UNDERSTANDING STOCKS Michael Sincere 10381_Sincere_fm.c 7/18/03 10:59 AM Page i Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-143582-4 The material in this eBook also appears in the print version of this title: 0-07-140913-0 All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. 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DOI Page 6x9 10/2/02 1:33 PM Page 1 , Contents Acknowledgments v Introduction vii P ART O NE WHAT YOU NEED TO KNOW FIRST 1 Welcome to the Stock Market 3 2 Stocks: Not Your Only Investment 19 3 How to Classify Stocks 29 4 Fun Things You Can Do (with Stocks) 37 5 Understanding Stock Prices 49 6 Where to Buy Stocks 55 P ART T WO MONEY-MAKING STRATEGIES 7 Want to Make Money Slowly? Try These Investment Strategies 69 8 Want to Make Money Fast? Try These Trading Strategies 77 10381_Sincere_fm.c 7/18/03 10:59 AM Page iii For more information about. this title, click here. Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. P ART T HREE FINDING STOCKS TO BUY AND SELL 9 It’s Really Fundamental: Introduction to Fundamental Analysis 89 10 Fundamental Analysis: Tools and Tactics 97 11 Let’s Get Technical: Introduction to Technical Analysis 107 12 Technical Analysis: Tools and Tactics 131 13 The Psychology of Stocks: Introduction to Sentiment Analysis 141 P ART F OUR UNCOMMON ADVICE 14 What Makes Stocks Go Up or Down 149 15 Why Investors Lose Money 157 16 What I Really Think about the Stock Market 171 Index 189 iv CONTENTS 10381_Sincere_fm.c 7/18/03 10:59 AM Page iv Acknowledgments I’d like to give special thanks: To Stephen Isaacs and Jeffrey Krames at McGraw-Hill for once again giving me the opportunity to do what I love most, and to Pattie Amoroso for helping me put the pieces together to produce a book. To my researcher, Maria Schmidt, who found the answer to nearly everything I asked; Tine Claes, who never fails to find something that needs improvement; and Lois Sincere, who has truly mastered the idio- syncrasies of the English language. To Tom Reid, a teacher at Deerfield High School in Florida, for help- ing to make the most complicated financial concepts seem easy; student Bailey Brooks for helping with editing; Dan Larkin, CEO and senior consultant for Larkin Industries, Inc., for his extremely insightful sug- gestions and comments; Mike Fredericks, Brad Northern, and Howard Kornstein for their thoughtful financial analysis and insights; Colleen McCluney for her encouragement and patience; and Oksana Smirnova for her inspiration and enthusiasm. To the hardworking and friendly staff at Barnes & Noble bookstore and Starbucks in Boca Raton, Florida. Finally, to my friends, family, and acquaintances: Idil Baran, Krista Barth, Bruce Berger, Andrew Brownsword, Sylvia Coppersmith, Lourdes Fernandez-Vidal, Alice Fibigrova, Joe Harwood, Jackie Krasner, Johan Nilsson, Joanne Pessin, Hal Plotkin, Anna Ridolfo, Tim Schenden, Tina Siegismund, Luigi Silverstri, Alex Sincere, Debra Sincere, Miriam Sincere, Richard Sincere, Harvey 10381_Sincere_fm.c 7/18/03 10:59 AM Page v Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. Small, Bob Spector, Lucie Stejskalova, Deron Wagner, and Kerstin Woldorf. For additional reading, I recommend the following books: The Stock Market Course (John Wiley & Sons, 2001), by George Fontanills and Tom Gentile A Beginner’s Guide to Short-Term Trading (Adams Media Corpo- ration, 2002), by Toni Turner Reminiscences of a Stock Operator (John Wiley & Sons, 1994), by Edward Lefevre vi ACKNOWLEDGMENTS 10381_Sincere_fm.c 7/18/03 10:59 AM Page vi Introduction This book will be different. Thousands of books have already been written about the stock mar- ket, many of them technical and tedious. Before I wrote this book, I was amazed that so many boring books had been written about such a fas- cinating subject. Just like you, I hate reading books that put me to sleep by the second chapter. That is why I was so determined to write an entertaining, easy-to-read, and educational book about the market. I wanted to write a book that I can hand to you and say, “Read everything in this book if you want to learn quickly about stocks.” You don’t have to be a dummy, idiot, or fool to understand the market. You also don’t have to be a genius. After you read this book, you will real- ize that understanding stocks is not that hard. (The hard part is making money, but we’ll get to that later.) I also don’t think you should have to wade through 300 pages to learn about the market. Too many books on stocks are as thick as col- lege textbooks and not nearly as exciting. Even though this book is short, it is packed with information about investing and trading. I did my best to make sure that you would have a short and easy read. I wrote this book because I wanted you to know the truth. As I was writing, a corporate crime wave was sweeping across America. Dozens of corporations were accused of cheating people out of millions of dollars. It upset me that so many investors have become victims of the stock market. It seems as if the name of the game is entic- 10381_Sincere_fm.c 7/18/03 10:59 AM Page vii Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. [...]... representative group of 30 stocks, the Dow 30 Even if the market is down for the day, the stock you own could be up, or the other way around 12 UNDERSTANDING STOCKS Other Indexes Although the Dow (operated by the Wall Street Journal) was the first index to keep track of stocks, hundreds of other indexes have been created to track almost everything from transportation to utilities to technology stocks Some sophisticated... Coca-Cola The Nasdaq, on the other hand, contains many technology corporations like Cisco Systems, Intel, and Sun Microsystems In addition, stocks that are traded “over the counter” (OTC) are located on the 8 UNDERSTANDING STOCKS Nasdaq By the way, there are over 5000 stocks traded on the three U.S stock exchanges and another 5000 smaller companies traded over the counter Corporations: Convincing People... increased to 30 stocks, which is the number of stocks in the index today (By the way, this index is sometimes called the Dow 30.) These 30 stocks are a cross section of the most important sectors in the stock market (A sector is a group of companies in the same industry, such as technology, utilities, or energy.) Over time, the Dow changed from an equal-weighted index to one in which different stocks have... for Terms of Use 4 UNDERSTANDING STOCKS What Is a Share of Stock? We’re not talking about livestock! Actually, the word stock originally did come from the word livestock Instead of trading cows and sheep, however, we trade pieces of paper that represent ownership—shares— in a corporation You may also hear people refer to stocks as equities or securities Most people just call them stocks, which means... shares of your stock Why Stocks Are a Good Idea There are a number of reasons why you should buy stocks According to researchers, stocks have beaten every other type of investment over any 10-year period during the last 75 years They are a good buy even after a market crash or an extended bear market According to research conducted by Jeremy Siegel, best-selling author of Stocks for the Long Run (McGraw-Hill,... fits in perfectly with our discussion about the stock market 22 UNDERSTANDING STOCKS Mutual Funds: A Popular Alternative to Individual Stocks and Bonds Instead of investing directly in the stock market, you can buy mutual funds An investment company creates a mutual fund by pooling investors’ money and using it to invest in an assortment of stocks, bonds, or cash In a way, investing in a mutual fund is... for a small loss In other words, day traders buy stocks in the morning and sell them for a higher price a few minutes or hours later Generally, they move all their money back to cash by the end of the day Keep in mind that it’s extremely hard to consistently make money as a day trader Only a small percentage of people make a living at it 10 UNDERSTANDING STOCKS Professional Traders Professional traders... is the Nasdaq Composite Index, which tracks the more than 5000 stocks listed on the Nasdaq On television or on the Internet, when you see the Dow listed, you will almost always see the Nasdaq below it The third index that many people watch closely is the S&P 500 If you guessed that this contains 500 stocks, you are right These are 500 stocks that Standard & Poor’s Corporation (S&P) has selected to... Poor’s Corporation (S&P) has selected to represent the overall stock market They are usually the largest stocks and include a lot of technology stocks Other popular indexes are the Russell 2000 index and the Wilshire 5000 You’ll learn later that you can invest directly in them, since they trade just like stocks If you were a professional money manager, your goal each year would be to beat the major indexes... years later, the company Charles Dow helped start, Dow Jones, launched the Dow Jones Industrial Average, consisting of 12 industrial stocks If you know about averages, you know that you basically add up the prices of the stocks in the index and divide by the number of stocks to create a daily average By watching the Dow, you can get a general idea of how the market is doing It also gives us clues to . to the Stock Market 3 2 Stocks: Not Your Only Investment 19 3 How to Classify Stocks 29 4 Fun Things You Can Do (with Stocks) 37 5 Understanding Stock Prices. UNDERSTANDING STOCKS Michael Sincere 10381_Sincere_fm.c 7/18/03 10:59 AM Page i Copyright