April is Financial Literacy Month, during which Get Rich Slowly is exploring the fundamentals of personal finance.
I don’t know much about stocks. I’ve read some books about traders (Den of Thieves, for example), and I understand the rudiments of the stock market itself, but I don’t know anything about the language of stocks. I don’t know anything about the nitty-gritty. I can vaguely describe a P/E ratio, but that’s about it.
Obviously, I’d like to learn more. I have several books on my shelf, begging me to read them. What I really need is a bare-bones introduction to the subject.
Michael Fischer, the man behind the Saving and Investing videos I promote from time-to-time, has begun work on a new series specifically about stock valuation which I hope can give me a basic understanding of the vocabulary of stocks. Here are some of his introductory remarks on valuation:
The purpose of this section on valuation is much more to demystify some of the terminology and to highlight some of the methods that are used by analysts and portfolio managers and market professionals to determine the value of stocks, and also to demystify the terms that are so commonly used in the financial press…[These videoas are not meant] to encourage people to conduct valuation of individual securities themselves, or to use these methods to make decisions…
I haven’t had time to watch all of these yet, but I’d like to point them out in case you’re interested in learning, too:
- 1. Introduction to valuation
- 1b. Remarks on valuation
- 2. The price/earnings ratio
- 2b. One year of earnings might not tell you that much
- 3. The price/sales ratio
- 4. The price to book
- 5. An introduction to the dividend discount model
- 6. An introduction to the discounted cash-flow model
In his introduction to valuation, Fischer says:
When we talk about valuation, we’re talking about trying to derive what the value of a particular security [i.e. stock] might be using different methods. All of the methods have advantages and disadvantages — some are more difficult to calculate, and some more easy.
In general, when we think about buying anything, whether it’s a piece of art or furniture, we’re typically comparing the benefits that item might provide, how they compare to the cost of that item, or how they compare to benefits that other items might provide at a similar cost. We can ultimately make an informed assessment whether those future benefits outweigh the cost of that item today.
After watching two videos from this new series, I think it’s important to first be familiar with some fundamental terminology. A good way to do this is to watch Fischers’s first series of videos on saving and investing.
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