Investing 101: Understanding the Stock Market | Business Casual | Skillshare

Investing 101: Understanding the Stock Market

Business Casual, Business Casual

Play Speed
  • 0.5x
  • 1x (Normal)
  • 1.25x
  • 1.5x
  • 2x
8 Lessons (21m)
    • 1. Why You'll Love This Course!

      0:30
    • 2. What Is The Stock Market?

      2:35
    • 3. What Is A Broker?

      3:03
    • 4. What Is A Stock?

      3:03
    • 5. Why Do Companies Go Public?

      3:17
    • 6. What Is An Index?

      2:48
    • 7. Index Types

      2:28
    • 8. What Is An ETF?

      3:09
407 students are watching this class

About This Class

The stock market is the key to building personal wealth, but it is also often misunderstood.

In this 20-minute class you'll learn:

 - how the stock market & exchanges like the NASDAQ and the NYSE work;

 - why companies go public and how their shares work;

 - why brokers exist and why their services are valuable;

 - how indexes like the S&P500 work and why they matter;

 - how ETFs work and why they are your most important tool.

Once you're done watching the videos check out the class project: you'll find very useful tools there that will help you with your investing!

Transcripts

1. Why You'll Love This Course!: investing is becoming more popular than ever, and with good reason. It's hands down the best way to grow your wealth. But while getting access to the stock market has never been easier, going in without understanding how it works is a recipe for disaster. That's why in this class I'm going to show you how to stock market works, starting from the very basics. And by the way, if you don't know who I am, I'm the guy who runs business Casual the premier YouTube channel on business history. Now let's dive in. 2. What Is The Stock Market?: Let's start with the most basic question. What is the stock market? As the name suggests, it's where people go to buy or sell stocks and various companies. Pretty much every developed country in the world has a stock market, and in fact, even many developing countries have one. The stock markets of the world's biggest economies are actually made up of multiple stock exchanges. A stock exchange is the actual marketplace. Right trades happen. In the past, it was a physical location where traders would yell at each other and where every transaction happened. On paper. Today, virtually all stock exchanges, air, electronic and trading happens over the Internet. This allows multiple exchanges to function as a single, cohesive unit. That's why people can talk about the American stock market is one entity when in fact it's made up of over a dozen different exchanges. Every day, millions of investors go to the stock market to buy or sell their stocks. The way actual trades happen is through order books. Now every listed company has its own order book, and it's basically a collection of old, the orders currently active for that company's stock on the market. If you want to buy shares of AT and T, for example, you make an order at one of the exchanges. You have to mention how many stocks you want to buy and at what price. Then, when you submit the order, it gets posted on the order book, where everyone else can see it and everyone can decide whether they want to trade with you for the given quantity at the given price. The order book is the collection of millions of such orders, and every second the vast data centers of the NASDAQ or the New York Stock Exchange ensure that all of the orders air active and are matched together whenever possible. That's why when you look at the price chart of a given stock, you'll see that it changes constantly. That's because people are buying and selling the stock all the time at different prices, depending on the supply and demand of orders in the order book at that particular moment. But how does one actually go about making an order to buy or sell stock well to trade on a stock exchange, you need to be a member now. Memberships cost a ton of money and have strict regulatory requirements so individual investors can't actually become members. Instead, specialized companies spend the necessary time and money to become members and then offers their services to individual investors. These companies are what we call brokers, and if you want to trade in the stock market, you have to go through them in the next video. We're gonna learn what stockbrokers really are and why they're services are valuable. 3. What Is A Broker?: In order to invest, you need a brokerage account, and while that might sound like a hassle, it's actually a pretty good deal. You see, brokers do a lot for their clients. First and foremost, they allow for easy access to many stock exchanges across the world. If that sounds simple to you, trust me, it isn't pretty much. Every electronic stock exchange was coded by a different team of developers and multiple programming languages. Connecting all these various exchanges is truly a programming nightmare, which is why brokers spend millions of dollars developing platforms that can do that. Now some brokers make their platforms very simple to use and with minimal features in order to avoid confusing their customers. Other brokers tried to cram in as many services as possible into their platforms in order to attract more advanced clients. In any case, this is the first big advantage of brokers. They save you from all the complex coding use otherwise have to do yourself and present you with a single platform where you can do all of your trading. The next big advantage of brokers is the fact that they're very strictly regulated. America specifically is very serious about protecting investors, which is why both the SEC and FINRA exists to keep brokers in check and to make sure they're not fraudulent. Brokers then have to go through all the hassle of getting licensed, which involves passing numerous exams and is generally not on easy thing to dio. On top of regulations and licensing, the American government goes even further by providing what is known as S I P C, which is basically insurance for up to half a $1,000,000 worth of your assets held by a broker. The last big benefit brokers offer to investors is access to research. Things like dividend calendars and up to date analyst reports are very useful but oftentimes difficult to find for free on the Internet. Usually, brokers pay to get access to all of these publications and then provide them back to their clients for free or for much cheaper. So between the insurance, these of usage and the access to information, it's pretty good to have a brokerage account. Deciding which broker to use is the first major decision every investor has to make, and it's really down to three things. Firstly, commissions, different brokers charge a different amount for their services. And depending on how much money you have to invest, commissions can play a very big part in your decision. If you're starting out with a $1,000,000 commissions generally don't matter. But if you're going in with just 1000 the trading fees can really add up naturally. The second major factor is your starting capital. Some brokers just require a certain amount of money in order to open an account. Lastly, and most importantly, you have to decide how deep you want to go down the investing rabbit hole. If you want to just buy stocks and forget about them. Then you'll be happy with the locals broker providing minimal services. Then the more advanced you want to get with your investing, the better broker you're gonna need. But for now, let's stick with the simple stuff like stocks. In the next video, we're gonna learn what stocks are and why investing in them is a good idea. 4. What Is A Stock?: for most investors, stocks are the first asset class they encounter. It makes a lot of sense. Our world is driven by companies, so it's natural for people to want a piece of the action. But when you buy a share of a given company, you don't actually own a fraction of that company as an entity or a to least not directly. Instead, each share represents a claim on the company's assets. This distinction might sound trivial, but it's actually very important. Corporations are legally considered as people. They can own cars and houses in the same way that you can, and they can even borrow money and go into debt. There are many examples of companies borrowing too much money and going bankrupt, but legally that event has nothing to do with you, the shareholder. You just don't claim on that company's assets. And if the company doesn't have any assets, what was in your shares are worth zero. But the banks who loaned money to that company can't come after you. In other words, the most you could lose by purchasing a share is the amount of money you spent on it. Realistically, it's hard to imagine the world's biggest companies going bankrupt, which is why their shares are considered safe investments. Let's say you want to buy shares of McDonald's, for example. You log into your brokerage account, you make an order, and bam, you're now the proud owner of one share of the McDonald's Corporation. You're now officially a shareholder, but that doesn't mean you can go into any of their restaurants and eat a happy meal for free. So what benefit does only McDonald's start give you? Well, Like most companies, the McDonald's Corporation sets aside some of its profits every quarter and based them out to their shareholders. This is known as a dividend, and it gives you a steady stream of cash. But wait, it gets even better. McDonald's opens new restaurants every year, so you can reasonably expect the company to have higher earnings in the future, which not only means more dividends for you but also increases the value of the company itself. Thus, if you bought your share for $150 it might be worth 160 next year. As a proud McDonald's shareholder, you can attend to the company's annual meeting, where you can vote on many important decisions, which will impact the future of McDonald's. Now, most companies have a very simple voting structure. One share gets one vote. In your case, you own one out of the 785 million McDonald's shares in existence. So you command exactly this much of the voting power in the company. Obviously, you wouldn't be able to change much with your vote. But the more you invest in the company, the bigger your impact is gonna be. With enough money, you could theoretically, by up enough of the shares to single handedly become the majority shareholder. That is the magic of publicly traded companies with enough money. Anyone convey I their way in. Now that sounds awesome. But you might be wondering, Why would any founder give up their company by listing it on the stock market for everyone to buy in the next video were learned the answer to exactly that question 5. Why Do Companies Go Public?: to understand why companies go public. We need to understand why companies exist in today's world. If you want to do business, you have to register a company. And here's why. Even the biggest companies today started out as just a few people with an idea. Now, having a good business idea is great, but you're not going to get very far if you don't have the money to develop it. That's why most young companies, also known as startups, begin looking for outside investors very early on in their existence, usually before they've even developed their first product. Of course, most startups never find a single investor, and they go bankrupt. In fact, finding an initial investor is so hard that in the startup world, that person is called an angel investor because he literally saved the company from failing to get angel investors on board. The founders, who up until now owned 100% of the start up, need to give up some of their ownership in exchange for money. The startup needs this money to hire employees Renton office and develop its first products . This initial stage is known as the Seed Round, and startups here are usually valued it upto a $1,000,000 once the start of has some angel investors. That's when it starts attracting venture capital firms and the start up world. VCs are the big boys. You've probably heard the names of the more popular VC funds, and it should come as no surprise that some of the biggest companies do. They have their own venture capital divisions. The stage at which venture capital gets involved is called the Siri's A, and at this point, startups are usually valued at around $10 million. Of course, some companies need even more money, so down the line they hold additional funding rounds to attract more venture capital. A few companies like Snapchat, for example, go very far down the funding alphabet, sometimes reaching $1,000,000,000 valuations while they're still private. But eventually all the angel investors and venture capitalists are gonna want to cash out. This is the biggest reason why start ups go public. Joining the funding round of a very sought after start up is difficult, but sending your startup shares after you give them is even harder. There are numerous restrictions on start of stock, like who you can sell them to and when at the earliest you can try to do so. But when a startup goes public on the stock exchange in a process known as an initial public offering, well, then most restrictions get lifted and all the early investors can cash out. They sell their stock to the hungry public, which is scrambling to get their hands on the newly listed shares. This is where you, as an individual investor, can finally get in on the action. But investing all your money and a newly public company is a very risky decision. In fact, investing over your money in any single company is generally a bad idea. Most investors spread their money out across multiple companies in many different industries. This is cold diversification, and it's one of the core principles of investing. But keeping track of hundreds of different companies and their stocks is very time consuming and difficult. Luckily for you, the investing world has figured out a brilliant solution. Indexes and the next video We'll learn all about what an index is and why it's awesome 6. What Is An Index?: keeping track of too many companies is bothersome, which is why Wall Street's invented indexes the index is just a calculation. It's not an actual entity you confined on a stock exchange. You can't buy it directly, so it only serves as a benchmark for two stocks it represents. So what sort of calculations are we talking about? Well, every index has its own methodology, but the underlying math is usually very simple. Let's say you want to make an index for five different companies. You take the current prices of their shares, and every day you keep track of how much these prices change. The most basic index you could make is just calculating the average daily change between these five companies and applying that percentage to a given number. The number itself doesn't matter. Some index has started 100 or 1000 for convenience, but it can really be any number. For example, one of the oldest indexes in existence is the Dow Jones Industrial Average started out at 40.94 But like I said, the number doesn't matter. What's actually important is how much that number changes, but here's a question for you. How much weight should you give to each component of your index. In the previous example, we gave each company the same weight one out of five or 20%. Most indexes, however, don't use such a simple solution. Instead, indexes today follow one of two approaches. Early indexes like the Dow were weighted based on the price of their components. In other words, a company whose shares are worth $100 would have a 10 times bigger impact than a company whose shares are worth only 10. The math here is still pretty simple, which is why most early indexes use it. But as you've probably noticed, this approach isn't very accurate. In our example, waiting by Price would give undue significance to some components above others. But companies obviously aren't equal, so we can't just use the simple average either. Most modern indexes, including the popular ones like the S and P 500 take into account not only share price but also the amount of shares in existence. You see, prize by itself is a very arbitrary metric that doesn't reflect how much a company is worth . To figure that out, you have to multiply the share price by the number of shares death company has issued. The result is known as market capitalization, and that number reflects how big the company is right now, According to the markets, waiting companies based on their market cap makes a meaningful size comparison, and the math remains relatively simple. In our example, using market camp provides a better index than comparing just prices. We're using a simple average. Now that we know how indexes work in the next video, we're going to look at all the different variants you can possibly imagine. 7. Index Types: one of the biggest benefits of indexes is just how versatile they are. In the example from the last video, we easily created an index of five companies. But because indexes air just math, you can add as many companies as you want. This versatility means that there are numerous indexes and existence, and now we're going to look at the most popular ones. The most popular index today is the S and P 500. As the name suggests, it's comprised of the 500 biggest companies listed on any stock exchange in the U. S. Indexes like the S and P 500 are what we call national indexes. And unsurprisingly, almost all countries have thumb. Bigger countries like the U. S. Which has multiple stock exchanges, can go even further in America. The major stock exchanges each have Their own index is comprised of companies listed solely on that exchange. The NASDAQ 100 is the best example here, but national or exchange based indexes are just the tip of the iceberg. If you want to see the bigger picture, you can combine companies from multiple countries into a single index. These indexes track the markets of entire regions. But you can go even higher, combining stocks from the whole world to track the global stock market. At this level, indexes air comprised of several 1000 companies and are extremely diversified. Of course, While indexes can be used to track the big picture, they can also get very specific. There are indexes that only Count Cos meeting specific guidelines, like the Dividend Aristocrats Index, which contains companies that have increased their dividends every year for the past 25 years. You also have sector specific indexes, which keep track of companies involved in finance or energy, for example. The variety is endless, so much so that you even find indexes like the Obesity index, which looks at companies that are making the best out of America's weight problem. Another big hit is the Gender Diversity Index, which only includes companies with female leadership, a noble effort that has sadly underperformed the market. But since indexes air just math and don't actually exist, you might be wondering why we're even talking about, Um, well, investing directly into an index is impossible, but there is a way for you to match the performance of an index of very closely In the next video, we'll learn about this almost magical class of products that is the pinnacle of convenience e d efs. 8. What Is An ETF?: being able to buy an index directly would be extremely convenient, but it's not possible. The investing world, however, has figured out a solution that is as close as you could possibly get. That solution is called an exchange traded fund or E T. F for short. Here's how we d s work. In a nutshell. Certain companies, usually large banks or specialized asset managers, look at a given index to see what its components are and how it's weighted. Then they create a fund made up of the same companies in the same ratios, essentially replicating the index manually. The TF graders then turn around and sell shares of that fund on popular stock exchanges, hence the name exchange traded fund. Now these shares function exactly like the shares of a regular company. You can buy them in your own brokerage account, and you receive whatever dividends DTs underlying companies issue. But there's a catch. The TF greater isn't doing all of this work for free. Maintaining an E T. F is a very challenging and ever, which is why the TF greater charges an annual fee for providing the service. Luckily, D D F industry is highly competitive and so these fees, better known as expense ratios, are usually very small. You're typically TF expense ratio is somewhere between 0.2% and 1% but the more popular ET Efs can go as low as 0.3 The most popular E T F, which is also the oldest one, unsurprisingly, tracks the most popular index, the S and P 500. In 1993 State Street created the Standard and Poor's Depository Receipts, or SPDR, for short. In less than three decades, the spider has become the most traded asset on the planet, with an average of 87 million shares changing hands every day. Buying a single share of the SPDR will cost you a couple of $100 but it will give you exposure to the 500 biggest American companies for comparison. If you tried manually replicating the S and P 500 yourself, you would have to buy over $13 million worth of shares to accurately maintain the index ratios. In other words, the convenience of ET efs is very much worth the small annual fees they charge you. And today, E. T s are the backbone of investor portfolios. But of course, there are numerous other asset classes investors can buy. Beyond the stock market and individual companies, the beauty of E D EFs is that they can be applied to almost any asset class out there. And within your one brokerage account, you can gain exposure to stocks, bonds, commodities, currencies and even real estates just by purchasing shares, any TFC. But all these topics are for another time. I'm sure you agree that each of the asset classes I just mentioned deserves its own series of videos. But for now, I think we've done a good job covering the basics of how the stock market works. Thank you for joining me on my first class here, and if you were left with any unanswered questions, please mention them in the comments. I would be happy to answer them. And, of course, if you enjoyed this class, feel free to share it with your friends and family. If you think it would be useful to them once again, thank you for watching. And until next time, stay smart