Why Stocks Go Up and Down

Why Stocks Go Up and Down is an in depth introduction to stocks and bonds. It explains the basics of of financial statement analysis, cash flow generation, stock price valuation, and more. Commonly misunderstood terms such as “capitalize”, “equity,” and “diluted earnings” are explained clearly. Stock valuation methods including price/earnings ratio, price/cash flow ratio, and Enterprise Value / EBITDA are covered. The book is about fundamentals; it is not an investment system or “how to make a million dollars in the market”.

Introduction:

There are many popular books about investing which try to convey wisdom without first conveying adequate knowledge. Why Stocks Go Up and Down does just the opposite. It presents the basic fundamental knowledge that all investors need. This will enable you to get more value from other books which deal with specific aspects or approaches to investing. Why Stocks Go Up and Down goes well beyond other introductory investment books. It will not insult your intelligence. In fact, it will go into more detail in some areas than you may need, but by doing so, the major concepts should stay with you, and you will not find yourself having more questions than you started with.

The book is the outgrowth of introductory investment courses we have taught at the college level and through professional organizations such as the Boston Security Analysts Society for more than 20 years. Our students are newcomers to the investment business who have had little or no experience with accounting, finance, or the stock market. The book has evolved to provide them—and other interested investors—with the fundamentals needed for successful investing.

Part 1 introduces the basic concepts of business ownership and financial statement analysis. The emphasis on accounting may not seem relevant at first, but stock prices are directly related to financial statements. To ignore this would be an oversimplification, and would leave readers with major gaps in their knowledge. Part 1 also covers the process of “going public” and the difference between primary and secondary equity stock offerings. This section will clear up many common misconceptions.

Part 2 is about bonds and preferred stock (which is quite different from common stock). To understand a company and its stock price behavior, it is important to understand all the instruments a company can use to raise capital. It is, however, possible to skip over Part 2 without losing the continuity of the other parts of the book. In fact, many readers skip from Part 1 to Part 4 in their first time through the book.

Part 3 explains more fully how income statements and balance sheets relate to stock prices. When you understand concepts such as write-offs, or the difference between earnings and cash flow, you will be better able to understand stock price behavior. Part 4 discusses stock price valuation. It will give you a framework for understanding stock prices, and point to what you should watch for in your investments. It will help you avoid many mistakes that new investors make. This is the part that most interests new investors, but readers will get more value from Part 4 by reading the other parts first. The final chapter is an investment analysis of Abbott Labs that draws on many of the concepts in the book, and takes readers through the thinking process of a professional investment analyst.

A glossary at the end gives succinct definitions of many terms used in the book. Investing is like many other aspects of life: the more thoroughly you prepare, and the more you work at it, the better you will do. There is no substitute for watching your stocks respond to day-to-day news concerning the economic environment, the stock market, and the company you are analyzing. The background that you should take from this book will help you gain that experience much faster.

Contents:

• STARTING A BUSINESS
• OWNERSHIP AND STOCK
• BORROWING MONEY AS THE COMPANY GROWS
• RATIOS INVESTORS WATCH
• GOING PUBLIC—PRIMARY AND SECONDARY OFFERINGS
• EARNINGS DILUTION—JMC GOES PUBLIC
• FINANCING GROWTH: SELLING NEW STOCK VS. SELLING NEW BONDS
• BONDS
• WHY BONDS GO UP AND DOWN
• BONDS: ADVANCED TOPICS
• CONVERTIBLE BONDS
• PREFERRED STOCK
• CONVERTIBLE PREFERRED STOCK AND HYBRID PREFERRED SECURITIES
• FIXED ASSETS, DEPRECIATION, AND CASH FLOW
• COST VERSUS EXPENSE, CAPITALIZING ASSETS, AND WRITE-OFFS
• CASH FLOW
• INVENTORY ACCOUNTING—IMPACT ON COMPANY EARNINGS
• PRICE/EARNINGS AND OTHER EVALUATION RATIOS: WHEN IS A STOCK HIGH OR LOW?
• WHY STOCKS GO UP AND DOWN

Why Stocks Go Up and Down By William H. Pike, Patrick C. Gregory pdf