Teaching Some Information About Stocks


The main thing you want to discuss when presenting information about stocks is why should individuals be interested in investing stocks. An article by Fidelity helps out greatly with this. They present the following three reasons to invest:

Stocks grow over time (if you pick the right ones) at a greater rate than other investments. It is important to note that not all stocks will grow, as some will remain stagnant and others will decline.

Data Source: Ibbotson Associates, 2014 (January 1926 – April 2014). Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard and Poor’s 500 Index (S&P 500 Index), bonds by the U.S. Intermediate Government Bond Index, short-term investments by U.S. Treasury bills, and inflation by the Consumer Price Index.

Often times you are hearing on television how certain markets are reaching new highs and this is true in a lot of cases each day because more and more people are investing.

It is important to note that investing in stocks is a speculative risk, meaning there is a chance for earning more money, but also a chance to lose everything. As a result it is often important to diversify your portfolio. It is also important to understand the beta coefficient of a stock. If the beta, listed on a stock table, is above 1 that means its price fluctuates with the market. For example, a beta of 1.50 vs. a beta of .75 means the stock with a beta will go up and down as the market it is associated with does, resulting in more price volatility.

Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or implied performance of any investment option.

When deciding on what stocks to purchase there are important questions that need to be asked. Wall Street Survivor has posted a great blog featuring 50 questions you should answer Yes to and 25 questions you should answer No to before deciding on stock purchases.

When teaching stocks it is essential to discuss all risks associated with stocks: speculative risk, political risk, economic risk and so on. It is important to indicate that investing in stocks should be done as a long term investment for the best growth. It is important to indicate how individuals should check how their stocks are performing a couple of days a week, but to not make rash decisions about selling off stocks unless they have strong reason.

It is important to understand the information presented regarding stocks. For example, a conference call is the company’s best chance of indicating they will improve, so this informational piece holds a bias towards the company. In the same way many television shows relating to stocks feature analysts who have their own bias. For example, nearly every stock discussed on Mad Money with Jim Cramer features shortly after it “Cramer’s Trust owns this stock.” This is often times how famous investors make money on stocks, by suggesting people buy them. This is extremely common regarding penny stocks. In the same regard guest analysts featured on Fast Money may discuss a stock that their firm owns to get it exposure. Luckily for most individuals now Fast Money has a “first trade tomorrow” segment that specifies each analysts position in the stock. For example, you may see an analyst suggest you buy a stock and below there will be an indication of long, short or no position.

Finally, it is a great idea to suggest tools regarding both the understanding of stocks and the implementation of trading.

NOTE: Trading of stocks is not for everyone and requires risk tolerance.

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