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lOMoARcPSD|12620520

Lecture notes, all lectures
Introduction to the Stock Market (Mount Royal University)

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Resistance is above the market while support is below
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In a downward trend, support is usually broken
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 Refers to the longer-term trend of the market
 Also called the primary trend
o Secondary or intermediate trend – a correction in the major trend that
can last from 1-6 months
 Not a short or long term trend
o Short-term or minor trend – a correction of consolidation of the
intermediate or major trend phase that lasts less than 1 month
 Represents a pause
 Most important to market traders rather than investors
 Every stock has a stock symbol (2-5 digits)
 Stocks keep track of all the buys or sells
Stock Quotes
 Growth
o Growth increases as the size of the company increases
 Ex: Walmart
o A small company will have the most growth
o Medium size companies have continual growth but not as much growth as
small companies
o A large company will have little growth, but mostly stable
 Earnings per share (EPS)= Earnings/# of shares
 Price Earnings Ratio (P/E)= stock trending price/EPS
 A company with positive growth can do 2 things:
o Keep it or
o Give it out in dividends
 Dividend payment – how much dividends were paid per share
 Dividend Yield= dividend/price of stock
 If a company is small, they will keep it to increase their business
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The Bid is the highest price someone is willing to
buy that stock for at that particular time
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If the ask and bid are far apart, you may want to go join the bid and try
to get the stock at a lower price
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

 Tobacco
 Procter and gamble stock
In an expansion
o People have more money… more likely to buy
o Invest in…
 Real estate
 Luxury items (restaurants, airlines, cars, resorts, entertainment)
 Commodities

Jan 27
 Bank of Canada cut interest rates from 1% to 0
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1% (first half of 2015 expected 1
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4%
 Broke ridge firms have 5 degrees when selling stocks
o Top pick
o Strong buy/outperform
o Buy/mkt perform
o Hold
o Sell
 The top 3 categories are all buys
 If a stock drops down a category, it is time to phase out of the stock
 By the time it gets to a hold, you should be out of the stock
 If an analyst says they stopped covering a stock, it is time to
withdraw from the stock
 Stock quotes
o Gap – when it closes the day lower than it starts the next day at (or vise
versa)
 High volume
 Positive gap stock will continue to go up
 Gaps continue the bullish or bearish trend
 High volume at the beginning of a trend
 Triangle/ascending pattern
o Flat resistance line with a rising support line
o Is a continuation pattern
 Whichever trend occurred before the pattern is what to expect
after the pattern
o Bulling trend
 Descending triangle pattern
o Continuation
o Bearish trend
o Flat support line, declining resistance line
 Symmetrical triangle
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o Simple moving average
 Is an average over a certain number of days usually shown in 50
(short term) and 200 (long term)
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 Bearish= LT/ST/P
o If the price crosses below the moving average lines, the stock is then
considered to be in a bearish trend
o When 50 MA is above 200 MA, trend is bullish
o If the price of the stock crosses above the moving average lines, it is
considered a bullish trend
 Bullish= P/ST/LT
 Bearish= LT/ST/P
 If not a typical bullish or bearish pattern, look back to
where is was
 Bollinger Bands

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 Longer term trades
 When the stock price is trading b/w the simple average
moving line and the resistance band, it indicates that the
stock is in a bullish trend
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This is a good indicator for choosing
medium long-term stocks
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

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o Works best in a swinging market
Stochastics
o Fast stochasitcs
 Fast line (%K) = 100 x (close-low14)/(high14-low14)
 Slow line (%D)= 3-day average of %K
o Slow stochastics
 Slow (%K) = fast %K smoothed with a 3-day average
 Slow (%D) = 3 day average of slow %K
o Has two guide lines (20 and 80)
 Overbought when its over 80
 Oversold when under 20
o If the %K and %D cross above 80, you want to sell once they cross the 80
line
o If the %K and %D lines cross below 20, you want to buy once it crosses the
20 line
Relative Strength Index (RSI)
o Scale of 0 to 100%
 30 to 70% is a consolidation area
 Above, 70%  overbought
 Below 30%  oversold
o Usually calculated over 14 days
o RS = 100 – (100/1+RS)
 Ex: if RS is 3
 100 – (100/1+3) = 75 (overbought)
o Buy when RSI breaks above 30%
o Sell when RSI breaks below 70%
o Bullish when in between 50% to 70%
o Bearish when between 50% to 30%
Japanese Candlesticks
o Shows the open and the close
o If its white, price closed higher than the open
o If its coloured in, price closed lower than the open
o The ‘wick’ shows the range in which the price traded for the day

To analyze a chart
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Look at the price (last), legend and graphs
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Write down facts about each indicator showing
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If BMO trades at $66 (exercise your option to buy at $60
and sell shares at $66… gained $6,000)
 If BMO trades at $54 (let the option expire worthless, do not
exercise option)
Price that you can purchase the option at is called the exercise or strike price
The time that the option is good until is called the expiration date
The cost to buy an option is called the premium
* An option to buy stock is called a call option
An option to sell stock is called a put option
o Locks in a higher selling price and as the price goes down you would make
money
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Investopedia
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TO)
Set up for 1 year
Do the chart
MACD- fast MACD line is very close to slow signal line
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Looks like they are going to
cross zero, which would enter a bullish market
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RSI- in consolidation but is above 50%, indicating a bullish market
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MA- Price/ST/MT/LT… buy signal
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BULLISH
BB- price is about turn bullish b/w the price is crossing over the short term moving
average line
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Volume- OBV has been tending down
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Price follows volume
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Stochastics – lines are moving above 50 line
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Line is going in an
upward direction and have not reached 80, which would be overbought
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Both exited the oversold signal which is a
strong buy signal
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Price- moving in an upward direction
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BULLISH
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Buy this stock
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1 major company and comparing it to 2 others
Explain the companies and how they do business or how they operate
o Similarities and differences
Explain the general economy and the sector you are looking at
o Background
o Economic and market data
Financial analysis
o Need to have a table (3 years of data)… do calculations of ratios, compare
ratios of each company
o Then you’ll be able to decide which company is the best to invest in
compared to the others
Technical analysis
o Similar to midterm exam
o Do an analysis of a recent draft of the company
 Buy or sell
Conclude
o Bring in factors of fundamental and technical, state if you would invest



To pick a company
o Must be north American based
o Must trade publically (NASDAQ, NYSE, TSX)
o Fairly large company and has been trading for 5 years
o Should be profitable
 Need competitors with these traits as well
o Do a company you are interested in



Print off: Income statement and balance sheets for Nike, Adidas, Under armour
o Use most recent financial statement for 2014
o http://investors
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com/files/doc_financials/2015/q2/NIKE-Inc-Q215Press-Release-FINAL_v001_v2g508
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adidas-group
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pdf
o http://investor
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com/income
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Expenses
 All the other costs of running the company
 Sales - Admin expenses = operating profit
 Interest
 Taxes

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The amount extra that
he paid for it (b/c it has a
good reputation) is called
goodwill
o If goodwill ever goes to $0,
takes money out of equity
 Liabilities – what they owe
 Current
o Debt (can seize assets)
o Other current liabilities (cannot seize assets)
 Long term
o Long term debt
o Other long term liabilities
 Shareholder’s Equity
 Share capital
o Amount of money you have made by selling shares
 Retained earnings
o Any profit left over from the year before
o Can see how profitable a company is just by looking
at this account
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 Depreciation
 Spreads the cost of an asset out over the years
 Does not effect the cost of the company
 Just an accounting entry (to account for the cost of the
item)
o Ex: company cars
 Might be on a separate statement: Statement of cash flows
o Do not want depreciation stated on the balance
sheet
o Other expenses
o Operating profit
o Interest exp
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– cash taxes – deferred taxes
*Debt
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From the equity owner’s perspective
Interested in debt that could force the company into bankruptcy
Do not consider payables as debt
What is considered debt:
o Anything to do with the bank
 Bank loan, bank overdraft, etc
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

Debt (something that the company labels as debt)

Ratios
 Liquidity (refers to the ability to turn assets into cash)
o Current ratio
 = Current assets / current liabilities
 Want a number greater than 1
 If it is less than one then they don’t have enough to pay their bills
 Inventory can cause liquidity problems if it stops selling
o Quick ratio
 = Current assets – inventory / current liabilities
 Profit
o Gross profit margin
 = Gross profit/sales
 Make into a %
o Operating profit margin
 = Operating profit/revenue
o Net profit margin
 = Net profit/revenue
o Return on common equity (ROCE)
 = (Net profit – Preferred Dividends) / Equity
 Denominator… look at shareholder’s equity
 Take the total of equity and subtract (-) preferred shares
o Inventory Turnover
 = COGS / Inventory
 Debt
o Debt to equity
 = Debt / Equity
 Format as a %
 Lower is better
o Cash flow to debt
 = (Net profit + depreciation + deferred tax) / debt
o Interest coverage
 = Operating profit / Interest expense
 Put as a multiple (ex: 7  7
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Coverage
 = Operating profit / (Interest Exp
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)
o Asset Coverage (AKA net tangible assets per $1000 of debt)
 = ((Total assets – intangible assets – other current liabilities)/
(short + long term debt)) x 1000
 Valuation
o Earnings per share
 = (Net profit – preferred dividends) / # of shares outstanding
o Price Earnings (P/E)
 = Trading price / EPS
 Lower is better
 Put as a multiple (ex: 15x)
 Look for trading price other than financial statement
o Book Value Per Share
 = (Equity – Preferred share dollar value) / # of shares outstanding
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

o Where they do it
o What they produce
Then introduce the other 2 companies
o Why are they different
 What different products do they do or do not produce

Section about where the economy is now, where the industry is now (give perspective as
to where things are and how it influences the company)
Ratio Analysis
 Input and ratio calculation sheet can be in the body of the report
o When talking about the companies, use numbers as proof and reference
table
 Stock checker
 Make some conclusions about the fundamental part of the report (state who did
better, or if there are two companies that were similar)
Technical Analysis
 Print out a chart with lots of technical indicators
 Discuss technical indicators for main company and determine if it is a buy or a
sell
 Can do it for all companies if you choose
 Within 10 days of due date (March 27 and on) and update the share price for that
date in the spread sheet
 Can split into the different types of indicators (oscillators, moving averages)
Conclusion
 How the economy is doing, how the company did fundamentally and technically
Appendix
 Income statement and balance sheet for the main company for most recent
period
 May include the other two companies as well
References
Exam:
 Multiple choice
o Ratios
o Indexes, options, futures, passive investing, general trading
 Read the one-pagers on blackboard
 Written portion
April 7
Futures
 Contract for the exchange of goods and money in the future for some asset
 Two-sides, both have obligations
o One to deliver, one to pay upon delivery
 Short – the seller of the commodity
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Price is just the market price on the day you enter
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Want to go short on the contract if you think the market will go down
Want to go long on the contract if you think the market will go up
Hedger - someone that has the product or has a natural use for that commodity
o They are trying to reduce the volatility of their business by locking in the
price for the future
Speculators – people who believe they know which way the market will go
o Don’t have the product to actually deliver (more risk)
If the contract goes against you and you don’t have enough money, the broker will
buy the other side of the contract to lock in the loss… then the broker will come
after you for the loss

Stock Simulator Project (4-5 pages) don’t put charts in
 No cover page
 Name, class section
 Name of group
 US Dollar Value
 Canadian Dollar Value
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what worked and what
didn’t work
 What can you take away from it later in life
Appendix
o Print out trade history

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