Stock valuation metrics and how to value a stock

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:

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How to use debt consolidation to cope with high-interest debt

Today, Michael Fischer covers two closely-related subjects: high-interest credit card rates and debt consolidation.


High credit card interest rates (3:48)

 

"With the effects of compounding, having credit card debt is a really bad idea." Credit card interest rates are high because lenders are taking a greater risk. When you buy a house, the bank knows there's something it can repossess if you fail to pay. But when you buy food or clothing on credit, there's nothing for the bank to take if the debt goes bad. Unsecured debt like this carries higher interest rates in order to compensate for the increased risk. "When we have credit card debt to buy things that drop quickly in value, we have the worst scenario on both sides."

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What is Dollar-Cost Averaging? An introduction to DCA

The three videos scheduled for today were going to cover hedge funds. After watching them, however, I've decided they're not necessary for basic financial literacy. Unless I've missed something, hedge funds are targeted primarily at institutional investors. If you want to learn more about them, you can visit the SEC or watch Michael's videos at YouTube:

Instead of covering hedge funds, we'll move on to Michael's discussion of timing investments and dollar-cost averaging:


Timing investments and dollar-cost averaging (5:52)

 

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Active vs. passive investing: Which management strategy works best?

First, Michael Fischer introduced us to mutual funds. Next, he described the various types. Today he looks at the difference between actively- and passively-managed funds.


What are active and passive management? (4:27)

 

In a way, passive management is like "autopilot" — the fund manager feeds parameters into a computer, and the fund manages itself. Active management costs more, but in return there's an actual pilot at the helm of the craft, attempting to find the best route. (This metaphor is a simplification, but conveys the basic idea.) Continue reading...

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What is a Stock Market Index?

Have you ever wondered what all of those numbers on the nightly business report actually mean? Michael Fischer explains:


What is a stock market index? (3:44)

 

Just as you cannot accurately gauge the health of a garden from the growth of a single plant, you cannot gauge the health of the market from the performance of s single stock. Stock market indexes — or indices, if you prefer — allows us to track groups of stocks instead of simply following individual stocks.

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What is a Stock?

Yesterday we learned about bonds, which are small slices of debt. Today Michael Fischer defines stocks, or small slices of equity:


What is a stock? (2:37)

 

The stock market has its own unique vocabulary, with "puts" and "calls", "preferred stock" and "P/E ratios", "dividends" and "spread". I'll cover more of these later, but for now here are some basic concepts.

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Why do financial markets exist?

In today's episode of "Saving and Investing", Michael Fischer explains why we have financial markets. If you've been following along, you can probably guess that their primary function is to encourage interaction between providers of capital (savers and investors) and users of capital (companies and governments).


Why do financial markets exist? (2:19)

In his book, Michael elaborates on the subject:

Because there are so many different users and providers of capital with different needs and preferences, there is more than one financial market, and also there are different terms used to describe different areas of the financial markets.

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An introduction to financial statements

Today's episode of "Saving and Investing" features three short videos, each of which is an introduction to a particular financial statement. Learning to read financial statements can help you evaluate the companies in which you would like to invest. (These statements are mandatory parts of corporate financial reports.)

First, Michael Fischer explains balance sheets:


What is a balance sheet? (1:53)

This video has some difficult-to-read subtitles. They are, in order:

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What is Leverage?

In today's episode of "Saving and Investing", Michael Fischer explains a concept I've heard mentioned a lot, but have never understood. The term "leverage" is used in many financial books and articles, often referring to real estate investments. The concept has always puzzled me, even when I looked it up. Michael's explanation is short and to the point. Leverage makes perfect sense now.


What is leverage? (2:48)

 

A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you've made $1. However, if you're able to borrow an additional $90 to purchase that stock, you'd have $100 total to invest. If that stock goes up 10%, you've made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)

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Debt vs Equity: The difference between these relationships

Yesterday Michael Fischer differentiated between providers of capital and users of capital. Today he explains the two ways in which these groups interact: through the exchange of debt and the exchange of equity.


Equity and Debt (5:57)

 

When a provider of capital loans money to a user of capital, it's a debt transaction. When he owns a portion of the user of capital, it's an equity transaction.

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