UNDERSTANDING STOCKS Michael Sincere 10381_Sincere_fm.c 7/18/03 10:59 AM Page i Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-143582-4 The material in this eBook also appears in the print version of this title: 0-07-140913-0 All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. 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DOI Page 6x9 10/2/02 1:33 PM Page 1 , Contents Acknowledgments v Introduction vii P ART O NE WHAT YOU NEED TO KNOW FIRST 1 Welcome to the Stock Market 3 2 Stocks: Not Your Only Investment 19 3 How to Classify Stocks 29 4 Fun Things You Can Do (with Stocks) 37 5 Understanding Stock Prices 49 6 Where to Buy Stocks 55 P ART T WO MONEY-MAKING STRATEGIES 7 Want to Make Money Slowly? Try These Investment Strategies 69 8 Want to Make Money Fast? Try These Trading Strategies 77 10381_Sincere_fm.c 7/18/03 10:59 AM Page iii For more information about. this title, click here. Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. P ART T HREE FINDING STOCKS TO BUY AND SELL 9 It’s Really Fundamental: Introduction to Fundamental Analysis 89 10 Fundamental Analysis: Tools and Tactics 97 11 Let’s Get Technical: Introduction to Technical Analysis 107 12 Technical Analysis: Tools and Tactics 131 13 The Psychology of Stocks: Introduction to Sentiment Analysis 141 P ART F OUR UNCOMMON ADVICE 14 What Makes Stocks Go Up or Down 149 15 Why Investors Lose Money 157 16 What I Really Think about the Stock Market 171 Index 189 iv CONTENTS 10381_Sincere_fm.c 7/18/03 10:59 AM Page iv Acknowledgments I’d like to give special thanks: To Stephen Isaacs and Jeffrey Krames at McGraw-Hill for once again giving me the opportunity to do what I love most, and to Pattie Amoroso for helping me put the pieces together to produce a book. To my researcher, Maria Schmidt, who found the answer to nearly everything I asked; Tine Claes, who never fails to find something that needs improvement; and Lois Sincere, who has truly mastered the idio- syncrasies of the English language. To Tom Reid, a teacher at Deerfield High School in Florida, for help- ing to make the most complicated financial concepts seem easy; student Bailey Brooks for helping with editing; Dan Larkin, CEO and senior consultant for Larkin Industries, Inc., for his extremely insightful sug- gestions and comments; Mike Fredericks, Brad Northern, and Howard Kornstein for their thoughtful financial analysis and insights; Colleen McCluney for her encouragement and patience; and Oksana Smirnova for her inspiration and enthusiasm. To the hardworking and friendly staff at Barnes & Noble bookstore and Starbucks in Boca Raton, Florida. Finally, to my friends, family, and acquaintances: Idil Baran, Krista Barth, Bruce Berger, Andrew Brownsword, Sylvia Coppersmith, Lourdes Fernandez-Vidal, Alice Fibigrova, Joe Harwood, Jackie Krasner, Johan Nilsson, Joanne Pessin, Hal Plotkin, Anna Ridolfo, Tim Schenden, Tina Siegismund, Luigi Silverstri, Alex Sincere, Debra Sincere, Miriam Sincere, Richard Sincere, Harvey 10381_Sincere_fm.c 7/18/03 10:59 AM Page v Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. Small, Bob Spector, Lucie Stejskalova, Deron Wagner, and Kerstin Woldorf. For additional reading, I recommend the following books: The Stock Market Course (John Wiley & Sons, 2001), by George Fontanills and Tom Gentile A Beginner’s Guide to Short-Term Trading (Adams Media Corpo- ration, 2002), by Toni Turner Reminiscences of a Stock Operator (John Wiley & Sons, 1994), by Edward Lefevre vi ACKNOWLEDGMENTS 10381_Sincere_fm.c 7/18/03 10:59 AM Page vi Introduction This book will be different. Thousands of books have already been written about the stock mar- ket, many of them technical and tedious. Before I wrote this book, I was amazed that so many boring books had been written about such a fas- cinating subject. Just like you, I hate reading books that put me to sleep by the second chapter. That is why I was so determined to write an entertaining, easy-to-read, and educational book about the market. I wanted to write a book that I can hand to you and say, “Read everything in this book if you want to learn quickly about stocks.” You don’t have to be a dummy, idiot, or fool to understand the market. You also don’t have to be a genius. After you read this book, you will real- ize that understanding stocks is not that hard. (The hard part is making money, but we’ll get to that later.) I also don’t think you should have to wade through 300 pages to learn about the market. Too many books on stocks are as thick as col- lege textbooks and not nearly as exciting. Even though this book is short, it is packed with information about investing and trading. I did my best to make sure that you would have a short and easy read. I wrote this book because I wanted you to know the truth. As I was writing, a corporate crime wave was sweeping across America. Dozens of corporations were accused of cheating people out of millions of dollars. It upset me that so many investors have become victims of the stock market. It seems as if the name of the game is entic- 10381_Sincere_fm.c 7/18/03 10:59 AM Page vii Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. [...]... you want to buy 10 00 shares of a stock that is selling for $15 a share How much will it cost you? The answer is $15 ,000 One more example: Let’s say you want to buy 10 0 shares of a stock that costs $5 a share The answer is $500 How Much Did You Make? Let’s say you decide to buy 10 00 shares of a stock that costs $15 a share It will cost you $15 ,000 If the stock goes to $16 , you have made 1 point If the... point If the stock goes to $17 , you have made 2 points Here’s the important part: If you have 10 00 shares of a stock and you made 1 point, you made $10 00 in profit If the stock goes up 2 points, you made $2000 in profit So the more shares you own, the more money you’ll make (or lose) (More examples? If you own 10 0 shares of a stock and it goes up 1 point, you made $10 0 If you own 10 0 shares of a stock and... complicated than it is The same type of scoring is done with the major indexes like the Dow, the Nasdaq, and the S&P 500 If the Dow went from 10 ,000 to WELCOME TO THE STOCK MARKET 13 10 ,10 0, you would say the market went up by 10 0 points If your stock went from $10 a share to $11 a share, you made a point, not a dollar Note: Although it’s okay to tell people how many points you made or your percentage gain,... representative group of 30 stocks, the Dow 30 Even if the market is down for the day, the stock you own could be up, or the other way around 12 UNDERSTANDING STOCKS Other Indexes Although the Dow (operated by the Wall Street Journal) was the first index to keep track of stocks, hundreds of other indexes have been created to track almost everything from transportation to utilities to technology stocks Some sophisticated... dates, from 1 to 12 months; notes have maturity dates ranging from 1 to 10 years; and bonds have maturity dates of 10 years or longer, often as long as 30 years Usually, the longer the term of the loan, the higher the yield will be (The yield is what you will actually earn from the bond.) Bonds can be confusing so I’ll give several examples: Let’s say you decide to lend a corporation $5000 for 10 years... corporation pays you 10 percent a year That means that for the next 10 years you’ll receive $500 a year in interest payments To review, the bond has a $5000 face value (how much it costs), a 10 percent coupon (a fixed interest rate), and a 10 -year maturity (time period) That wasn’t hard, was it? Usually, people who don’t like a lot of risk tend to buy bonds rather than stocks With stocks, there is the... first place If you owned a mutual fund that contained a stock that went up a lot in price in 1 day, you might make 1 or 2 percent on your fund that day But if you owned the stock directly, you could make 10 or 20 percent, or perhaps more, in 1 or 2 days (I’ve owned stocks that have gone up as much as 50 percent in 1 day.) Net Asset Value A net asset value (NAV) is similar to a stock price It technically... shares of your stock Why Stocks Are a Good Idea There are a number of reasons why you should buy stocks According to researchers, stocks have beaten every other type of investment over any 10 -year period during the last 75 years They are a good buy even after a market crash or an extended bear market According to research conducted by Jeremy Siegel, best-selling author of Stocks for the Long Run (McGraw-Hill,... the most popular method of determining whether the market is up or down for the day The Dow Jones Industrial Average In 18 84, a reporter named Charles Dow calculated an average of the closing prices of 12 railroad stocks; this became known as the Dow WELCOME TO THE STOCK MARKET 11 Jones Transportation Average His goal was to find a way to measure how the stock market did each day He then wrote comments... which refers to a very aggressive short-term trader For example, a day trader might buy a stock at $10 a share with a plan to sell it at $10 .50 or $11 , usually within the same day If the stock goes down in price, he or she will probably sell it quickly for a small loss In other words, day traders buy stocks in the morning and sell them for a higher price a few minutes or hours later Generally, they . Stocks Go Up or Down 14 9 15 Why Investors Lose Money 15 7 16 What I Really Think about the Stock Market 17 1 Index 18 9 iv CONTENTS 10 3 81_ Sincere_fm.c 7 /18 /03. Analysis 10 7 12 Technical Analysis: Tools and Tactics 13 1 13 The Psychology of Stocks: Introduction to Sentiment Analysis 14 1 P ART F OUR UNCOMMON ADVICE 14