The Teen’s Guide to Stocks
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The Teen’s Guide to Stocks
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Here at the Fool we’ve spent years loudly bemoaning the state of financial education in the U.S., and for good reason. Research strongly suggests that millions of Americans lack even the most rudimentary form of financial literacy. Teaching our children better habits is key to solving the problem.
Transcript of The Teen’s Guide to Stocks
The Teen’s Guide to Stocks
Do You Know This Man?
Buffett holding court at the Berkshire Hathaway annual meeting. Source: The Motley Fool.
A lifetime of investing in stocks has made Warren Buffett one of the world’s richest men. How did he do it?
● Study. Even as a young boy, Buffett famously memorized entire books of ticker symbols in an attempt to understand every American business that sold stock on the public markets.
● A bit of math. Of course, he also mastered the basic metrics that explain whether a stock might be worth buying.
Next, we’ll look at common metrics. But first, remember that stocks trade on exchanges and are identified by ticker symbols. Do you know your favorite company’s ticker symbol?
Trivia Time!
The NYSE. Source: iava.orgl.
Founded in 1792, the New York Stock Exchange is today one of dozens of exchanges around the world. Three things you might not know:
● U.S. exchanges quote prices more than 978 million times daily.
● More than half the stocks bought each day are sold to someone else inside of a single second!
● Some of the most expensive computer systems in the world govern the NYSE and other exchanges.
Do you know which was the first electronic exchange?
Need Stock Data? What Do Others Think?
Meet Motley Fool CAPS, an investor intelligence database that tracks key metrics for thousands of stocks. What data should you know? Let’s talk details ...
Market Capitalization
THE BASICS
Formula: (Shares outstanding) x (current per share price).
Explains: The current full market value of a business.
IN PRACTICE
Netflix has 58.92 million shares outstanding. Multiplying that by the recent closing price of $294.15 equals $17.33 billion.
You’d need at least that much cash available in order to buy the company outright. I say “at least” because of our next metric ...
Source: Netflix.
Enterprise Value
THE BASICS
Formula: (Market cap) - (cash) + (debt)
Explains: The entire cost of a business were you to buy it with cash.
IN PRACTICE
Alaska Airlines has $1.43 billion in cash to go along with $944 million in debt. Combining those figures with its $4.09 billion market cap creates an enterprise value of $3.52 billion.
But is that a fair price? Let’s talk about valuation metrics ...
Source: Alaska Airlines.
The Price-to-Earnings Ratio (And Its Cousins)
THE BASICS
Formula: (Current stock price) / (current earnings per share).
Explains: The cost of buying a share of ownership in a business. Generally, the higher the P/E, the more costly the stock is.
IN PRACTICE
Apple recently traded for $506.17 a share and reported $40.11 in earnings in its last financial report. The company’s P/E is 12.62 as of this writing.
Related metrics include price-to-sales and price-to-book.
Source: Apple.
Other Metrics (And Where to Find Them)
3 MAJOR FINANCIAL STATEMENTS
Income Statement: How much revenue, profit?
Balance Sheet: How much cash, debt?
Cash Flow Statement: How much cash was created?
The Securities and Exchange Commission (SEC) tracks all financial filings at a database it calls EDGAR. Find it at sec.gov.
Still Want to Learn More?
INTRODUCTORY BOOKS ON STOCKS
One Up On Wall Street: By former mutual fund manager Peter Lynch. The best introduction to investing in stocks.
The Motley Fool Investment Guide For Teens: By David and Tom with help from some other Fools. Provides 8 tips for getting started.
FREE RESOURCES ON THE WEB
Investopedia: Defines all things finance and investing.
The 13 Steps to Investing Foolishly. Read before you buy any books. Chock full of examples to help you understand stocks and investing.
Source: Amazon.com.
Get Started Investing Now!
Warren Buffett started with stocks when just 11 years old. The message? It’s never too early to start building a nest egg. In a new special report, our analysts walk through the steps to securing your financial future. For example ...
● Learn the differences between mutual funds and Exchange Traded Funds, and how to pick the best fund for your beginning portfolio.
● Discover why dividends are such an important contributor to long-term, market-beating performance.
Click here to get your FREE copy of this report, and a special bonus offer that includes 10 stock ideas and three special reports straight from our flagship service, Motley Fool Stock Advisor.
