All about promotions. Esme Faerber

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About the book “All About Stocks” by Esme Faerber

You have the most detailed and clear guide to stock investing in your hands.

The book contains the necessary knowledge that can be useful to an investor: from basic concepts of the stock market to professional tools and working methods. Esme Faerber will teach you how to assess risks and build your portfolio, introduce you to the basics of fundamental and technical analysis, and provide ready-made strategies for the rapid growth of assets and their thoughtful development. Working with a book will save your savings.

The book is intended for novice investors and those who want to strengthen their knowledge of the stock market.

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In November 2001, Enron filed for bankruptcy. Investors who bought shares of this well-known company at $60 per share at the beginning of the year watched their investments lose value.
For three years, from March 2000 to 2003, the stock market was in deep crisis. The NASDAQ index fell 71%. The stock market has not experienced such a decline since the Great Depression of 1929.
The Boeing stock price was $33.50 per share in November 2001, and on May 3, 2006 it rose to $85 per share. Over 4.5 years the growth was 155%.

So you've seen how easy it is to lose money when investing in stocks. Yet more than half of United States citizens own stocks either directly or indirectly through retirement portfolios. Understanding what stocks are and how the stock markets work can help you avoid costly stock investing mistakes and build a portfolio of high-yielding investments, like Boeing stock.

WHY INVEST IN STOCKS

The investment profile raises the question: why invest in stocks if you can lose part of your investment because of it? The answer is visible in Fig. 1-1, illustrating why the stock is so attractive to .

Over a more than 19-year period, from 1986 to 2004, returns on stocks of both large and small companies exceeded returns on bonds and Treasury bills, significantly outpacing inflation. However, over five years, 19 stocks performed worse than bonds and Treasury bills. However, a long-term investor should not be discouraged by a few unprofitable years, as it is the growth of wealth over the long term that matters more.

In Fig. Figure 1-2 shows how significantly actual stock returns outperformed bond and Treasury bill returns from 1926 to 2000. $1 invested in each of the above instruments showed different inflation-adjusted returns. A $1 investment in small-cap stocks returned over $500, while a similar investment in large-cap stocks returned $150 over the same period. Actual returns on Treasury bills, Treasury bonds, and corporate bonds were 1.50, 3.79, and 5 .50 dollars respectively. These returns demonstrate how attractive investing in stocks is over the long term.

So, we can draw the following conclusions:

to reduce the risk of losses, you should invest in shares for a long-term period;
To obtain high returns in the long term, investors should not attach great importance to the volatility of annual returns, which should be considered as an insignificant obstacle to higher returns;
with long-term investing, losses in the stock market become quite noticeable;
when investing for a long period, shares of small companies bring higher returns compared to large ones;
In the short term, investments in bonds and short-term Treasuries may be more effective than investments in stocks;
bonds provide higher yields than Treasury bills (money market securities);
investing in common stocks provides favorable federal tax treatment that investors in the bond and money markets do not have. Dividends on common stocks are taxed at preferential federal tax rates (below the marginal tax rate), while income from bonds and money market securities is taxed at marginal rates.

In table Table 1-1 outlines some reasons why you should consider investing long-term in stocks rather than bonds, Treasury bills, certificates of deposit, or money market mutual funds for better returns.

Investors who invest for the long term (more than five years) and are willing to bear the risk of loss in a falling market should invest in stocks. Investors with shorter "time horizons" who want a steady stream of income from their investments and who are risk averse should invest in bonds. Your financial goals and personality determine the types of securities in which you invest.

TABLE 1-1. Top reasons to save more and invest wisely

People are living longer, so they need more money to support themselves in retirement.
Prices for medical care, education and insurance services are constantly rising.
Real estate prices, including residential buildings, are steadily rising.
It is necessary to stay ahead of inflation and improve living standards.
People want to make a fortune to leave a legacy.
The more you save and invest now, the higher your solvency will be due to the compounding interest rate.
By investing wisely, you increase your wealth.

DEVELOP A PERSONAL FINANCIAL PLAN

The investing process begins with creating a financial plan that outlines your financial goals and a plan to achieve them. If you don't know what you want, you won't know how to get it.

1. Formulate your financial goals

within one year, collect savings “for a rainy day”;
buy a car in five years;
after 10 years, pay for children’s education;
within 25 years to form a pension capital. Investing for retirement differs from investing for shorter-term goals due to the time horizon and risks involved.

TIME HORIZON

Determining your time horizon is important because it gives you a better idea of how much you will need to invest to achieve each goal. The amount of funds to finance each goal directly depends on your financial status or net worth. In table 1-2 shows how to calculate it. Equity is the difference between how much you have and how much you owe.

Analyzing your monthly budget will also help you determine how much you'll have to invest and how much risk you're willing to accept.

safety of invested capital;
income stream;
capital gains.

Safety of invested capital. Money market instruments, such as bank accounts, savings accounts, certificates of deposit, money market mutual funds, Treasury bills, and commercial bills, provide investment security and low returns. Short-term goals such as building an emergency fund and saving for small purchases throughout the year fall into this investment category. The profitability of such instruments often does not cover inflation and taxes.

Income Stream. Investments that provide a steady stream of income at a higher rate of return than money market instruments include bonds and preferred stocks. A shift in interest toward bonds and preferred stocks in order to obtain higher returns may result in a loss of invested capital. If the price of bonds and preferred shares falls below their purchase price, investors will suffer losses if they sell their investments. High-risk, high-yield bonds (junk bonds) offer potentially higher income streams than investment-grade bonds, but they are also not immune to the risk of default on payments of the bond's face value to its holders. Investors wishing to finance their goals with time horizons ranging from one to five years use bonds that have maturity dates that correspond to their chosen horizons. This allows you to get higher returns than money market instruments.

Capital gains. Investing for capital appreciation may provide an increase in the value of the investment, or capital gains. Stocks have the potential for capital gains if their prices rise above the purchase price. The risk is that the price of a stock may fall below its purchase price, causing loss of capital. For this reason, it takes a longer time horizon (more than five years) to be able to ride out a decline in the stock market. Some stocks pay dividends, providing stockholders with a stream of income. In general, the yield on dividend stocks is lower than on bonds. However, not all stocks are dividend stocks, and investors invest in them expecting growth. Equity investments are suitable for financing long-term investment goals (with a time horizon of more than five years), such as building retirement savings.

Thus, there is always a balance between risk and return. Low-risk investments (money market securities) guarantee the safety of invested capital, but have low returns. Fixed income securities (bonds and preferred shares) provide higher yields but carry the risk of losing invested capital if the bonds default or the preferred shares must be sold for less than their purchase price. Common stocks provide the highest level of total returns (capital gains and dividends) over the long term, but have an increased risk of losing invested capital over a short time horizon. Your personal circumstances (age, marital status, number of dependents, net worth and income) determine your appropriate level of risk as a guiding principle when choosing investment instruments.

2. Distribute your assets

So, the younger you are, the more money you should invest in capital gains (common stocks and real estate). The closer you get to retirement, the more you should invest in bonds and money market securities that provide income, and the less you invest in stocks that provide portfolio growth. In Fig. Figures 1-3 show two asset allocation plans as examples. The first of them is aimed at a married couple aged about 30 years, who invest mainly in the formation of pension savings for a period of more than 30 years. The second plan is designed for a married couple aged about 45 years. This plan invests slightly less in stocks for the 20-year period remaining before retirement.

Asset allocation plans should be re-evaluated periodically as your financial situation changes. In table Tables 1-3 provide guidelines for creating your personal asset allocation plan.

3. Choose an investment strategy

Investors who believe in efficient markets expect to earn average market returns, knowing that they cannot beat them. Such investors follow a passive investment strategy, forming and holding a diversified portfolio of shares that follows the structure of stock indices.

If investors believe that markets are inefficient (prices are slow to respond to information), then there will be many undervalued and overvalued stocks for them to find. Such investors use financial and investment to find such undervalued stocks and obtain returns above the market average. Investors following an active investment strategy buy stocks when they are undervalued and sell them when they are perceived to be overvalued. Asset allocation plans change with market conditions, and the percentage of funds invested in stocks increases when the market is considered undervalued and decreases when the market becomes overvalued.

4. Choose investment instruments

An active investor uses fundamental and technical analysis to buy stocks when they are undervalued, then sell them when they become overvalued and replace them with other, undervalued assets.

Whether you are an active or passive investor, you need to reduce your risk of loss by diversifying your portfolio. In other words, don't put all your eggs in one basket.

5. Evaluate your portfolio

You should evaluate your portfolio periodically as changes in your circumstances may necessitate a review of your asset allocation plan. In addition, changing economic and market conditions may affect your asset allocation plan. Also, changes in a company's business will have a direct impact on the price of its shares, which are included in your investment portfolio.

WHAT INVESTING IN STOCKS CAN GIVE YOU

If you have a long-term investment horizon and sleep well at night during stock market downturns, then you should consider investing in stocks because:

shares provide income in the form of dividends and capital appreciation. Historically, stock returns over the long term (seven years or longer) have outperformed bonds and money market securities. Investing in shares provides growth in the investment portfolio in addition to income in the form of dividends;
shares are a means of preserving capital. Buying and holding appreciation stocks in your portfolio is a tax-smart way to increase their value because if the holding period before selling the shares is longer than one year, the capital gains are subject to federal tax at a rate not to exceed 15%. Income from shares held for less than a year is taxed at your marginal tax rate, which can exceed 35%. Check with your accountant to see if Congress has changed the Internal Revenue Code regarding the capital gains tax;
Dividend income on qualified shares that qualify for tax benefits is taxed at lower rates than interest income on bonds and money market securities.

All rights reserved. No part of this book may be reproduced in any form without the written permission of the copyright holders.
Legal support for the publishing house is provided by the Vegas-Lex law firm.

© Esmé Faerber, 2006
© Pobortseva O.M., translation into Russian, 2013
© Edition in Russian, design.
Mann, Ivanov and Ferber LLC, 2013
© Cover photo, shutterstock.com

Foreword from the publishing partner

The global financial system basically contains many different instruments: stocks, futures, bonds, forwards, options, currencies, etc. - all this is like a living organism. From Latin, the word “action” is translated as “action” or “to set in motion.” It is stocks that are the first to make this cauldron boil, being the most sensitive indicators of macro- and microeconomic processes in the world. This is the basis from which you should start, what everyone who is going to devote even a small part of themselves to the investment process should start with.
Russian realities are such that Forex trading, investing in pyramid schemes and investing in stocks are often on the same level - and this is taken for granted. And not only that, the promises of castles in the air, filled with profits from dubious placement of funds, are compared with real earnings on the stock market. How often do we not notice the filthy soul behind beautiful faces? Or, on the contrary, behind the seemingly ordinary appearance lies Humanity (with a capital H). This is exactly what is happening now: people are greeted by their clothes, but no one looks into their heads, and for some reason delving into the essence is now unfashionable. Perhaps the complex and sometimes too pretentious presentation of general concepts related to the stock market, on the one hand, gives it a certain mystery and even romance, and on the other, completely discourages the desire to go deeper into the process.
The wonderful book “All About Stocks,” written by a mother who loves her children, a good wife and, of course, an outstanding specialist in her field, is designed to help everyone who has wanted to ask something for so long, but was a little shy. Here everyone will find answers to those questions that caused difficulty. Understand what stocks are and what is the use of them; learn to manage them and find out when it’s best to buy and sell them; discover some interesting ways of analysis; perhaps become a supporter of one of the approaches to investing and, finally, choose the style or method that suits you - all this can be found in the book by Esmé Ferber.
Despite the fact that the publication is adapted for the American market, the examples most accurately and succinctly characterize the subject of the story. The essence of investing in stocks is the same, whether it is the USA, Brazil, Germany, China or Russia, so you should not focus on the regional aspect. And of course, anyone who reads it in Russian will definitely take a different look at the Russian stock market, see new opportunities for themselves and finally open this invisible curtain between those who are “in the know” and those who are not. .
I recommend reading it!

Kazakbaev Marat,
asset manager
NETTRADER.ru

Acknowledgments

Many people at McGraw-Hill contributed to this book, but I would especially like to highlight Daina Penikas.
Thomas Hoens provided me with information about his research on the net cash flow adequacy ratio (CFAR), for which I am very grateful.
I dedicate this book to my husband, Eric, and my children, Jennifer and Michael, for their constant support, patience, and help.

Preface by the author

The third edition of All About Stocks includes materials that will help investors become more informed about their stock investments. Investing in stocks is not an easy task as the process involves many questions, recriminations and risks. Hindsight can help you figure out which stocks to buy, but when it comes to looking into the future, many investors are afraid to make decisions that will give them an edge in the market. The purpose of this book is to describe stocks, their associated risks and returns, describe how the stock market works, evaluate stocks, how to use fundamental and technical analysis in choosing stocks to sell and buy, the differences between growth, value and momentum stocks, and outline stock market theories.
Among the many changes made to this edition are new chapters on stock valuation, foreign stock investing, and exchange-traded funds. Each chapter contains new sections that will help both beginners and advanced investors find the tools and knowledge necessary to increase profitability without significantly increasing risk by building a diversified portfolio. As an informed investor, you can more easily make better stock investing decisions.

Chapter 1
Why invest in stocks?

Main themes

Why should you invest in stocks?
Developing your financial plan
What will investing in stocks give you?

Investment section
In November 2001, Enron filed for bankruptcy. Investors who bought shares of this well-known company at $60 per share at the beginning of the year watched their investments lose value.
For three years, from March 2000 to 2003, the stock market was in deep crisis. The NASDAQ index fell 71%. The stock market has not experienced such a decline since the Great Depression of 1929.
The Boeing stock price was $33.50 per share in November 2001, and on May 3, 2006 it rose to $85 per share. Over 4.5 years, the growth was 155%.

Why invest in stocks

The investment profile raises the question: why invest in stocks if you can lose part of your investment because of it? The answer is visible in Fig. 1-1, illustrating why stocks are such attractive investments.
Over a more than 19-year period, from 1986 to 2004, returns on stocks of both large and small companies exceeded returns on bonds and Treasury bills, significantly outpacing inflation. However, over five years, 19 stocks performed worse than bonds and Treasury bills. However, a long-term investor should not be discouraged by a few unprofitable years, as it is the growth of wealth over the long term that matters more.

Figure 1–1
Annual returns on stocks, bonds, and Treasury bills, 1986–2004.

In Fig. Figure 1–2 shows how significantly actual stock returns outperformed bond and Treasury bill returns over 1926–2000. $1 invested in each of the above instruments showed different inflation-adjusted returns. A $1 investment in small-cap stocks returned over $500, while a similar investment in large-cap stocks returned $150 over the same period. Actual returns on Treasury bills, Treasury bonds, and corporate bonds were 1.50, 3.79, and 5 .50 dollars respectively. These returns demonstrate how attractive investing in stocks is over the long term.

Figure 1–2
Actual return on investment of $1, 1926–2000.

So, we can draw the following conclusions:
to reduce the risk of losses, you should invest in shares for a long-term period;
To obtain high returns in the long term, investors should not attach great importance to the volatility of annual returns, which should be considered as an insignificant obstacle to higher returns;
with long-term investing, losses in the stock market become quite noticeable;
when investing for a long period, shares of small companies bring higher returns compared to large ones;
In the short term, investments in bonds and short-term Treasuries may be more effective than investments in stocks;
bonds provide higher returns than Treasury bills (money market securities);
investing in common stocks provides favorable federal tax treatment that investors in the bond and money markets do not have. Dividends on common stocks are taxed at preferential federal tax rates (below the marginal tax rate), while income from bonds and money market securities is taxed at marginal rates.
In table Table 1-1 outlines some reasons why you should consider investing long-term in stocks rather than bonds, Treasury bills, certificates of deposit, or money market mutual funds for better returns.
Investors who invest for the long term (more than five years) and are willing to bear the risk of loss in a falling market should invest in stocks. Investors with shorter time horizons, who want a steady stream of income from their investments and who are risk averse, should invest in bonds. Your financial goals and personality determine the types of securities in which you invest.

Table 1–1
Top reasons to save more and invest wisely

People are living longer, so they need more money to support themselves in retirement.
Prices for medical care, education and insurance services are constantly rising.
Real estate prices, including residential buildings, are steadily rising.
It is necessary to stay ahead of inflation and improve living standards.
People want to make a fortune to leave a legacy.
The more you save and invest now, the higher your solvency will be due to the compounding interest rate.
By investing wisely, you increase your wealth.

Develop a personal financial plan

The investing process begins with creating a financial plan that outlines your financial goals and a plan to achieve them. If you don't know what you want, you won't know how to get it.