How Not To Suck At Investing: Understanding Stocks (Part 2) | Business Casual | Skillshare

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How Not To Suck At Investing: Understanding Stocks (Part 2)

teacher avatar Business Casual, Business Casual

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

13 Lessons (43m)
    • 1. Introduction

    • 2. Why Valuation Matters

    • 3. Market Capitalization

    • 4. P/E Ratio

    • 5. P/FCF Ratio

    • 6. P/B Ratio

    • 7. D/E Ratio

    • 8. Dividends

    • 9. Buybacks

    • 10. Stock Classes

    • 11. Fundamental Analysis

    • 12. Technical Analysis

    • 13. Class Project

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About This Class

Buying stocks is the first step most investors take in their investing career.

In this 40-minute class you'll learn:

 - the 5 most common valuation metrics, which will help you determine whether a stock is overvalued or a bargain;

 - how stocks return value to their shareholders, either via dividends or buybacks;

 - what stock classes are and why they matter;

 - how to perform fundamental analysis of a company via valuation and industry comparison;

 - how to read price charts and perform technical analysis.

When you're finished watching the class make sure to check out the class project: it's a step-by-step guide to finding great stocks via several free online tools.

Meet Your Teacher

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Business Casual

Business Casual


Business Casual is a digital media company located at the intersection of capitalism and culture.

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1. Introduction: Hello, everyone. And welcome to the second class in my Siris. On investing, I'm Jordan from business Casual, the eminent YouTube channel on business history. But I don't just make YouTube videos. I've also been investing for the better part of the past decade, which is why I'm making this series now to get you started on your journey to building wealth and this class, we're gonna be diving deep into the world of stocks were gonna examine. The different valuation metrics you can use to compare companies is where was all the different properties of stocks themselves, like dividends and buybacks. Then, to top things off, we're gonna explore the two unique ways of analysing companies fundamental and technical analysis. To understand this class, you're gonna need minimal amounts of knowledge about the stock market, which I'm certain you have. If you watched my previous gas. It's a much more general overview of how the stock market works, and it's a great introduction for this class. So if you haven't watched it set aside 20 minutes to go through that one first, now let's begin 2. Why Valuation Matters: when buying stocks. Picking out the right companies to purchase is only one part of the equation. You might be confident that Microsoft, for example, will continue being successful in the future. You're convinced that buying Microsoft stock is the right decision, but the big questions then becomes When should you buy it? Microsoft might be a great company, but does its market price right now represent a good entry point? Answering this question for any given company is difficult, and many investors spend their entire lives perfecting their methodologies. The skill I'm talking about its evaluation it's being able to see not just whether a company is successful were not, but also whether its current price is a bargain. This is the problem we're gonna be tackling in the first part of this class. And over the next few videos, we're going to look over some of the basic ways of valuing a company alongside some real life examples. And by the way, one thing you can do to help you understand this section on valuation is to have a stock screener open in another tab so you can check out the actual ratios of your favorite companies as they talk about to those metrics in the next few videos I for the link to the stock screener I use in the description below for your convenience. And now let's dig in. 3. Market Capitalization: when you try to value a company, what you really want to see is whether is the price you think a stock should be at corresponds to the current market price. In other words, before even trying to value a company, the first thing you have to look at is the valuation the market is giving it right now. Just Price alone isn't a good metric, especially if you're trying to compare different companies. So what you're usually looking for is market capitalization. It's a very simple calculation is just a current market price multiplied by the number of shares that company has issued. If a company's shares are currently trading at $1 apiece and it has a 1,000,000,000 shares outstanding, well, then its market cap is a $1,000,000,000. Market cap is the most basic indicator of size, and it's one of the easiest ways to categorize companies. Corporations value added, over $10 billion are considered large cap, then anything between 10 and two billion is labeled as mid cap, and finally, companies below two billion are small cap. What market capitalization can tell you is whether you're looking at a global conglomerate or a regional business But it's also useful is a measure of risk on international Titan like Apple, which has hundreds of billions of dollars in cash, is pretty unlikely to go bankrupt if the economy goes bad. That makes Apple were safe investment, but also Will s Rescue one. Since Apple is already so big, it's difficult to imagine it making very high returns into future. Apple shares are very unlikely to go to zero, but they're also probably not gonna double in value every year. Now compares this to a small cap stock like stamps dot com. You've probably never heard of it before, and it might not survive the next recession. But, hey, it might be the next Google. So the higher risk brings along with it the potential for greater rewards. But market cap, beyond its utility is an approximate size and risk indicator isn't a very useful valuation metric. After all, it's calculated from the current market price, which can sometimes be incredibly far from reality. In fact, is the entire premise of picking individual stocks relies on you believing that the market isn't always right. It's usually right under normal circumstances, but 2008 or any other market bubble shows that the entire market can sometimes make big mistakes. But the beauty of picking stocks is that you don't need the entire markets to be wrong in a major way. Even a minor mispricing on an individual stock can make you a lot of money. And to find thes opportunities, you're gonna need the valuation metrics we're going to discuss in the next few videos. 4. P/E Ratio: the most common valuation metric you're gonna find is known as the P E ratio, or price to earnings. It's a very quick and convenient way of getting a rough idea of how expensive or cheap a given stock is. The B ratio tells you how much money you're gonna pay now for $1 of earnings from that particular company. Here is an example. Let's say that Netflix earns a $1,000,000,000 in net profits per year. If Netflix has a 1,000,000,000 shares in existence, well, then that profit gets spread around by that much. Dividing one by the other gives us the earnings per share, which in our example, amounts to Netflix, making $1 of earnings for every share. This number, known as the E. P s, usually gets updated once every three months because American companies report their financials once per quarter. But just knowing the E. P s is half the battle, what matters is how much you're paying for it. Dividing the price you paid for your shares by their E. P s gives us the price to earnings ratio in our Netflix example. If the current market price for Netflix shares was $10 you would effectively be paying $10 now for $1 earnings per year. In other words, it would take you 10 years to earn back your investment if earnings remained the same. But here's the thing. Earnings aren't supposed to remain the same. In fact, you want the earnings of the companies you own to be growing every quarter. This is where we run into one of the big limitations of the P E ratio. It gives you a snapshot of the present using information from the past. Usually, when you see someone talking about a company's P ratio, he's gonna be making the calculation using the company's earnings for the past 12 months. This number does not take into account the estimates for future earnings, which is exactly what you should be interested in because buying shares today entitles you to the earnings made in the future. A company with a low P ratio might have declining sales and falling profit margins, so the ratio being low can actually be deceptive. For example, you might see that Sears is trading at a P ratio of just four, meaning that you can make back your investment in just four years. However, that doesn't take into account. That's years is closing stores left and right, and has been in decline for many years. On the other hand, you might see that Amazon shares are currently trading at a price to earnings of 150. You might think that someone would have to be mad to buy shares at a price that would require you toe wait a century and 1/2 to make back your money. But again, the P ratio is deceptive here because it doesn't consider the immense growth potential Amazon has. One of the solutions to this problem is to use analyst estimates for future earnings instead of the actual numbers companies report in their financial statements. This is what we call the forward P e ratio. And by the way, whenever someone is stalking about a B ratio without specifying 99% of the time, they're talking about the ratio. Using passed information, which is also known as the trailing P ratio, the forward P is less used but is arguably more valuable every quarter. When companies report their earnings, you get dozens of analysts giving their predictions for the future based on newly released information. Now, analysts, while being experts in their field, have been known to make wildly inaccurate predictions. That's why the forward P ratio is calculated by averaging all the predictions analysts have made in an effort to avoid individual bias. The Forward be ratio is a great way to compare companies operating in the same industry. For example, if you compare the trading P ratios of Apple and Google, you're going to notice a huge difference between the two. It looks as if Google was more than twice as expensive as Apple. What you might take away from this is that investors think Google still has a lot of room to grow in comparison to Apple, which is why the market is giving Google such a hefty premium. But when you look at the forward P ratios of these companies, you'll see a very different story. Google, while having a higher ratio, is priced much closer to its rival. One conclusion you can make from this is that the market sees both companies as growing at a rather similar pace. The power of both types of P ratios is in their simplicity. Once you understand how they work. All you need is a quick glance at a company in its competitors to draw meaningful conclusions about its valuation. But be ratios have on inherent flaw in the fact that they rely on management being honest and consistent in the way they report their company's earnings. Management, however, usually has to hit specific targets in order to receive their bonuses. So you get a very bad incentive where management might want to apply some creative accounting artificially lower there price to earnings. That's not to say that, oh, companies trying to fudge their numbers, But it's worth keeping in mind that inconsistencies in accounting can distort things a lot . Luckily, there's evaluation metric similar to the P ratio, which is much more resistance to manipulation, and we're gonna learn more about it in the next video. 5. P/FCF Ratio: there is an adage in the investing world with its cash is king, and that's a popular phrase for a good reason. Accounting with all its complexity, can be manipulated for whatever reason. But faking actual cash is much harder, which is why a lot of investors use the company's cash flow is one of their main valuation metrics. So what exactly is cash flow? Quite literally. Is the flow of cash coming into a business minus the amount of cash flowing out of it? It's like a river. Revenues from sales and investments flow into the company. But then the company has to pay wages by inventory, pay, rent or interest on its debts and a 1,000,000 other expenses. If there's any cash left after covering all these expenses, well, then the remainder is called free cash flow, because the company can do with it whatever it likes. What's most important to you is that when a company has free cash flow, the river can now flow from the company to you in the form of dividends. Companies that have free cash flow, like McDonald's, for example, are sustainable as long as McDonald's maintains its free cash flow, it can continue doing business forever. In contrast, a company without free cash flow is at danger of going bankrupt even if its businesses otherwise viable. My favorite example is Tesla. The car's Elon Musk is making are very sought after. Some people have been waiting years to get one. And yet the sheer expensive building factories and developing technology devours all the cash Tesla takes in. And then some companies which don't have free cash flow like Tesla. After constantly search for new sources of cash to keep running, whether it be from bank loans or by issuing more shares to the public, like with the P E ratio, we can calculate a price to free cash flow ratio. What we do here is we divide a companies free cash flow by the number of shares it has outstanding. Let's take the Ford Motor Company as our example. Ford makes cars and earns $10 billion in free cash flow per year. If the company has five billion shares outstanding, that means that every share of the Ford Motor Company has $2 of free cash flow per year, backing it up now. What matters is how much you're gonna pay for those shares. If the market price of Ford is $10 per share, well, then they're PFC F Ratio is five, which, if you look through the stock screener, is a very low ratio. Most companies struggled to get below 15 while Microsoft and Google, for example, are in their low forties. In any case, a company having free cash flow is the easiest way to determine how risky oven investment you're gonna be making. McDonald's has free cash flow, and it's pretty stable. So it's a low risk investment when compared to Tesla, which doesnt have free cash flow and has a much higher risk of bankruptcy. But there's another price ratio out there that can tell you whether a company is overvalued or not, and we're gonna look at it in the next video. 6. P/B Ratio: one quick way of getting a rough idea of a company's valuation is to use the price to book ratio. Book in this case means the company's book value. It is the sum of all the assets it owns, like offices and equipment, minus all the liabilities it has. A company's book value is gonna tell you how much you're going to get. If you sold off all the company's assets and paid off whatever loans it had, it's literally how much a given company is worth. According to its books. Let's look at Starbucks as an example. Starbucks has thousands of stores across the world whose value U confined on their balance sheet. The stores are as the main asset Starbucks has and their collectively valued at $5 billion which is a lot of real estate. Of course, Starbucks also has cash on hand and inventory as well, with some long term investments like maybe stocks or bonds. All together, we can see that Starbucks has $10 billion in assets, but what about its liabilities? As it turns out, Starbucks has borrowed a lot of money, about half of which has to be paid back within one year. If Starbucks, for some reason decided to sell everything in close up shop, they'd gain roughly $10 billion from all their assets, and they'd be left with $2 billion after they've paid off all their debts. In other words, their book value is $2 billion. Now what matters is how much you're gonna be paying for that book value. If Starbucks have a 1,000,000,000 shares outstanding, well, then that leaves us with $2 of book value per share. Is the current market price of Starbucks is $4 than their price to book ratio is, too? In other words, you'd be paying $2 now for every $1 of Net assets Starbucks has. Book value is very intuitive when you applies to companies that rely on production or physical sales. However, things get less clear when you move towards services, and I t. After all, it's pretty easy to put a price tag on a piece of land. But it's much harder to give an accurate value to Microsoft Office, for example. That's why when you look at asset heavy industries like banking or car manufacturing, you're usually going to see price to book ratios around one. Then, when you look at the technology sector, you're going to see a much bigger diversions. In general, the BB ratio is most useful when comparing companies operating in the same industry, especially if that industry is acid heavy or capital intensive. Now, in the next video, we're gonna look at one final evaluation metric before we really dive into the mechanics of stocks in general. 7. D/E Ratio: so far in our valuation metrics, we've been avoiding talking about debt, and we shouldn't because it's actually one of the most important parts of every company. The fundamental premise of every business is to make money or, in other words, to earn a return on its investment. Obviously, you're gonna want that number to be positive. But that's usually not enough cos air pretty risky endeavors, especially when you compare them to government bonds like the ones issued by the US government. So at the very minimum, you're gonna look for a return on investment that's above with the U. S. Treasury would be willing to pay you, which is widely considered in the investing world as the risk free rate of return. A company that can't be the U. S. Treasury is unlikely to be very successful, which is why the world's biggest companies often achieve a much higher return on investment . But this constant search for higher returns creates a very interesting incentive. Let's take Netflix as our example. Most of the money Netflix spends goes towards making you shows an original content for their platform, and their return on investment is about 10%. But Netflix on. Lee has so much cash enough to produce a dozen shows at best. If Netflix only had access to cash, it would not be making enough new shows to interest viewers. But luckily for Netflix, it also has access to debt. Let's say the U. S Treasury offers 2% on its bonds. A company like Netflix is big enough to be able to borrow money at a pretty good rate, let's say 3%. So for Netflix, it makes sense to borrow billions of dollars each year at 3% and two investment back into the business by making more shows at 10% Netflix is effectively being paid to borrow money , and exactly the same principle applies to virtually every company, which is why you usually find plenty of that on their balance sheets. So now we know that having a least some debt is good, but obviously there is a limit. A company the size of Netflix might feel great borrowing $10 billion but it would certainly not be able to pay interest on a trillion. There's a very fine balance every company has to maintain. It must borrow enough money to invest in itself and not miss out on opportunities to expand , but not so much that it will drown an interest. This balance is measured by the debt to equity ratio, our final evaluation metric. It's very straightforward. You take all the liabilities the company has, and you divide them by the company's book value, which recovered in the previous video. The result tells you how many dollars of debt the company has for every $1 it actually owns . This is what is known as leverage. The more money a company borrows, the more leathered it becomes at a debt to equity ratio of to, a company has borrowed $2 for every $1 it has. Effectively, it can invest three times as much money, which means three times higher profits, but can also result in three times greater losses. As usual, different industries have different benchmarks for their ideal that to equity ratio. The more capital intensive the industry, the higher the ratio tends to be. But of course, there are exceptions. Car companies are usually hovering around a D ratio of two, but the oil and gas industry, which in comparison requires much more capital, actually tends to have a lower ratio. The answer lies in the details. Companies pay off their debts using their cash flow, which for car companies tends to be stable and easy to forecast. The price of cars rarely goes down, and the demand for them doesn't vary all that much year to year. In comparison, the price of oil is extremely volatile. In the span of a single year, it can double, or it can go down by 50% which makes cash flow incredibly difficult to predict. While companies just can't afford the luxury of high leverage, which is why they're D ratios look so deceptively low. We're gonna be looking at more such comparisons a bit later because now it's time to examine the cherry on top of every stock dividends. 8. Dividends: Let's be honest. One of the biggest reasons most people buy stocks is to watch that steady stream of dividends flow into their account. It's actually very beautiful Cos after all, exist to benefit their shareholders. And what better way of doing that than by literally giving you money? Investors love dividends because they're consistent. If the company you've bought is doing good, it will keep on paying its dividends like clockwork. If the company is growing, it might also try to increase its dividends every year. Here's the dividend history of Microsoft, for example. Like most American companies, Microsoft pays out to dividend every quarter. And because the company has been very successful, it has also been raising its dividend every year for the past decade. Let's look at how one of these payments goes down with dividends. You have three dates you have to look out for. The 1st 1 is the announcement date. The company's board of directors makes a press release announcing the size of the next dividend, and when it's going to be paid, this usually happens at least a month in advance. In Microsoft's case, they announced two months ahead in the press release the board then announces the remaining two dates. The most important one is the ex dividend date. It's essentially a deadline before which you must have bob the stock in order to receive that particular dividend. The date is called that way because that day is the 1st 1 in which the stock trades without its dividend. If the ex dividend date is November the 14th then you must have bought Microsoft stock on November the 13th at the latest. If you buy shares on the Ex dividend date, well, then you're out of luck and you have to wait another quarter. The final dates is pretty simple. It's known as the payments date, and it simply tells you when the company will actually give you the money. Most companies pay a poor than two weeks, but Microsoft, for example, makes you wait a full month. So now that we know how dividends work, let's figure out how we can compare them between companies. The most basic way to compare the dividends of different companies is just to calculate how much dividends each company pays for every dollar you own. This is known as the dividend yield. If Microsoft shares cost $100 pay out a total of $2 worth of dividends in a year. Well, then, dividing one by the other gives Microsoft dividend yield, which in this case would be 2%. Most big companies you can think of have dividend yields roughly around 2%. But there are some exceptions. A T and T, for example, has a dividend yield of over 5%. Judging just by the yield might make A T and T seem like a much better investment than Apple or Microsoft. But there's another ratio that can shed some light on this matter, and that is the payout ratio. Unlike the dividend yield, the payout ratio considers not just the dividends the company pays but also the company's earnings, which are, of course, where the dividends air coming from. We can calculate the company's payout ratio by dividing the amount of dividends at pace per year by the company's earnings per share. Let's go back to our Microsoft example. Every share of Microsoft's base out $2 per year and dividends, but it actually makes $4 worth of earnings in the same time. It turns out that Microsoft is paying out to its shareholders only half of what it actually earns. In other words, Microsoft's payout ratio is 50%. Every time you see a stock with a much higher dividend yield the normal, the first thing you should dio is to check the payout ratio. In the case of A T and T, we're going to see that the 5% dividend is backed by a payout ratio of 110%. So the company is actually paying out in dividends more than it earns, which, of course, is not sustainable. In comparison, Apple and Microsoft have much lower payout ratios, which in turn makes their dividends much safer when a recession hits, AT and T will almost certainly have to cut its dividend drastically. But Apple and Microsoft are both gonna be able to weather the storm. You might have noticed, however, that a lot of the biggest companies don't actually pay a dividend. There's a very good reason for that, of course, and we're gonna discuss it in the next video 9. Buybacks: it might seem strange to Some of the world's biggest and most profitable companies don't pay any dividends, but don't worry. They're still giving plenty of money back to their shareholders just in a very roundabout way. Instead of handing out cash to their shareholders directly, some companies think that money and use it to buy back their own stock. They go to the stock markets just like you and I can, and they start placing buy orders, effectively creating new demand, which in turn increases the stock's price. It's a roundabout way of achieving the same thing. You're getting the same amount of money, but instead of it being handed to you in cash, it shows up directly into your shares because their price increases. That might not sound like much of a difference, but it's actually really important. And here's an example to show why. Let's say Facebook shares are trading at $100 apiece, and Mark Zuckerberg is generous enough to be paying a 10% dividend. As soon as you get paid to those $10 worth of dividends, you owe taxes on them, which very depending on where you live, but they're usually a significant amount. Now let's look at what happens if Facebook uses the dividend money to buy back its own stock. Instead of handing off 10% of itself in the form of dividends, Facebook just goes to the stock market and buys back 10% of its outstanding shares. The business itself is exactly the same. Oldest after Iran employees are still it Facebook. But now there are 10% less shares of Facebook and existence. In other words, the same amount of value is spread around a lower amount of shares, making each share more valuable. And, of course, because buying stocks isn't a taxable event, Facebook doesn't get hit by taxes, and neither do you because you didn't actually receive any cash. The higher the tax rate, the bigger the incentive is to distribute company profits through buybacks instead of dividends. Unsurprisingly, that makes buybacks a very popular option among American companies. And in fact, over the past 20 years, buybacks have actually over taken dividends as a distribution method of choice. Of course, taxes are into the only incentive that makes buybacks popular. The salaries of company executives are very often tied to how well a company's stock performs. And since buybacks increased share price, they also increase the wages management receives. Buybacks are a true blessing for management because they're extremely flexible. You can buy back billions of dollars worth of stock one year and then buy back nothing the next because buybacks aren't legally binding. When a company announces buybacks, they say they're going to buy back up to a certain amount. But that up to can mean zero or it can mean the full number. In other words, a company can announce buybacks and then not do them. It's perfectly legal to do that with buybacks, but you can't do with with dividends, which is why dividends are viewed as a consistent source of income. That's one of the reasons why cutting dividends is such a universally bad sign, so much so that even in times of crisis, management does everything in its power. To avoid doing that, you can look at the crisis of 2000 and eight to see this in action. You notice the dividends barely go down well by bags declined by almost 80%. It's exactly this flexibility, however, that makes buybacks very difficult to use as a metric due to their inconsistency, you won't find many stocks screeners out there that keep track of buyback ratios, even though they're a pretty big part of what makes holding stocks valuable. So now that we know how companies distribute their profits in the next video, we're going to learn about the different ways a company constructor its shares. 10. Stock Classes: most American companies you're gonna find have a very basic stock structure. They have a single class of stock, which is known its common stock, and every share carries with it unequal claim of ownership of the company and a single vote on matters of corporate policy companies usually trying to keep their structure simple. But in some cases you're gonna find more than one class of shares. The most common reason for that is when a private company goes public. Typically, a company's founders don't want to lose their control over their own business. With a single class of shares, they need to hold at least 50% to maintain a majority voting power. But what they can do instead is to create a second class of shares that carries more votes . They can create Class B stock, which carries 10 times higher voting power, for example, so they can sell off 90% of the company and still maintain a voting majority. The Ford Motor Company has such a structure. The shares you can buy on the stock market are Class A and carry one vote, while the Ford family also the Class B shares, which represent only 2% of the company's value but carry 40% of its voting power. There is one additional catch with these super shares. They convert to regular stock when they get sold, which ensures that voting power can't end up in the wrong hands. Some founders get particularly paranoid about maintaining their voting power, which is why some companies get an additional class of shares that gets no votes whatsoever . Google is the prime example. It has regular Class A shares with one vote, Ah, founder only Class B stock with 10 votes apiece, and Class C stock, which doesn't have any votes at all. Google's cases particular interesting because the company doesn't pay a dividend. Instead, it returns money to shareholders exclusively through buybacks. But the only share class Google buys back is its Class C. In other words, the Class A shares don't get the same upwards pressure in their price. Where things get really interesting, however, is when we get to preferred shares. Unlike the common shares a company can issue, preferred shares have a higher priority in the event of a bankruptcy. They get paid out first, and whenever a company pays dividends, the preferred shares are the first in line to get the money. In some ways, preferred shares are actually similar to bonds. Unlike regular shares, they usually carry a fixed percentage dividend and no voting rights. Companies issue preferred shares in very specific circumstances, which is why, if you see any, you have to dig deep to figure out exactly how that particular issue works. Technically, preferred shares don't have an expiry date, but companies often at a specific date, after which they can forcibly redeem the shares for you at a specific price. Finally, some preferred shares allow you to convert them into regular stock to save yourself some headaches. So now that we've got a handle on the way stocks can be structured, let's dive into the fun part of actually learning how to analyze companies. 11. Fundamental Analysis: the most important analysis you're gonna have to make when picking stocks is known as fundamental analysis. This type of analysis focuses on the characteristics of a given company or, in other words, it's fundamentals. You have to become intimately acquainted with the company you're looking to purchase and the way it's business model works. Luckily for you, American companies disclose exactly this information in their financial reports, which you can find on the investor relations part of their websites. These reports go into excruciating detail about all of the aspects of the company and are the best way to learn all the different revenue sources that particular company has. Let's take a look at Microsoft as our example. Like most companies, Microsoft breaks down their business into multiple segments, each representing a different revenue stream. Microsoft specifically has three segments, and the 1st 1 is productivity and business. It contains Microsoft Office, which makes money through licensing deals and linked in which brings in revenue from advertisements and subscriptions. Microsoft second segment is the intelligent cloud, and it contains Asia, their cloud computing platform, which effectively rents out servers and also owe their enterprise consulting services. Microsoft's final segment is more personal computing, and it contains pretty much all their consumer products. It has Windows, which is again a licensing revenue stream, and all the various devices Microsoft cells. The segment also contains the X box ecosystem, with all its hardware, software, subscriptions and advertising. Alongside each segment, Microsoft is kind enough to mention its direct competitors, like Amazon Web services, competing with Asia and Sony's PlayStation Going Up against X Box. Microsoft then breaks down its revenue by segment, allowing you to see the numbers and growth of each one. Of course, you're also gonna find the complete results, which you can then use to calculate the financial ratios we discussed earlier in this class . Or, if you want to save time, you can just look them up in your stock screener. Once you've learned how a given company makes money, it's time to go up a level and start comparing it to other companies in the same industry. This is where the financial metrics come in handy. Going back to our Microsoft example, we know that Microsoft is part of the software in programming industry alongside many of the competitors it mentioned in its report. Now you can either compare the ratios of competing companies directly. Or if you're screener supports it, you can look at industry averages. Looking at just the company's ratios individually doesn't provide a lot of useful information because different industries have different benchmarks for their metrics. In the case of Microsoft, we can see that it has a lower price to earnings ratio than the industry average. It's priced a book and price to free cash flow ratios, however, are higher than average, which makes the stark, comparatively more expensive. Microsoft has more debt than the average technology company, but it's not by much, and it is within reason. On the dividend side, it's clear that Microsoft base a smaller dividend than average, but at least it's payout ratio was lower, which makes the dividend more safe. Overall, only the P E ratio stands out. But if you actually look at the industry, Microsoft is classified and you'll see several big outliers which artificially increased the number. Removing them gives us an industry average of 33 which is much closer to Microsoft's. Of course, just doing an industry comparison doesn't show was the full picture, so we need to go a step higher into the world of macroeconomics. Companies and industries don't exist in a vacuum there, part of different sectors of the national economy, and each sector behaves differently, depending on whether the economy is doing well or not. During recessions, for example, technology companies are among the first casualties, whereas companies like McDonald's and Wal Mart could breeze through with minimal issues. At the end of the day, even if you're running out of savings, you still have to eat. When the economy is booming, however, some sectors outperform others. With technology again being the prime example, keeping track of the economy isn't easy because there are hundreds of indicators, each telling their own story. But on a very basic level, you have to keep in mind your expectations for the future. If you think there is a recession coming, well, then you probably don't want to put all your money in technology stocks. Of course, the national economy is not define a level here. You can also make a broad level predictions about the way the world is heading. Geopolitics can have huge influence on stocks. Microsoft and Google are big and globally diversified, but they're the exception most companies depend on their country doing well and being fair . And China is a great case study. Their economy is doing good, but their political situation makes investing in China from abroad a much riskier endeavor . You never know when the Chinese Communists air going to sweep in and nationalize the company you've invested in, which is a risk that's not present in America or in Europe. It's fair to say that with fundamental analysis, the higher you go, the harder it is to make accurate predictions. Judging by Microsoft's annual report, you can make a pretty good bet that they're going to continue growing. But it's much less clear whether America is heading towards a recession or whether China is going to continue being friendly towards foreign investors. So now that we know about fundamental analysis in the next video, we're gonna look at it somewhat controversial. Opposite technical analysis 12. Technical Analysis: Whereas fundamental analysis relies on reading financial statements, technical analysis is all about reading charts. When you look at a chart of the stock price of a given company, they're gonna notice that it's usually not shown as a line. Instead, historical stock prices air displayed through what is known as a candlestick. Unlike line charts, which show a single point of data for any given time period, candlesticks give much greater information. The main body of every candlestick represents the opening and closing prices for the stock . If the candlestick is green, that means the stock opened low and more people bought than sold, which pushed its price higher over the course of the time period. If the candlestick is red. On the other hand, you noted, the stock opened high and then declined in price because more people were selling, then Those thin spikes on both sides of the candle represents the highest and lowest price to stock traded at during the time period. Candlesticks are great at telling stories. Have a look at this line chart. For example, we see a big decline, but if we look at the candlesticks, we're going to see a very different story. The stock very clearly tried to break the $50 level multiple times, but it bounced back every time. That is what is known as a support level because it shows where most buyers air, confident enough to step in and prevent to the stock from falling further on the opposite side. Of course, you have resistance levels, which are where sellers swore men to keep the stock's price and check support levels are usually pretty easy to find, and they're very important. If you're trying to find an entry point for a particular company, when a stock remains that its support level without breaking it, that's usually a good entry point for buyers. However, you also have to be aware that a stock breaking at supporter resistance level can signal with change of market sentiment. Such a dramatic moves don't happen on their own. Of course, there is almost always going to be a fundamental event behind it, like a bad earnings report or a geopolitical shock. That's why technical analysis isn't highly regarded by some people. At the end of the day, numbers are arbitrary. In other words, support and resistance levels aren't laws of nature, but rather a psychological phenomenon. After all, the price of stocks is determined by buyers and sellers who are usually motivated by fundamentals, not by patterns in the charts. That's why technical analysis should be used as a supplement to fundamental analysis. Luckily for you, that means that you don't have to bother learning the millions of difference. Technical indicators. Instead, you should focus on the most popular ones, which are also pretty easy to understand. The most basic indicator out there is the moving average. It's a line you drawn the chart, and each point represents the average of the previous and candles where n depends on the time frame you're looking for. You'd usually look at 50 for a monthly chart or 200 for a yearly, and the higher the number this lower the moving average changes. In a way, moving averages act like a changing support, a resistance level depending on whether the stocks prices above or below the moving average . That's why it's a good idea toe watch out when the price crosses, it's moving average because that usually signals the beginning of a strong trend. Now we're not gonna go through any other indicators for the sake of your sanity, but we are going to look at something that's not a technical indicator, but it's still vital for technical analysis, and that is volume. Volume is usually shown as a bar chart. Underneath the price candlesticks and the higher each bar. The more shares were traded during that particular candle volume is important because it shows you how strong and given movement is. A stock's price can change by a large percentage, especially if we're talking about a small company. But that change can be interpreted differently depending on the volume behind it. Low volume changes are usually disregarded, whereas high volume can be interpreted as a confirmation that a new trend is beginning. But like I said, technical analysis is far from a certain thing. Sometimes, even when all the indicators point in one direction, the price Congar the opposite way. So you should avoid relying on indicators exclusively. So now that we know both forms of analysis, it's time for you to apply your newfound knowledge in the class project, which we're going to discuss in the next video 13. Class Project: for this glasses project, we're gonna once again use the wonderful screener of Finova's. Once you've opened it using the Lincoln the class description, you're gonna notice to very convenient filter categories near the top, fundamental and technical. Now that you know what the most important ratios and indicators are, you can make it custom search for companies fitting precisely the parameters you're looking for, like companies with a very low P ratio that also have minimal debt. Once you've tailored your search, you can start going through the results. Since Fenves has a rather limited capacity of actually comparing and analysing individual companies. Once you find a company that catches your eye, you're gonna want instead open investing dot com. There you can type the company's name in the search bar to find a very impressive selection of analytics. Both fundamental and technical is where was industry comparisons. I want you to find a company whose fundamentals you like and who's technical situation presents. A good entry point is the title of your class project. You can ride the company's name and then in the actual text, I want you to write a brief summary of your thought process why you chose it and which ratios and circumstances made it look appealing. Of course, if you have any questions, I encourage you to ask them in the comments below. And once you're done with your project, consider sharing this class. Which your friends and family. If you think they might like it as well. Thank you very much for watching my class and until next time, stay smart.