Ch1. Stock Market Investing — Fundamentals & Market Structure
What Is a Stock?
A stock (share/equity) represents partial ownership of a company. When you buy a stock, you become a shareholder with a proportional claim on the company’s assets, earnings, and growth.
Shareholder rights:
- Receive dividend payments (if the company pays them)
- Vote at shareholder meetings
- Claim on residual assets in liquidation (after creditors)
Why stock prices rise:
- Company earnings increase → stock price typically rises
- Future growth expectations improve → P/E multiple expands
- Broad market sentiment improves (bull market)
Major Stock Markets
US Markets
| Exchange | Characteristics | Major Companies |
|---|---|---|
| NYSE | Traditional large companies | Berkshire, JPMorgan, ExxonMobil |
| NASDAQ | Technology and growth companies | Apple, Microsoft, Google, Nvidia |
| S&P 500 | Index of top 500 US companies | Benchmark for most funds |
Order Types
| Type | How It Works | Best For |
|---|---|---|
| Market order | Executes immediately at current price | Speed is priority |
| Limit order | Executes only at your specified price or better | Price is priority |
| Stop-loss | Becomes market order when price falls to trigger | Downside protection |
Core Valuation Metrics
Market Capitalization
Market Cap = Share Price × Shares Outstanding
Represents the total value the market assigns to a company.
P/E Ratio (Price-to-Earnings)
P/E = Share Price / Earnings Per Share (EPS)
- Lower = potentially undervalued (relative to peers)
- Higher P/E = market pricing in higher future growth
- S&P 500 historical average: ~16–17x earnings
P/B Ratio (Price-to-Book)
P/B = Share Price / Book Value Per Share
- P/B < 1: Trading below liquidation value
- Particularly relevant for banks, financials, industrial companies
ROE (Return on Equity)
ROE = Net Income / Shareholders’ Equity × 100
- Higher = more efficient use of shareholder capital
- Warren Buffett’s key metric; target 15%+ consistently
Chapter 2 Preview
Next: Fundamental Analysis — reading financial statements, DCF valuation, competitive moat analysis, and Warren Buffett’s investment principles.
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