Investing 101 - Wall Street 101 - Wall Street Survivor

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  • Investing 101

    A Complete Introduction to Investing, Stock Markets & Online Trading for Beginners

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    ta bl e of c on t e n t s

    Table of Contents Introduction 3

    1 Understanding Investment Choices 4

    2 How the Stock Market Works and Why It Moves 26

    3 Making Your First Trade 44

    4 Building Your $100,000 Portfolio 58

    5 Now That I Own It, What Should I Do? 70

    6 Fundamental Analysis: Understanding Earnings & Cash Flow 82

    7 Technical Analysis: Common Charts & Terms 102

    8 Current Topics In Trading 130

    9 Introduction to Options 150

    10 The Survivors Guide To Success 168

    Quiz Answers 184

  • wa l l st r e et su rv i vor i n v e st i ng 101

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  • i n t roduc t ion

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    Introduction

    Whether you are working at Mcdonalds or working on Wall street, education is the key to empowering yourself to take charge of your financial future.

    Whether you have $100 or $10,000,000 in savings, we believe that you should have a basic understanding of how the stock market works. You should know how to manage your own money ,so that you can control your financial future. if youre paying others to manage your money, now you can learn to do it yourself its not as diffi-cult as you might think.

    its a fact that most brokers and money managers cant outperform the market. They pay themselves and their secretaries and their marketing expenses first, and then the investors get to share whatever profits are left. learn to manage your money yourself, and youre already ahead because you dont have a broker or money managers expenses!

    investing 101 will teach you about the different investment choices available to you, how the stock market works, how to evaluate stocks, and how to build and manage a well balanced portfolio.

    before we jump in, please understand that this course is not about getting rich quick; this course is about getting rich slowly.

    successful investing requires constant education and a disciplined approach. The goal is to grow rich over a lifetime of savings and prudent investing decisions, so please resist offers from so-called investment gurus who promise to make you a million dollars in the next year. investing 101 will show you how money and wealth are really generated; by carefully investing over time, and by balancing risk with potential returns.

    ready? Then lets begin.

  • wa l l st r e et su rv i vor i n v e st i ng 101

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    Chapter 1 Understanding Investment Choices

    t he first time tiger Woods grabbed a golf club he couldnt hit the ball perfectly straight 300 yards and the first time Michael Jordan touched a basketball he couldnt dunk it, so dont think that you will be able to earn a 100% return in the first year. before tiger could swing a club, he had to learn which end of the club to hold, and how to hold it. When learning any new skill, you must begin understanding some of the tools and terms involved. Without this basic knowledge, it is difficult if not impossible to practice your new skill properly.

    as you navigate through this investing course, you will become a knowl-edgeable and smarter investor. This first lesson covers the primary tools you will use to empower yourself to become more financially successful. once you become comfortable with these tools and understand what each can accomplish and what they cannot you will begin an exciting jour-ney toward financial security.

    as with most journeys, you will encounter some twists, turns, and detours. With your newfound knowledge, however, you should navigate successful-ly during both sunny and pleasant periods and during stormy conditions. enjoy your trip!

    Marks Tip!

    During these sunny and stormy conditions you are sure to experience the the thrill of victory and the agony of defeat (to borrow a line from the old ABC Wide World of Sports).

    The thrill of victory is buy-ing a stock and having it double in a few weeks and the agony of defeat is losing your shirt on a trade when you knew it was going to be a solid performer.

    wa l l st r e et su rv i vor i n v e st i ng 101

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    c h a p t e r on e u n de r sta n di ng i n v e st m e n t c hoice s

    1.1 Bank and Credit Union Products

    so, you just got your year-end bonus of $2,000. now, what are you going to do with it? lets review the obvious choices

    M ost financial institutions, banks, credit unions, mutual savings banks, and savings and loan associations have a similar menu of investment products from which you may choose. Here are the most common and popular products:

    Sav i ngS accou n tS

    The benefit of a savings account is that you can make deposits and with-drawals whenever you want, no questions asked. Plus, your deposit is protected by the full faith and credit of the u.s. government. if the bank ever goes belly-up, the federal deposit insurance corporation (fdic), which is a branch of the u.s. government, will guarantee your money up to $250,000 per person, per bank account. and in 2009, the fdic has been very busy protecting the deposits for people in about 100 banks that went bankrupt!

    from bank to bank, savings accounts are all basically the same, but you need to pay close attention to the fine print. The typical differentiators are:

    Interest rate

    Frequency of interest (earnings) posting periods

    Different minimum balance accounts that pay higher interest rates if you maintain the minimum amount on deposit

    Fees for withdrawals, statements, etc.

    Here is a savings account interest rate table from one of the leading u.s. banks:

    Bal anCe R eqUIR e d InTe R esT R aTe$0 0.05%$10,000 0.25%$25,000 0.75%

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    as long as you are investing $250,000 or less, this is a very safe investment, but on the downside, you can see that your return is practically nothing at this time.

    certificate S of DepoSit (cDs)

    You agree to deposit a specific amount of money for a fixed period of time called the maturity. in return, your financial institution agrees to pay you interest, usually higher than regular savings accounts, over this period. However, you will have limited opportunities to access these funds, so only use cds for cash you dont anticipate needing until after your cd matures.

    should you need some or all of your money in cds, you can withdraw it, but you will pay a substantial penalty, often forfeiting all the interest you have earned since you purchased the cd.

    There are several different terms for cds: 3 months, 1 year, 2 years, 5 years, even 10 years. generally, the longer the term of the cd, the greater return on your money. However, there is a catch: you risk interest rates going up when you buy a longer term.

    When you buy a cd, you are locked into that interest rate for the life of the cd. if you take out your money before the full term, the bank will charge you a substantial penalty as we mentioned before, so you cant just sell a cd and then buy a new one with a higher interest rate if your current cd has a lower yield.

    on the flip side, you are practically guaranteed a fixed rate of interest on your money for the complete term of that cd. in an era of high inflation rates, cds are an excellent investment.

    The last time there were high interest rates in the u.s. was the 1980s, when rates of return on cds were in the mid-to-high teens! now, however, inter-est rates for cds are very low: 2 percent for a one-year cd and just 3 percent for a 5-year cd.

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    c h a p t e r on e u n de r sta n di ng i n v e st m e n t c hoice s

    Mon ey M a r k et accou n tS (M M as)

    These accounts are designed to be a combination of the features of a classic savings account and a cd. some typical features include:

    Higher interest rate than classic savings accounts

    No maturity date as with a CD

    A minimum balance that must be maintained (e.g., $2,500)

    Limited withdrawals each month (typically up to six transactions per month)

    do not confuse bank MMas with the similarly named accounts offered by investment firms. They are very different. bank MMas are another form of savings account and carry the federal insurance, currently up to $250,000 per depositor, which all other deposit accounts enjoy. The similarly named product offered by investment houses is typically a short-term invest-ment in one or more mutual funds that may or may not generate positive earnings. There is also no federal insurance protecting your principal (investment).

    When you have one of these savings accounts, you are really loaning your financial institution your money. in return, the bank or credit union pays you interest for making these loans. unlike most loans, however, you are usually guaranteed repayment; even if your institution fails. in case of the banks failure, the free federal insurance you receive covers the loss.

    StockS

    stocks are equity investments, which means that buying even one share of a companys stock means you are a part-owner.

    for example, if you own one share of apple, inc. (aaPl) stock and apple has 100,000,000 shares that are issued and outstanding, then you own .000001% of the company. if apple were then to be sold to XYZ company for $50,00,000,000 then you would receive $50 for your share.

    so, as a stock owner, you are really becoming a business owner. and what do business people care about? Thats right, you guessed it: maximizing sales and minimizing expenses. This equals increasing profits and making money! Therefore, the price of a stock is generally dependent on a combi-nation of current profits and expected future profits of that business.

    Marks Tip!

    If