensive view of the company by examining available information like public videos, interviews with management, product testing, and financial statements.
fundamental_analysis_form.pdf
fundamental_analysis_form.docx
Key Questions:
- Is the management team well-suited to lead the company?
- What is the market outlook for the company? Is it in a thriving or declining industry?
- Does the company seize or miss opportunities?
- How well are the company's products or services performing?
- Is the company well-positioned for the future?
- Is the company financially stable?
- Debt-to-Equity Ratio
Shows the proportion of debt a company uses to finance its assets. High levels can indicate high risk or an unhealthy company but may be industry-specific.
A ratio below 1 is generally considered good, as it indicates that a company has more equity than debt.
Formula:Debt-to-Equity Ratio = Total Debt / Total Equity - Is the company's market share increasing or decreasing?
- What are the key revenue streams for the company?
- Free Cash Flow
Reflects a company's financial flexibility and its ability to invest, repay debt, or return money to shareholders.
Positive free cash flow is considered healthy as it indicates the company can pay off debts, make new investments, and return money to shareholders.
Formula:Free Cash Flow = Operating Cash Flow - Capital Expenditures
Stock-based compensation is often not accounted for in the Free Cash Flow and should be subtracted manually. This can have a significant impact on the company's actual Free Cash Flow, as these non-cash expenses could artificially inflate the FCF numbers.
- How competitive is the company in its market?
- The history of the Earnings per share. A falling EPS can indicate that the Business is not doing well or diluting the shares by creating new ones out of thin air to raise more capital.
- Earnings Before Interest and Taxes (EBIT)
Gives an idea of a company's earning potential from its core business, excluding the impact of interest and taxes.
A positive EBIT is healthy; it indicates the company is profitable from its core business operations before accounting for interest and taxes.
Formula:EBIT = Revenue - Operating Expenses
The fundamental analysis serves as the foundation for investment decisions. If the foundation is weak, the share price is less relevant.
After establishing a basic understanding of the company, investors can dive into more detailed financial metrics to gauge share price value.
Key Financial Metrics and Formulas:
After establishing a basic understanding of the company, investors can dive into more detailed financial metrics to gauge share price value.
-
Price-to-Earnings (P/E) Ratio
Measures how much investors are willing to pay for a company's earnings. A high P/E could indicate overvaluation, while a low P/E might suggest undervaluation.
A P/E ratio between 15 and 25 is generally considered healthy. A lower P/E ratio could indicate an undervalued stock, while a higher ratio could mean an overvalued stock.
Formula:P/E Ratio = Stock Price / Earnings Per Share (EPS) -
Price-to-Book (P/B) Ratio
Compares the market value of a stock to its book value. Lower values often indicate a stock is undervalued.
A P/B ratio under 3 is usually considered good. However, this can depend on the industry. For example, tech companies often have higher P/B ratios.
Formula:P/B Ratio = Stock Price / Book Value Per Share -
Return on Assets (ROA)
Measures how efficiently a company uses its assets to generate profit. Higher ROA is generally better.
A ROA above 5% is generally considered good, indicating effective use of assets to generate profits.
Formula:ROA = Net Income / Average Total Assets -
Return on Equity (ROE)
Measures profitability from shareholders' perspectives. A higher ROE indicates better efficiency in generating profits.
An ROE above 15% is considered healthy. It shows that the company is effectively using shareholders' equity to generate earnings.
Formula:ROE = Net Income / Average Shareholders' Equity -
Net Debt-to-EBITDA
This ratio measures a company's leverage and its ability to meet its debt obligations. A higher ratio often indicates higher financial risk.
Formula:Net Debt-to-EBITDA = Net Debt / EBITDA
These formulas should provide a solid foundation for evaluating a company's financial health. Always remember to consider these values in the context of the industry and economic conditions.
¶ Portfolio Diversification
Spreading investments across a variety of assets, sectors, or regions to reduce risk. Portfolio diversification aims to maximize returns by investing in multiple areas that would each react differently to the same event. This can include various types of stocks, bonds, cryptocurrencies, and other asset classes.
Diversification reduces the risk associated with the poor performance of a single asset or sector. It also provides the potential for better long-term returns by allowing investors to capitalize on opportunities in different areas.
Purchasing an index fund or ETF can be a form of diversification, but the degree of diversification varies by the index or ETF in question. Often you are not as diversified as you might think
More Information
-
Concentration Risk:
If the index or ETF is heavily concentrated in a few stocks or sectors, it might not offer broad diversification. (which is the case for many) -
Sector Exposure:
Some index funds and ETFs are sector-specific, limiting diversification across the economy. -
Geographic Exposure:
Global or international index funds and ETFs offer geographic diversification. -
Asset Classes:
There are index funds and ETFs that cover equities, bonds, commodities, and multiple asset classes for broader diversification.
Research shows, that a Portfolio of >20 Stocks, usually almost entirely represents the Market movement and Diversification of >10 stocks has less and less effect
Key Effects:
Reduces overall investment risk
Increases potential for higher long-term returns
Offers protection against adverse market conditions
Click to reveal the detailed list of benefits and drawbacks
Benefits:
Reduced risk of substantial loss
Improved potential for long-term gains
Decreased impact of any single investment's poor performance
Opportunity to invest in different sectors and asset classes
Easier to manage risk and return expectations
More resilient to market volatility
Drawbacks:
May lead to lower returns if diversified into underperforming assets
Complexity and time required for ongoing management
Costs related to diversifying, like transaction fees, especially for smaller portfolios
Risk of over-diversification leading to mediocre performance
¶ Dollar-Cost Averaging
Regularly buying a fixed dollar amount of a stock, regardless of its price, to build a position over time.
The concept aims to mitigate the risk associated with a single large investment. By dividing a significant investment into smaller, periodic purchases, you effectively average the purchase price. This strategy minimizes the impact of market volatility and can even make it advantageous, as you'll buy more shares when prices are low and fewer when prices are high.
Additionally, for those looking to invest large sums, dollar-cost averaging can prevent a single transaction from unduly affecting the market price.
Key Effects:
Averages out the stock market price
Less potential to outperform the market by timing purchases, but also less potential to underperform
Reduces stress and emotional investment decisions
Click to reveal the detailed list of benefits and drawbacks
Benefits:
Very easy to execute
Enables larger investments without market disruption
Well-suited for a saving plan where you invest a specific amount each month
Reduces emotional investment decisions
Lowers stress by automating investment decisions
Encourages disciplined investment
Removes the nessesity of timing the market
Drawbacks:
May result in suboptimal asset allocation
Potential for lower returns in a consistently rising market
Investment fees could accumulate over time with frequent purchases
Does not guarantee profits or protect against losses in long term declining markets
¶ Risks and Rewards of Investing in Stocks
Investing in stocks comes with both potential upsides and downsides. Understanding these can help investors make more informed decisions.
Click to reveal a detailed list of risks and rewards
Rewards Details:
Stocks are generally easy to buy and sell.
One can do that from small amounts of cash to large quantities (low entry level, high scalability)
Your stock's value can increase over time, offering the potential for high returns.
Some companies distribute a portion of their earnings to shareholders.
Financial freedom through compounded returns
Ease of diversification
Holding a company's stock means you own a piece of the company and may have voting rights in corporate decisions.
Risks Details:
Stock prices can be volatile and there's the potential to lose your entire investment.
As a shareholder, you have limited influence over the company's management decisions.
Factors like inflation, interest rates, and economic downturns can negatively affect stock prices.
While it is easy to buy/sell a stock, understanding the financial Principles can be very complex. a recipe for desaster. More info: Dunning-Kruger effect
A decline in the industry can impact your investment.
Poor management can result in a declining stock price.
Company bankruptcy risk
Emotional stress due to market fluctuations
Companies can create new shares in order to raise more capital. This dilutes your share on the company.
¶ Conclusion
Stocks offer an investment opportunity with both risks and potential rewards. Due diligence and a diversified portfolio are keys to successful stock investment.
For more in-depth information on related financial instruments, navigate to their respective sub-pages.